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DISHONOURING CHEQUE GIVEN AS SECURITY CANNOT BE HELD LIABLE UNACCOUNTED LOAN NOT LEGALLY ENFORCEABLE DEBT

 
 
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DISHONOURING CHEQUE GIVEN AS SECURITY CANNOT BE HELD LIABLE UNACCOUNTED LOAN NOT LEGALLY ENFORCEABLE DEBT
by System Administrator - Sunday, 27 August 2017, 2:29 AM
 

By: M.S.Yatnatti: Editor and Video Journalist Bengaluru: Reportedly the rule that a cheque should not be dishonoured on presentation at the pain of being penalised is not cast in stone. The Negotiable Instruments Act itself contemplates the presumption of a cheque having been issued for consideration or discharge of debt being amenable to rebuttal. Reportedly In Vijay v. Laxman, the Apex Court was satisfied with the statement of the respondent as corroborated by a witness that he did issue a cheque for Rs. 1,15,000 but only as a security for advance payment towards milk to be supplied by him to the appellant's father. The milk having been supplied, he had demanded the cheque given as security back but was refused. In fact, it was this very cheque that was presented and a case filed for its dishonour. The Supreme Court was satisfied that the appellant had, with a view to wrecking vengeance, given an altogether different colour to the transaction by calling it a loan for which there was no evidence. In the event, the Apex Court upheld the High Court judgment that the cheque was given only as a security and not in repayment of loan and hence its dishonour was not liable to be visited with a penalty under Section 138. The Supreme Court held that whether a post-dated cheque is for "discharge of debt or liability" depends on the nature of the transaction. If, on the date on which the cheque is issued, liability or debt existed or the amount is legally recoverable, Section 138 of the act will be attracted.In the case at hand, although the word 'security' was used in the agreement, the term referred to the cheques being issued to repay the loan. It was held that the repayment of the loan amount fell due under the agreement the moment that the loan was advanced and the instalments fell due; thus, the dishonoured cheques fell within the scope of Section 138 of the act. As such, the dishonoured cheques represented outstanding liability.In its judgment, the court distinguished between a cheque given towards an advance payment for a purchase order and post-dated cheques given under a loan agreement.In doing so, the Supreme Court referred to its judgment in Indus Airways Private Limited v Magnum Aviation Private Limited,in which it was held that if the cheque towards advance payment is dishonoured, it will not give rise to criminal liability under Section 138 of the act. However, the purchaser may be liable for breach of contract when the contract provides that the purchaser must pay in advance.

One of the main ingredients of the offence of dishonour of cheque under Section 138 of the Negotiable Instruments Act, 1881, is that the cheque which is dishonoured must have been given "for the discharge, in whole or in part, of any debt or other liability". The relevant extract from Section 138 is reproduced below:"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 two year, or with fine which may extend to twice the amount of the cheque, or with both: ...”.The language of this legal provision is very clear. The offence of dishonour of cheque is made out only if the cheque had been issued for the discharge of any debt or other liability. If the cheque had been issued as a "security”, and if such cheque bounces, no offence is made out under Section 138 of the Negotiable Instruments Act.In this regard, it may be noted that in the case of Vijay v. Laxman, (2013) 3 SCC 86, the Supreme Court upheld the acquittal of the accused in a cheque dishonour case on the ground that the accused, who was supplier of milk, was given the price of the milk in advance as per the trade practice, in acknowledgment and by way of security for which amount the accused had issued the cheque in question.Likewise, in the case ofSudhir Kumar Bhalla v. Jagdish Chand, (2008) 7 SCC 137, the Supreme Court set aside the order of the High Court, inter alia, on the ground that the High Court had not addressed the legal question that the criminal liability of the accused under the provisions of Section 138 of the Negotiable Instruments Act is attracted only on account of the dishonour of the cheques issued in discharge of liability or debt, but not on account of issuance of security cheques. In this case, the Supreme Court remitted the case back to the High Court for reconsideration.Similarly, in the case of Vinita S. Rao v. Essen Corporate Services (P) Ltd., (2015) 1 SCC 527, the Supreme Court remitted the case back to the High Court by setting aside its order, inter alia, on the ground that the cheques which were dishonoured were issued as a security and that there was no crystallised liability or outstanding dues.