Is a Bounced Security Cheque Punishable?

The lender was Sripati Singh. After his death, his son Gaurav Singh carried the case forward. The borrower was an old family acquaintance. He and Sripati Singh's daughter had studied together in London, and after the borrower settled in Bangalore the two families stayed on cordial terms.

The borrower learned that Sripati Singh was in business and approached him at Daltonganj. He asked for Rs.1 crore to invest in his own business and assured the lender it would be returned. Between January 2014 and July 2014, the lender says he advanced Rs.2 crore in all. The money was transferred from his own account and from his daughter's account.

Four loan agreements were reduced to writing on non-judicial stamp papers. Each is dated 13.08.2014, and in each the borrower promised to pay Rs.50 lakh, so Rs.2 crore in total. He agreed to clear the whole amount within June/July 2015. Para 5 of the agreement records that six cheques were issued as security.

Three cheques worth Rs.1 crore were handed over, then three more worth another Rs.1 crore. The lender met the borrower in July 2015 and was assured the money would come in October 2015. On that assurance, he presented the cheques on 20.10.2015, according to the Court's narration of the facts. The legal notice the Court later quotes gives 26.10.2015 as the presentation date. The bank returned the cheques for "insufficient funds".

The lender sent a legal notice under Section 138 and filed a complaint under both Section 420 IPC and Section 138. The Judicial Magistrate First Class, Palamau, took cognizance and issued summons by an order of 04.07.2016. On 13.06.2019 the Magistrate rejected the borrower's petition to be discharged. The High Court of Jharkhand at Ranchi reversed both orders on 17.12.2019, in Cr.M.P. No.2635 of 2017 and 2655 of 2017. The lender's two appeals then reached the Supreme Court as Criminal Appeal Nos. 1269-1270 of 2021.

The borrower's defence was twofold. The loan agreement itself called the cheques "security", so he said they could never count as cheques for a legally recoverable debt. He also said the matter was a civil loan dispute and not cheating. The High Court accepted both arguments. The Supreme Court accepted only the second, and only for Section 420.

Section 138 bites on a cheque dishonoured when it was issued for a legally recoverable debt. The borrower's lawyers said a cheque marked as security was not issued towards discharge of any debt. The High Court relied on Sudhir Kr. Bhalla v. Jagdish Chand and Others to hold that a security cheque cannot attract Section 138.

The Supreme Court said that decision did not help the borrower. It contained no categorical declaration that a security cheque can never be presented. Its facts involved alterations made in the cheques and a counter-complaint by the drawer.

Instead, the Court leaned on Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd. That case asks whether the cheque represents discharge of an existing enforceable debt. The Court also quoted M/s Womb Laboratories Pvt. Ltd. v. Vijay Ahuja, where it held that the plea of security is a matter of defence to be proved at trial. Indus Airways Pvt. Ltd. v. Magnum Aviation Pvt. Ltd. was referred to as the contrasting case, where a cheque was issued as advance payment against a purchase order that was cancelled.

The Court's core holding is blunt. A security cheque is a pledge of payment for a loan. If the borrower promised to repay within a fixed period and has not repaid in any other form, the cheque matures for presentation once that period runs out.

The Court then applied the dates. The borrower had agreed to repay in June/July 2015. The Court records presentation on 20.10.2015, while the legal notice it quotes, dated 21.11.2015, speaks of 26.10.2015. Either way, the cheques were presented after the agreed repayment period and after the loan had fallen due. On that record, the Section 138 complaint was maintainable. The borrower's defences were left for trial, and the Court said none of its observations should bear on the main trial.

The Court agreed with the High Court on Section 420. The mere dishonourment of the cheque cannot be construed as an act with a deliberate intention to cheat, and the mens rea in that regard cannot be gathered from the point the amount had been received.

• A security cheque cannot be presented before the loan or instalment matures. Prior repayment in another form, or an altered situation with an understanding between the parties, are defences available to the drawer in Section 138 proceedings. Here, the borrower could not complain at this stage about the Magistrate taking cognizance or rejecting his discharge petition.
• The drawer cannot dictate the forum. Once a security cheque is presented and dishonoured, the holder may choose civil proceedings for recovery or criminal proceedings for punishment.

• Documents on the record here: four loan agreements on non-judicial stamp paper, the cheques, and the bank's "insufficient funds" return. The record also held the Section 138 legal notice dated 21.11.2015 and the sworn statements of the complainant and his witnesses.
• Forum: the complaint went before the Judicial Magistrate First Class, Palamau, who took cognizance and later refused discharge. The borrower then went to the High Court of Jharkhand at Ranchi, and the lender appealed to the Supreme Court. The judgment states no limitation period.
• Mistake to avoid as a holder: do not present a security cheque before the loan or instalment is due, or after the loan has been discharged. The Court treated prior discharge and an altered understanding between the parties as grounds not to present it.
• Mistake to avoid as a borrower: if you hope to escape a cheque bounce case only because the paper was labelled security, this judgment does not support that. The Court held the complaint could not be thrown out merely because the cheques were shown as security in the loan agreement. Repayment or deferral are defences to be put forth and established in the trial.