An offence under Section 138 of the Negotiable Instruments Act, 1881 is made out against a person when such person issues a cheque to pay an amount to another person in respect of some debt or liability and fails to honor that cheque. A case of cheque bouncing can only be made out in cases where there is a legally enforceable debt meaning thereby that a Cheque Bouncing case can only be instituted for a cheque that was issued for some debt / liability that can be legally enforced. In all those cases where a cheque bounces, but the cheque is not issued for some lawful debt or lawful purpose, a case under Section 138 NI Act cannot be made out.
Usually, in commercial transactions / loan transactions, there is a guarantor who guarantees that in case the borrower fails to make the payment, then the guarantor would make good the amount and pay the same to the lender. It is settled law, that if the cheque issued by a borrower bounces, he will be liable under the said section. However, what would happen if a cheque that is issued by a guarantor bounces. Will such a guarantor be liable under Section 138 NI Act or not? Will it be considered that he is liable to be prosecuted under this penal provision of Cheque Bouncing?
The Supreme Court of India has decided in the case of I.C.D.S. Ltd. v. Beena Shabeer, 2002 (6) SCC 426, decided the abovementioned question whether a person, who is a guarantor, would be liable for a cheque bounce case if the cheque that is issued by him, in discharge of his role of a guarantor bounces and is not honored by him.
In the instant case, the cheque that was issued by the guarantor as security had bounced and the question before the Supreme Court was whether proceedings would be maintainable with respect to a security cheque issued by the guarantor.
In the abovementioned matter, a Single Judge bench of the Kerala High Court, after discussing the provision under Section 138, had opined that when a cheque is given as a security, no Complaint under Section 138 of the Act is maintainable as the cheque issued cannot be said for the purpose of discharging any liability or debt. The High Court further opined that under Section 138 NI Act, a cheque must be for the payment of amount of money from out of the account. If a cheque is issued as a security, it cannot be said to be for immediate payment of money.
Consequently, an SLP was filed before the Hon’ble Supreme Court challenging the order of the High Court. The Supreme Court at first discussed Section 138 of the NI Act.
According to Section 138 Negotiable Instruments Act,
“138. Dishonour of cheque for insufficiency, etc., of funds in the account. – Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both :
Provided that nothing contained in this section shall apply unless
(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.
(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within fifteen days of the receipt of information by him from the bank regarding the return of the cheque as unpaid, and
(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.
Explanation For the purpose of this section, “debt or other liability” means a legally enforceable debt or other liability.”
The Supreme Court observed that the first three words and the language used by the Legislature while enacting the said provision is “Where any cheque”. The Supreme Court observed that the first three words are of a great significance as it shows the legislative intent that in all cases where the cheque is dishonored, the provisions under Section 138 NI Act would apply to that case and the Drawer of the said cheque would be liable under the said provision. The words “where any cheque” shows the legislative intent, that all cheques that are issued for the discharge of any debt or liability are dishonored, the provision under Section 138 NI Act would apply. The Supreme Court observed, “The legislature has been careful enough to record not only discharge in whole or in part of any debt but the same includes other liability as well. This aspect of the matter has not been appreciated by the High Court, neither been dealt with or even referred to in the impugned judgment.”
The Supreme Court refused to entertain the argument of the liability of the Guarantor being co-existing with that of the borrower and observed that the legislative intent of Section 138 NI Act is clear by the expressions “any cheque” and “other liability” and observed that whenever there is any default of a cheque that is issued in discharge of some debt or liability, there cannot be any embargo or restriction in the matter of application of Section 138. The Supreme Court further observed that any other contrary interpretation would defeat the legislative intent.
While quashing the order of the High Court and reinstating the proceedings under Section 138, the Supreme Court observed that although the counsels have made elaborate submissions on Section 126 and 128 of the Indian Contract Act, the court is not inclined to refer to any other statute for consideration of the instant case because of the specific language used by the legislature.
