25 November 2021
INTRODUCTION
The Supreme Court, in the case of Sripati Singh vs. The State of Jharkhand & Anr[i], has provided much needed clarity on the often-used defence of a cheque having been issued as ‘security’ in proceedings under the Negotiable Instruments Act, 1881 (the Act). The Court held that a cheque issued by way of security, if dishonoured, would attract the provisions of the Act, if the same is issued in consequence of a legally enforceable debt, which has become recoverable at the time of its presentation.
FACTUAL BACKGROUND
On account of the earlier acquaintance of the parties, the Appellant advanced a sum of Rs. 2 crore to Respondent No. 2, on the assurance that the same shall be repaid. The loan transaction was reduced to writing on non-judicial stamp paper. Respondent No. 2 also issued six cheques aggregating the advanced amount, as security.
After the loan repayment date, the Appellant presented the cheques for payment and the same were returned due to insufficient funds in the account of Respondent No. 2. Accordingly, the Appellant issued a notice under Section 138 of the Act to Respondent No. 2. Subsequently, the Appellant filed a complaint against Respondent No. 2 inter alia under Section 138 of the Act.
The Ld. jurisdictional Magistrate took cognizance of the Complaint, issued summons to Respondent No. 2, and rejected Respondent No. 2’s miscellaneous petition seeking discharge from the criminal proceedings. On Respondent No. 2’s challenge, the Jharkhand High Court set aside the aforesaid orders passed by the Ld. Magistrate. The Appellant approached the Supreme Court, assailing the order passed by the High Court.
ARGUMENTS ADVANCED BY THE PARTIES
On behalf of the Appellant, it was inter alia argued as under:
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Respondent No. 2 acknowledged receipt of the advanced amount by signing the loan agreement. This agreement was supplemented by an undertaking to repay the advanced amount, due to which, the cheques were issued to the Appellant.
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Respondent No. 2 failed to arrange sufficient funds in his account, despite having issued the cheques to assure repayment of the amount advanced by the Appellant.
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The provisions of Section 138 of the Act would be attracted, as the cheques issued by Respondent No. 2 were towards discharge of a legally recoverable debt, and the same had been dishonoured, on presentation for payment.
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The High Court had erred in arriving at the conclusion that the cheques were issued towards security, and hence, could not be treated at par with a cheque issued towards discharge of a legally enforceable debt.
On behalf of Respondent No. 2, it was inter alia argued that:
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The Ld. Magistrate acted without application of mind, while taking cognizance of the Complaint. The High Court has rightly held that no case has been made out for an offence under Section 138 of the Act.
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The transaction at hand, can at best be considered as an advancement of loan for business purposes, and hence, even if the amount was not repaid, such default would only give rise to a civil liability. No remedy would be available under any criminal statue.
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The Appellant having relied on the loan agreement himself, which refers to the cheques issued as a means of security for the loan, cannot sustain a case against Respondent No. 2 under Section 138 of the Act.
FINDINGS OF THE COURT
While considering the issue of maintainability of proceedings under Section 138 of the Act, the Supreme Court differed from the findings of the High Court. The Supreme Court referred to the High Court’s decision, which had itself held that the instant case was one of a simpliciter non-refunding of a loan amount, prima facie indicating the existence of a legally recoverable debt. Having arrived at this prima facie conclusion, the only real issue before the High Court was to ascertain whether an offence under Section 138 of the Act was made out, considering that the cheques were allegedly issued by Respondent No. 2 towards ‘security’, and not towards the discharge of debt.
While delving into the minutiae of the loan agreement executed by and between the parties, the Supreme Court conceded that the cheques issued by Respondent No. 2 were indeed issued towards security. Having said that, however, the Supreme Court observed that the High Court’s reliance on the decision of Sudhir Kr. Bhalla vs. Jagdish Chand & Ors.[ii], to hold that a cheque issued towards security could not attract the provisions of the Act, was unfounded. The Supreme Court held that the same would be contingent on the nature of the transaction, as also the date on which a cheque is presented for payment. If on the date of presentation of the cheque, the liability to pay exists, the provisions of the Act would be attracted. The Supreme Court relied on the decisions in Sampelly Satyanarayana Rao vs. Indian Renewable Energy Development Agency Ltd [iii] and M/S Womb Laboratories Pvt. Ltd.[iv] in support of its findings.
The Court held that a cheque issued as security, pursuant to a financial transaction, cannot be considered as a worthless piece of paper. A security is given, deposited or pledged to ensure the fulfilment of an obligation undertaken. If a cheque is issued to secure repayment of a loan advanced and if the loan is not repaid on or before the due date, the drawee would be entitled to present the cheque for payment, and if such a cheque is dishonoured, the consequences contemplated under Section 138 of the Act would follow. When a cheque is issued and is treated as ‘security’ towards repayment of an amount, with a time period being stipulated for repayment, all that it ensures is that such cheque cannot be presented prior to the date of repayment. A prior discharge of the loan is a sine qua non for the drawee to not present such a cheque for payment.
Given the facts of the case, the Court found that it was incumbent on Respondent No. 2 to arrange for sufficient balance in his account to honour the cheques presented before the time period stipulated for repayment. Any pleas of the cheque being issued as a security could be, at best, defences raised at the stage of the trial. In light of such observations, the Supreme Court allowed the Civil Appeal before it, restored the Complaint filed by the Appellant before the Ld. Magistrate, so far as it concerned Section 138 of the Act, and set aside the High Court Order.
ANALYSIS AND CONCLUSION
The Supreme Court was, in the present case, dealing with an interesting and an often-misunderstood defence to cheque bouncing under the Act. The defence, that the cheque (which has bounced and is the subject matter of proceedings under the Act) was issued as security, and not as an instrument of repayment/ payment, is not a get-out-of-jail-free card. Infact, this misconception has often resulted in parties to a commercial transaction, wherein post-dated cheques are provided as security, rest fearless of consequences under the Act. The Supreme Court has put doubts to rest with the present judgment, clarifying that the nature of the cheque (whether issued as security or not) is irrelevant for initiation of proceedings under the Act, so long as amounts were due and payable on the date when the cheque is deposited. This is not to say that such a defence is not available to a party, who, for example, has repaid their monetary obligation under a commercial agreement, but has not been returned the cheque(s) issued as security. If such cheque(s) are deposited and bounce, the defence that the said cheques were merely issued as security, and that the underlying debt has been discharged, will still be a valid defence under the Act.
The object of the Act is to regulate financial promises in growing business activities and to adduce strict liability by inculcating greater vigilance in financial matters[v]. The criminal provisions in the statute are inserted to discourage people from dishonouring their financial commitments and obligations[vi]. This being the case, the entire object of the Act and its provisions will be rendered nugatory if cheques issued by way of security are altogether exempted from its applicability, and the drawer of the cheques are permitted to dictate terms with regard to the nature of litigation to be pursued.
Through the aforesaid decision, the Supreme Court has considerably cleared the mist surrounding the issue, pertaining to the validity of proceedings under the Act, where cheques in question have been issued by way of ‘security’. This judgement is a step in the right direction when it comes to assessing criminal liability of a party in cases of largely civil disputes. This judgement retains the far more nuanced ‘quasi-criminal’ liability arising under the Act; the same having been described as a ‘civil sheep in a criminal wolf’s clothing’[vii].
For further information, please contact:
Aditya Mehta, Partner, Cyril Amarchand Mangaldas
aditya.mehta@cyrilshroff.com
[i] Sripati Singh v. State of Jharkhand and Anr, 2021 SCC Online SC 1002.
[ii] Sudhir Kr. Bhalla vs. Jagdish Chand and Others, 2008 7 SCC 137.
[iii] Sampelly Satyanarayana Rao vs. Indian Renewable Energy Development Agency Ltd., (2016) 10 SCC 458.
[iv] M/s Womb Laboratory Pvt. Ltd. vs. Vijay Ahuja and Anr. (Judgment dated 11th September 2019 in Criminal Appeal No.1382-1383 of 2019, Supreme Court).
[v] Vinay Devanna Nayak v. Ryot Sewa Sahakari Bank Ltd., (2008) 2 SCC 305.
[vi] Goaplast (P) Ltd. v. Chico Ursula D’Souza, (2003) 3 SCC 232.
[vii] P. Mohanraj & Ors. V. M/S Shah Brothers Ispat Pvt. Ld. (2021) 6 SCC 258.
