“A check issued as security in pursuance of a financial transaction cannot in all circumstances be treated as a worthless piece of paper.”
The mere fact that a check is issued as security does not mean that it will not attract an offense as defined under Section 138 of the Negotiable Instruments Act, 1881 (‘NI Act’). This position of law was stated by the Supreme Court in 2011 Sripati Singh v. State of Jharkhand (Crim Appeal Nos. 1269-1270 of 2021) LL 2021 SC 606 is crystal clear in the series of judgments of this Court. Such The framing of the legal position tells us that checks are a species whose checks are issued as security as a species. A closer look at the reasoning adopted by the Hon’ble Supreme Court reveals a different picture and we find that any check ever issued is always only as security and there is no difference between ‘cheque’ and ‘issued cheque’. As security’, the latter makes a misnomer. The question whether liability is attracted under the NI Act turns on whether there is an existing liability on the check at the time of presentation. Whether the check was issued as security or not is irrelevant to conviction under the NI Act, and therefore it is advisable to remove the use of the words ‘cheque issued as security’ or ‘security cheque’ altogether.
Although ‘security cheque”https://news.google.com/”cheque issued as security’ is a widely used term, it is not defined under the NI Act. What elements added to a check make up a security check? This important question can be answered by referring to paragraph 16 of the judgment in Shripati Singh Which is very consistent with the Court’s existing precedent in sample Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd. (Crim appeal No. 867 of 2016)and which the Court has further relied on Sunil Todi Vs. The State of Gujarat (Criminal Appeal No. 1446 of 2021) LL 2021 SC 706, aptly explains the concept of ‘security’ Check:
“16. A check given as security in pursuance of a financial transaction cannot in all circumstances be treated as a worthless piece of paper. ‘Security’ is literally a condition of being safe and security given for a loan is something like this. A promise of payment. It is given, deposited or A promise is made to fulfill an obligation to which the parties to the transaction are bound. If in a transaction, a loan is advanced and the borrower agrees to repay a specified amount, it issues a check as security to secure repayment; If the loan amount is not repaid in any other form before the due date or there is no other understanding or agreement between the parties Postponing the payment of the amount, the check issued as security will mature for presentation and the drawee of the check shall be entitled to present it. On such presentation, if defied, the consequences contemplated under Section 138 and other provisions of the NI Act will be meted out.” (emphasis added)
From the above explanation, one factor seems to be important for a check to be considered as a security – that there is no legally enforceable obligation on the check at the time of its issuance. The liability against him, if at all, must arise at a future date. It is also to be noted here that the court recognizes the right of the parties to change their understanding or enter into a new agreement after the check is issued.
After that if we look at the decision of the Hon’ble Supreme Court Sunil TodiThis is now clear It is irrelevant whether the check was subject to liability when it was issued for the Objective to determine liability under NI Act. To establish liability under the NI Act, liability has to be shown to exist On presentation of check by payee, and not when it is paid by the drawer to the payee. This position of law is clear from the following passages extracted from the judgment in Sunil Todi:
In “24 sample And Shripati Singh, post-dated checks were issued as security for loan installments due. On the dates on which the checks were drawn, the loan was outstanding. In the present case, the check was issued on 30th June, 2016. The second respondent immediately started supplying electricity from the next day i.e. 1st July 2016. The facts in this case are contrary to the facts in Indus Airways. in Indus AirwaysSince the purchase agreement has been cancelled, there is no outstanding balance before the encashment of the cheque.. Intra-party transactions did not work Purchase order cancellation due to…
- The purpose of the NI Act is to increase the acceptability of checks and to instill confidence in the performance of negotiable instruments for business transactions. If the provision is interpreted to exclude cases where the loan is incurred after the draw of the cheque, before the loan is drawn but before its encashment, the intention of the provision will be obscured.….” In Indus Airways, Advance payments were made but no borrowing occurred due to the cancellation of the purchase agreement. The real purpose of Section 138 would not be served, if ‘debt or other liability’ was interpreted to include only the debt existing up to the date of draw of cheque. Moreover, Parliament has used the expression ‘debt or other liability’. The expression “or other liability” must have a meaning of its own, the Legislature having used two different phrases. The expression ‘or other liability’ has a content which is wider than ‘debt’ and cannot be equated with the latter…(emphasis added)
If the explanation is broken in Shripati drawn above and further explained Sunil TodiUnderstanding ‘cheque issued as security’ as per Hon’ble Supreme Court It is only a promise of future payment. According to this logic a check becomes a security check if it is a promise of payment for the future and not for the present. Interestingly, this is true for any check ever issued. Even if a check is issued against an existing liability, it may only be a promise to pay in the future. It’s just for a reason Issuing a check and presenting it to a bank cannot be contradictory.
Whether liability existed at the time of issuance of the check is irrelevant for purposes of conviction under the NI Act. A drawer may issue a check even though there is no liability on the issue of the cheque, but he is liable if, on presentation of the cheque, he has accepted liability against it by virtue of the agreement entered into between him and the drawee/holder. In due course of time after issuance of cheque. Similarly, even if a liability exists against the drawee when the check is issued by the drawer, the only factor relevant to determining liability under the NI Act is whether, at the time of presentation of the cheque, the liability still exists. If, at the time between the issue and presentation of the cheque, the drawer’s liability to him is waived by virtue of a new agreement between the parties, there shall be no liability on the cheque.
A look at what really distinguishes a ‘cheque issued as security’ from a ‘cheque’ shows that this distinction can be superficial. While there is no room for confusion and the Supreme Court has made it clear that liability under the NI Act turns on the question whether liability exists against him at the time of presentation of the cheque, the clarification itself is that the genus is the species. Conceptual clarity on important issues.
The author is an independent practitioner in Delhi and also works as a Satya Pro Bono Law Consultant. Views are personal.