Dishonour of cheque as security an offence: Supreme Court

Dishonour of cheque as security an offence: Supreme Court

The rule applies when the debt is not recoverable and the cheque has not matured

In a significant judgment, the Supreme Court has ruled that the dishonour of a cheque issued as security can attract offence under Section 138 of the Negotiable Instruments Act (NIA), 1881.

The division bench of Justice MR Shah and Justice AS Bopanna made it clear, "There cannot be a hard and fast rule that a cheque, which is issued as security can never be presented by the drawee of the cheque."

Such contention would arise only in a circumstance where the debt has not been recovered and the cheque issued as security, has not matured to be presented for recovery of the amount. This, if the due date agreed for payment of the debt has not arrived, the court appraised.

"A cheque issued as security, pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance. 'Security' in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment. It is given, deposited or pledged to make certain the fulfillment of an obligation to which the parties to the transaction are bound," the top court stated.

"If in a transaction, a loan is advanced and the borrower agrees to repay the amount in a specified time-frame and issues a cheque as security to secure such repayment; if the loan amount is not repaid in any other form before the due date or if there is no other understanding or agreement between the parties to defer the payment of the amount, the cheque which is issued as security would mature for presentation and the drawee of the cheque would be entitled to present the same," it added.