The Supreme Court of India (“SC”) has in its judgment dated October 28, 2021 (“Judgement”), in the matter of Sripati Singh (since deceased) through his son Gaurav Singh v. The State of Jharkhand and Another [Criminal Appeal Nos. 1269-1270 Of 2021], held that the dishonour of a cheque which is issued as a security can attract offence under Section 138 of the Negotiable Instruments Act, 1881 (“Act”).

Facts
Sripati Singh (since deceased) through his son Mr. Gaurav Singh (“Appellant”) challenged the order dated December 17, 2019 (“Impugned Order”) passed by the High Court of Jharkhand (“JHC”).

Hitesh K. Jain, the respondent no.2 (“Accused”) and the Appellant shared family acquaintance and cordial relationship. The Accused had approached the Appellant and sought financial assistance to the tune of INR 1 Crore for business purposes. On the assurance of the Accused that the same would be returned during June/July 2015, the Appellant advanced a total sum of INR 2 Crores during the period between January 2014 to July 2014. Towards the said transaction, four agreements dated August 13, 2014, were entered into acknowledging the receipt of the loan. Further, towards the said loan, total of six cheques amounting to INR 2 Crores were handed over to the Appellant.

In July, 2015 the Accused assured that the amount will be repaid during October, 2015. On October 20, 2015, when the Appellant presented the cheques for realization, they were returned due to ‘insufficient funds’ in the bank account of the Accused. The Appellant therefore issued a legal notice dated November 21, 2015 as contemplated under Section 138 of the Act. Since the Accused had taken the money on an assurance that the same would be returned, but had deceived the Appellant, the Appellant contended that the Accused had cheated him and accordingly the complaint was filed both under Section 420 of the Indian Penal Code, 1860 (“IPC”) and Section 138 of the Act.

By the Impugned Order, the JHC had set aside the previous orders passed by the Judicial Magistrate First Class, Palamau, (“JMFC”) (i) dated July 04, 2016 wherein the JMFC had taken cognizance of the offence and issued summons to the Accused; and (ii) order dated June 13, 2019 wherein the JMFC had rejected the petition filed by the Accused seeking discharge in the criminal complaint. The Appellant, therefore, challenged the Impugned Order before the SC.

Issue
Whether dishonour of cheque issued as a security can attract offence under Section 138 of the Act.

Arguments

Contentions raised by the Appellant:

The Appellant contended that the Accused took advantage of the acquaintance with the family and had borrowed the amounts. Further, the cheques that were issued towards discharge of the said legally recoverable debt (the same had been acknowledged by subscribing the signature to the loan agreements), had been dishonoured. Thus, the provisions of Section 138 of the Act would apply. In such event, the order passed by the JMFC for taking cognizance and also to reject the discharge petition filed by the Accused was in accordance with law.

It was further contended that the JHC had in fact committed an error in arriving at the conclusion that the cheque issued by the Accused was towards ‘security’ and that the same could not have been treated as a cheque issued towards the discharge of legally recoverable debt. Reliance was placed on the decision of the SC in the case of Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited [(Criminal Appeal No.867 of 2016)] and in M/s Womb Laboratory Private Limited v. Vijay Ahuja and Another [(Criminal Appeal No.13821383 of 2019)] to contend that the cheque issued towards discharge of the loan and presented for recovery of the same cannot be construed as issued for ‘security’. Therefore, the order passed by the JHC was liable to be set aside and the criminal complaint be restored to file, to be proceeded in accordance with law.

Contentions raised by the accused:

The JMFC, without application of mind to the fact situation, had taken cognizance and issued summons and had not appropriately considered the case put forth by the Accused seeking discharge of the criminal complaints. The JHC on the other hand, has taken note of the entire gamut of the case and has arrived at the conclusion that the offence alleged both under Section 420 of the IPC and Section 138 of the Act had not been made out.

The claim for the sum of INR 2 Crores as made in the complaint was without basis. Even if the case as put forth in the complaint is taken note, at best the transaction can be considered as an advancement of loan for business purpose. Further, even if it is assumed that the said amount was not repaid, it would only give rise to civil liability. Therefore, the Appellant could have only filed a civil suit for recovery of the loan. It was contended that under any circumstance, the offence as alleged under Section 420 of the IPC cannot sustain. Insofar as the offence alleged against the Accused under Section 138 of the Act, the same would also not be sustainable since the complainant himself has relied on the loan agreement wherein reference is made to the cheque being issued as security for the loan. Therefore, it was contended that the instant appeal ought to be dismissed.

Observations of the Supreme Court:

The SC observed that, the amount advanced by the Appellant was towards the business transaction and a loan agreement had been entered into between the parties. Under the loan agreement, the period for repayment was agreed and the cheque had been issued to ensure repayment. The mere dishonourment of the cheque cannot be construed as an act on the part of the Accused with a deliberate intention to cheat and the mens rea in that regard cannot be gathered. The SC upheld the conclusion reached by the JHC, that there was no sufficient evidence for a case punishable under Section 420 of the IPC to be made out in these facts and circumstances.

The SC observed that, however, when the JHC itself had accepted the fact that it was a case of non-refunding of the loan amount, the first aspect that there is a legally recoverable debt from the Accused to the Appellant was prima facie established. In order to consider the aforementioned issue, the SC had, at the outset taken note of the four loan agreements. Under each of the agreements, the promise made by the Accused was to pay the Appellant a sum of INR 50 lakhs, the total of which would amount to INR 2 Crores. Further, the SC noted that, para 5 of the loan agreement indicated that six cheques had been issued as security.

The SC observed that, a cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance. The SC further observed that, security is given, deposited or pledged to make certain the fulfilment of an obligation to which the parties to the transaction are bound. If in a transaction, a loan is advanced and the borrower agrees to repay the amount in a specified timeframe and issues a cheque as security to secure such repayment; if the loan amount is not repaid in any other form before the due date or if there is no other understanding or agreement between the parties to defer the payment of amount, the cheque which is issued as security would mature for presentation and the drawee of the cheque would be entitled to present the same. The SC observed that, on such presentation, if the same is dishonoured, the consequences contemplated under the provisions of the Act would flow.

The SC observed that, there cannot be a hard and fast rule that a cheque which is issued as security can never be presented by the drawee of the cheque. If such is the understanding, a cheque would also be reduced to an ‘on demand promissory note’ and in all circumstances, it would only be a civil litigation to recover the amount, which is not the intention of the statute. The SC observed that, when a cheque is issued, even though as ‘security’, the consequence flowing therefrom is also known to the drawer of the cheque and in the circumstance stated above if the cheque is presented and dishonoured, the holder of the cheque/drawee would have the option of initiating civil proceedings for recovery or criminal proceedings for punishment in the fact situation, but in any event, it is not for the drawer of the cheque to dictate terms with regard to the nature of litigation.

The SC observed that, if the above principle is kept in view, as already noted, under the loan agreement in question the Accused though had issued the cheques as security, he had also agreed to repay the amount during June/July 2015. The cheque which was held as security was presented for realization on October 20, 2015, which is after the period agreed for repayment of the loan amount and the loan advanced had already fallen due for payment. Therefore, prima facie the cheque which was taken as security had matured for payment and the Appellant was entitled to present the same. On dishonour of such cheque, the consequences contemplated under the Act had befallen on Accused. The SC observed that, the Accused may put-forth a defense in the proceedings which will be a matter for trial. In any event, the Accused in the fact situation cannot make a grievance with regard to the cognizance being taken by the JMFC or the rejection of the petition seeking discharge at this stage.

The SC observed that, in the background of the factual and legal position, the Appellant cannot be non-suited for proceeding with the complaint filed under Section 138 of the Act merely due to the fact that the cheques presented and dishonoured are shown to have been issued as security, as indicated in the loan agreement. The SC observed that, such contention would arise only in a circumstance where the debt has not become recoverable and the cheque issued as security has not matured to be presented for recovery of the amount, if the due date agreed for payment of debt has not arrived. In the instant facts, as noted, on the date of presentation of the cheque for realization, the repayment of the amount as agreed under the loan agreement had matured. The SC observed that, therefore, the amount had become due and payable.

The SC observed that, in the above circumstance, the cheque though issued as security at the point when the loan was advanced, it was issued as an assurance to repay the amount after the debt becomes due for repayment. The loan was in subsistence when the cheque was issued and had become repayable during June/July 2015 and the cheque issued towards repayment was agreed to be presented thereafter. If the amount was not paid in any other mode before June/July 2015, it was incumbent on the Accused to arrange sufficient balance in the account to honour the cheque which was to be presented subsequent to June/July 2015. The SC observed that, therefore, to contend that the cheque should be held as security even after the amount had become due and payable was not sustainable.

The SC observed that, the further defence as to whether the loan had been discharged as agreed by Accused and in that circumstance the cheque which had been issued as security had not remained live for payment subsequent thereto at best can be a defence for the Accused to be put forth and to be established in the trial. In any event, it was not a case to either refuse to take cognizance or to discharge the Accused in the manner it has been done by the JHC.

Decision of the Supreme Court:

The SC held that, though a criminal complaint under Section 420 of the IPC was not sustainable in the facts and circumstances of the instant case, the complaint under Section 138 of the Act was maintainable. The Impugned Order passed by the JHC was set aside. Consequently, the aforementioned orders passed by the JMFC were restored. The SC allowed the appeal with an observation that, all contentions of the parties on merit were left open, such that, all contentions and the defense were to be considered during the course of the trial and that the trial court shall independently arrive at its conclusion based on the evidence tendered before it.

VA View:
The SC observed that, ‘Security’ in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment. The SC further observed that, 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 which is issued as ‘security’ cannot be presented prior to the loan or the instalment maturing for repayment towards which such cheque is issued as security. Further, the borrower would have the option of repaying the loan amount or such financial liability in any other form and in that manner if the amount of loan due and payable has been discharged within the agreed period, the cheque issued as security cannot thereafter be presented.

The SC observed that, therefore, the prior discharge of the loan or there being an altered situation due to which there would be understanding between the parties is a sine qua non to not present the cheque which was issued as security. The SC observed that, based on the facts, prima facie there was a transaction between the parties towards which a legally recoverable debt was claimed by the Appellant and the cheque issued by the Accused was presented. On such cheque being dishonoured, cause of action had arisen for issuing a notice and presenting the criminal complaint under Section 138 of the Act,.

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