Applicability of Section 138 of Negotiable Instruments Act, 1881 on Issuing of Cheques as a SecurityThis is a featured page

Applicability of Section 138 of Negotiable Instruments Act, 1881 on Issuing of Cheques as a Security or for Future Liability.




Money or paper currency was developed as an alternative to the barter system as medium of exchange. However, with the growth of commerce and multiplicity of commercial transactions, the inherent risk and inconvenience in using the paper currency came to fore.[1] To lessen inconvenience, use of Negotiable Instruments was encouraged and the Negotiable Instruments Act, 1881 was introduced. The Negotiable Instruments Act, 1881 was amended by Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new chapter 25 was incorporated for penalties in case of dishonour of cheques due to insufficiency of funds in the account of drawer of the cheque. These provisions were in incorporated with a view to encourage the culture of use of cheques and enhancing the credibility of the instruments.[2]




The foremost object of encouraging uses of cheques is to use it as substitute of money. Cheques are issued having the knowledge that it would be encashed without any future contingency. However, with passage of time the use of cheques are not confined to aforesaid purpose but cheques are received or issued as security. Now-a-days practice of taking cheques for liability which might accrue in future is prevalent. Companies[3] and business establishments demand cheques from their dealers and distributors as a security, finance companies take cheques for future installments which actually accrue on future date. Sometimes cheques are received for future rent[4], which also accrue in future. Even cheques are received from surety for further security[5]. The purpose of receiving such cheques is not to encash them, on the day when they are received or issued but to use them in future, if any default happens on the part of drawer.




The goal of this treatise is to ascertain applicability of Section 138 Negotiable Instruments Act, 1881 on such transactions, in other words to determine whether prosecution can be initiated against the drawers in case of dishonour of cheques on such transactions(when cheques are received or issued as security).








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 provisions of this Act, be punished with imprisonment for a term which may extend to two 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 induce 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 thirty days of the receipt of information by him from the bank regarding the return of the cheques 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.






To invoke Section 138, cheque must be issued for discharge of any “debt or other liabilities”. The payment made through cheuqes as gifts, donations etc. are beyond the scheme of the section. Where a cheque is issued not for the purpose of discharge of any “debt or other liabilities”, the maker of the cheque is not liable for prosecution. For example, if the cheque is given by way of gift or present and if it is dishonoured by the bank the maker of the cheque is not liable for prosecution.[6] But it is incumbent to determine the extend and scope of words “debt or other liabilities”.




Too many definitions of the word “debt” have been given though the word “debt” is not defined in Act.[7] Debt is defined in the Stroud’s Judicial Dictionary[8] as sum payable in respect of liquidated money demanded recoverable by action.




In Webb v. Stention[9], Lindely L.J. observed:




“….a debt is a sum of money which is now payable or will become payable in future by reason of present obligation.”




In Union of India v. Raman Iron Foundary[10], debt is decided as an existing obligation to pay a sum of money now or in future[11].




In Kesoram Industries v. CWT[12], apex court opined:




“a debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable now or in future: debitum in prasenti, solvendum in future. But a sum payable upon a contingency does not become until the said contingency happened.[13]






In Taher N. Khambati v. Vinayak Enterprises[14], where in a loan transaction, a blank signed cheque was given as security, the Andhra Pradesh High Court held that the provision of s. 138 of the Act were not attracted in such a case. The Andhra Pradesh High Court held that it could not be construed that the cheque had been issued voluntarily for the discharge of any debt or legal liability as envisaged under s.138 of the Act. In the instant case, the appellant advanced some money to the respondents and obtained a pro-note. It was stipulated that the respondent should pay interest every month. At the same time appellant-creditor took a blank signed cheque from the respondents with the understanding that the complainant could fill the other columns in the cheque and present it if the respondents committed default in payment of interest. So, the appellant has obtained this blank signed cheque with a view to make use of it, as a threat to the respondents for realisation of the amount.




Having, however, the support of Andhra Pradesh High Court judgment, the Kerala High Court in Sreenivasan v. State Of Kerala[15] observed :




"A comparative reading of the principle laid down by the Andhra Pradesh High Court and the mandatory provisions laid down in Section 138 of the Negotiable Instruments Act is crystal clear that when a cheque has been issued as a security, no complaint will lie under Section 138 of the Negotiable Instruments Act."




Recently, in M/S Shreya Agro Services Pvt. Ltd. v. Chandrakumar S.B. [16],where appellant company was supplying the products on credit to dealers. The respondent –accused is one of the dealers of the appellant. Cheque issued by dealer was dishonoured but it was admitted that company has issued circular instructions to all its dealers to deposit signed blank cheques as a security for credit supply. The object of such insistence is to see that, if there is default on the part of dealer; the company would fill up the cheque showing the amount due as on that day payable by the dealer as a measure for effective recovery of dues, Karnataka High Court held:




“The very scheme of procedure adopted shows that cheques are not issued in respect of any current existing ascertained liablility. The word “for discharge of any debt or other liability” in Section 138 of the Negotiable Instruments Act should be interpreted to mean current and existing liability or past ascertained liabilities. The cheque issued in respect of future liabilities not in existence as on the date of cheque would not attract prosecution u/s 138 of Negotiable Instruments Act.”




In aforesaid case it was quoted by prosecution that in I.C.D.S. Ltd., v. Beemna Shabeer[17]


apex court held that the cheques which are issued by guarantor attract the prosecution u/s 138 of Negotiable Instruments Act. But Karnataka High Court rejected the plea and held that this case has no application to the facts of the present case.




In I.C.D.S. Ltd., v. Beemna Shabeer[18] case the husband of respondent entered into a hire-purchase agreement with the appellant for the purposes of the purchase of a Maruti car on hire purchase basis. The respondent, his wife stood as a guarantor in respect of the hire purchase facilities being made available to her husband. The facts further reveal that the respondent, on account of the aforesaid transaction and towards part payment issued a cheque for Rs. 80,490/-. The said cheque was dishonoured and returned to the appellant with a remark "insufficient funds". Under section 482 of code of criminal procedure high court, relaying on decision of Andhra Pradesh High Court in Taher N. Khambati v. Vinayak Enterprises[19] and of Karnataka High Court in Sreenivasan v. State Of Kerala[20], held that being a cheque from a guarantor it could not be said that to have been issued for the purpose discharging any debt or liability and the complaint under section 138 of Negotiable Instruments Act, thus cannot be maintained.




But apex court, while reversing the decision, held:






“The language, however, has been rather specific as regards the intent of the legislature. The commencement of the Section stands with the words "Where any cheque". The above noted three words are of extreme significance, in particular, by reason of the user of the word "any" the first three words suggest that in fact for whatever reason if a cheque is drawn on an account maintained by him with a banker in favour of another person for the discharge of any of debt or other liability, the highlighed words if read with the first three words at the commencement of Section 138, leave no manner of doubt that for whatever reason it may be, the liability under this provision cannot be avoided in the event the same stands returned by the banker unpaid. 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.”




Furthermore, supreme court, clarifying the significance of words “any cheque” and “other liabilities”, held:




“ The issue as regards the co-extensive liability of the guarantor and the principal debtor, in our view, is totally out of the purview of Section 138 of the Act, neither the same calls for any discussion therein. The language of the Statute depicts the intent of the law-makers to the effect that wherever there is a default on the part of one in favour of another and in the event a cheque is issued in discharge of any debt or other liability there cannot be any restriction or embagro in the matter of application of the provisions of Section 138 of the Act : 'Any cheque' and 'other liability' are the two key expressions which stands as clarifying the legislative intent so as to bring the factual context within the ambit of the provisions of the Statute. Any contra interpretation would defeat the intent of the legislature. The High Court, it seems, got carried away by the issue of guarantee and guarantor's liability and thus has overlooked the true intent and purport of Section 138 of the Act.”




Apex court on applicability of Taher N. Khambati v. Vinayak Enterprises[21] and Sreenivasan v. State Of Kerala[22], as referred by high court, held that these judgments do not have any relevance in the contextual facts.




Here a unique dichotomy in law emerged owing to the fact that if terms “any cheque” and “other liability” cover the case when cheque is issued by surety for further security then why not these terms cover the case when cheque is issued as security.




Moreover, if cheque is issued as security does not come under the purview of word “debt” then how cheque issued by surety for further security come under the purview of “debt”.




No, doubt that legal proceedings can be initiated directly against guarantor without making the recourse to debtor but it cannot be inferred that the cheque issued by guarantor for further security come under the purview of word “debt” because cheque issued by the guarantor not intended to be used in respect of debt but as a future liability in case of default by debtor in future.




By no stretch of imagination both the proposition can collaterally exist.




No judgment regarding applicability of section 138 of the Act on the issuing of cheque as a security comes into light except recently in M.S Narayana Menon v. State Of Kerela and Another.[23] But even in this case this issue was dealt neither diretly nor in detail. In M.S Narayana Menon v. State Of Kerela and Another[24], some discrepancies were raised by defendant in claim of complainant that there were differences in amount mentioned in account book and cheque and failed to maintain one statutory book. Apex court took it sufficient to rebut the presumption (that cheque has been issued in discharge of debt or other liability) under Section 139 of the Act and accepted the statement of defendant that cheque was issued as security, without production of any evidence to prove the same. Supreme Court accepted the defence as probable only due to some discrepancies. Apex Court Observed:




“If the defence is acceptable as probable the cheque therefore cannot be held to have been issued in discharge of debt, for example, if a cheque is issued for security or for any other purpose the same would not come within the purview of section 138 of the Act.”




It means apex court ratified the stance of law laid down by various High Courts that Section 138 of the Act cannot be invoked when cheque is issued for security. This stance is consonance with the scheme of Act.




Moreover, term “other liability” under section 138 should not be interpreted in isolation rather rule of Noscitur A Sociis would be applicable here. This rule, according to Maxwell[25], means that when two or more words which are susceptible of analogous meaning are coupled together, they are understood to be used in their cognate sense. Here also the term “other liability” couldn’t have independent existence and it must be read with word “debt”.




Besides this the rule of “Strict Construction of Penal Statues” would be applicable here. “Strict Construction of Penal Statues” means, as apex court opined in Jolaram v. State Of Bombay[26], if two possible and reasonable constructions can be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty.




It is crystal clear that to invoke section 138 of The Negotiable Instruments Act, 1881, while issuing the cheque, drawer knows that cheque is to be encashed without any future contingency.




It is noteworthy that cheques, which are issued to finance companies to enacsh on future date, are given for future debt because it accrued on future date when installments become due. So, in that case also section 138 would not be applicable.




Conclusion: It is crystal clear that prevailing law says that when cheque is issued as security and for dispensing any future liability, Section 138 of The Negotiable Instruments Act, 1881 would not be applicable. But if we see the prevailing scenario a large no. of cheques are issued and received for the same and it become popular business practice. It will not be wrong to say that many business establishmentss are wholly depend upon such practice. So, there is dire need to bring such practice in the ambit of Section 138 of The Negotiable Instruments Act, 1881 .Now ball is in the court of legislature to validate such practice.


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