WHERE A PERSON ISSUED A SECURITY CHEQUE FOR A PERSONAL LOAN, AND WHETHER DISHONOUR OF SUCH A SECURITY CHEQUE ATTRACTS LIABILITY UNDER SECTION 138 OF THE NI ACT

Here’s a summary of the recent important ruling by the Delhi High Sure — let’s go through this carefully.

You’re referring to landmark judgments under the Negotiable Instruments Act, 1881 (NI Act), particularly Section 138, which deals with the dishonour of cheques (commonly called cheque bounce cases).

Your query is about cases where a person issued a security cheque for a personal loan, and whether dishonour of such a security cheque attracts liability under Section 138 of the NI Act.

Key Principle

A security cheque can still attract liability under Section 138, if it is found that:

• The cheque was issued towards an existing enforceable debt or liability, or
• The liability crystallized by the time the cheque was presented.

However, if the cheque was purely for security with no existing liability at the time of presentation, Section 138 may not apply.

 Landmark Judgments

1. ICDS Ltd. v. Beena Shabeer & Anr.

(2002) 6 SCC 426 — Supreme Court of India
Key point:
Even a cheque issued as security can fall within Section 138 if, when presented, it represents a legally enforceable debt or liability.

“The cheque was issued by the respondent not for any gift, but for discharge of an existing or future liability. Thus, Section 138 would be attracted.”

2. Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd.

(2016) 10 SCC 458 — Supreme Court
Facts: Post-dated cheques issued as security for repayment of a loan.
Held: Even if cheques are described as security, if they were issued towards repayment installments under a loan agreement, dishonour attracts Section 138.

“If on the date of the cheque there was a debt or liability, Section 138 is attracted. Mere description of the cheque as ‘security’ does not change its legal character.”

3. Sripati Singh (since deceased) through his son Gaurav Singh v. State of Jharkhand & Anr.

(2021) SCC OnLine SC 1002 — Supreme Court
Key point:
If a cheque issued as security is presented after the debt becomes due, its dishonour will attract Section 138.

“A cheque issued as security cannot be considered as a worthless piece of paper. If the loan is not repaid and the cheque is presented, Section 138 is attracted.”

4. Indus Airways Pvt. Ltd. v. Magnum Aviation Pvt. Ltd.

(2014) 12 SCC 539 — Supreme Court
Key point:
If a cheque is issued for an advance payment or a contingent event (not for an existing liability), Section 138 does not apply.

“For Section 138 to apply, there must be a legally enforceable debt or liability on the date of the cheque.”

5. Sunil Todi & Ors. v. State of Gujarat & Anr.

(2021) 11 SCC 486 — Supreme Court
Key point:
If at the time of cheque presentation, there exists a legally enforceable liability, dishonour of even a post-dated or “security” cheque attracts Section 138.

Summary Table

 Application to Personal Loan and Security Cheque

If someone gave a cheque as security for a personal loan, and:

• The loan was not repaid, and
• The cheque was presented after default,
  then the cheque represents an enforceable liability, and dishonour attracts Section 138.

But if:

• The loan was repaid, or
• The cheque was presented before the loan became due,
  then Section 138 may not apply, as there was no subsisting debt.

Below, I’ll give you two sample legal drafts related to security cheques for a personal loan under Section 138 of the Negotiable Instruments Act (NI Act) — one for the complainant (who gave the loan) and one for the accused/defence (who gave the security cheque).

These are illustrative formats, to help you understand how courts approach such cases.

 1. Sample Complaint Format under Section 138 (Complainant Side)

IN THE COURT OF THE METROPOLITAN MAGISTRATE AT [CITY]
Complaint under Section 138 of the Negotiable Instruments Act, 1881

Complainant:
[Name],
[Address],
[Occupation].

Versus

Accused:
[Name],
[Address],
[Occupation].

Complaint under Section 138 of the Negotiable Instruments Act

1. The complainant and accused are known to each other. On [date], the complainant advanced a personal loan of ₹[amount] to the accused for his personal needs.

2. In discharge of the said legally enforceable liability, the accused issued a cheque bearing No. [xxxxxx] dated [date] drawn on [Bank Name, Branch] for ₹[amount], in favour of the complainant.

3. The said cheque was presented by the complainant for encashment on [date], but it was returned unpaid with the endorsement “Insufficient Funds” vide bank memo dated [date].

4. Thereafter, the complainant issued a legal demand notice dated [date] to the accused by registered post, calling upon him to make payment of the cheque amount within 15 days of receipt. The notice was duly served on [date], but the accused failed to comply.

5. The accused has thus committed an offence under Section 138 of the Negotiable Instruments Act, 1881.

6. The cause of action arose on [date] when the cheque was returned unpaid and continues to subsist.

PRAYER

The complainant therefore prays that this Hon’ble Court may be pleased to:

1. Take cognizance of the offence under Section 138 of the NI Act against the accused;
2. Issue process and summon the accused to stand trial;
3. Punish the accused as per law and direct him to pay compensation under Section 357 CrPC.

Place: [City]
Date: [Date]
Complainant’s Signature

Supporting Documents

1. Copy of the loan agreement or proof of loan transfer
2. Original dishonoured cheque
3. Bank return memo
4. Legal notice & postal receipt
5. Proof of service of notice

 2. Sample Defence Reply (Accused Side)

IN THE COURT OF THE METROPOLITAN MAGISTRATE AT [CITY]

Case No.: [Number]
Accused: [Name]
Complainant: [Name]

WRITTEN STATEMENT / DEFENCE

1. The accused admits that a cheque bearing No. [xxxxxx] was issued in favour of the complainant; however, the said cheque was given only as a security at the time of obtaining a personal loan, and not towards any existing or legally enforceable debt on the date of issuance.

2. The complainant has misused the security cheque despite the fact that the loan was either duly repaid or that the cheque was not due for presentation.

3. It is settled law (see Indus Airways Pvt. Ltd. v. Magnum Aviation Pvt. Ltd., (2014) 12 SCC 539) that a cheque issued as security, when no legally enforceable debt existed on the date of its presentation, does not attract Section 138 of the NI Act.

4. The complainant has not proved the existence of a subsisting debt as on the date the cheque was presented, hence the basic ingredients of Section 138 are not fulfilled.

5. Therefore, the complaint is false, frivolous, and liable to be dismissed.

PRAYER

It is therefore most respectfully prayed that this Hon’ble Court may be pleased to:

1. Dismiss the complaint filed by the complainant;
2. Acquit the accused of the offence under Section 138 NI Act; and
3. Pass such further orders as may be deemed just and proper.

Place: [City]
Date: [Date]
(Signature of Accused/Advocate)

Supporting Case Law Citations for Each Side