Can cheque bouncing cases be filed under Section 138 in respect of security cheques under Negotiable Instruments Act, 1881?

Aditya Pratap is a lawyer practicing in the Bombay High Court. He can be reached at aditya@adityapratap.com

Cheque Bouncing and Security Cheques

A situation of cheque bounce is basically a term used to define the unsuccessful processing of a dispensed cheque due to several reasons, such as non-sufficient funds, mismatch in signature, Damage cheque, overwriting on cheque etc. The reason for cheque bounce could be many but the one covered under section 138 of Negotiable Instrument Act,1881.

A Security Cheque is a cheque issued to a drawee as security or surety, for using in case the drawer fails to meet the future obligations arising during course of business or any other such transactions. Thus, they are like any other cheques and they create same liability to discharge as ordinary cheques and attract the provisions of The Negotiable Instruments Act Section 138 when they are dishonored.

Provisions of section 138 under Negotiable Instruments Act, 1881

The Negotiable Instruments Act, 1881 deals with negotiable instruments, such as promissory notes, bills of exchange, cheques etc. The penal provisions contained in Sections 138 to 142 of the Act under Chapter XVII have been enacted to ensure that obligations taken by issuing cheques as a mode of deferred payment are honored. Section 138 of the Act provides for circumstances under which a case for dishonor of cheques is filed. The ingredients required for complying with Section 138 are as follows:

  • a person must have drawn a cheque for payment of money to another for the discharge of any debt or other liability.
  • that cheque has been presented to the bank within a period of three months.
  • that cheque is returned by the bank unpaid, either because insufficient of funds or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank.
  • the payee makes a demand for the payment of the money by giving a notice in writing to the drawer within 15 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid.
  • The drawer fails to make payment to the payee within 15 days of the receipt of the notice.

Can Cheque Bouncing cases be filed under Section 138 in respect of security cheques.

Yes, cheque bouncing cases be filed under Section 138 in respect of security cheques under Negotiable Instruments Act, 1881.

The cheque issued in respect of future liabilities are not in existence as on the date of cheque would not attract prosecution under Section 138 of Negotiable Instruments Act, 1881. So even if security cheque is bounced the prosecution can be initiated, and the only defense regarding this is a legally enforceable debt.

If you have issued a security cheque while taking a loan and it bounces, then you can take the following defenses entitled by situations to back your case-

  • Cheques was given as security and was misused.

In this you can either ask the complainant to bring account statement with all your payments towards the debt. Simply by exhibiting statement will show there was no debt due at the time of issuance of the cheque and therefore the cheque was misused. You can also attach your payment proof if complainant fails to bring the statement of accounts.

  • The cheque amount is more than the debt itself.

In this you can again ask for statement of accounts and if cheque amount is more than the debt itself you can ask questions related to owed debt and take a defence that the cheque was misused.

  • No Loan was due or ever taken simply cheque misused.

In this case, court can cast a heavy burden on you if the issued cheque was misused. Thus, complaint made to the police will be helpful as token complaint and stop payment are effective.

Legal Cases concerning Bouncing of Cheques and Security Cheques

  • Dashrath Rupsingh Rathore v. State of Maharashtra

The ground rule under Section 138 of the Negotiable Instruments Act was changed to the prosecution of an individual who has presented a cheque which eventually bounced for insufficiency of funds.

In this case, the matter of jurisdiction for filing a criminal complaint under Section 138 was discussed. Earlier a case under Section 138 could be initiated by the holder of the cheque at his place of business or residence only. The court changed this practice and held that a criminal case has to be initiated at the place where the branch of the bank on which the cheque was drawn is located. The retrospective effect of the judgment leads to a major overhaul and interstate transferring of cheque bouncing cases.

  • Kishan Rao v. Shankargouda

Appeal against order of The High Court when the drawer failed to file any evidence, which proved that his cheque was stolen and no evidence was led by the drawer to rebut presumption under section 139 regarding existence of dept and liability. High Court passed a setting aside of order on the success of creating a doubt about the existence of dept and liability.

To which, Supreme Court held that Payee had led oral as well as documentary evidence on record, which proved that the cheque was issued by the drawer, which contains his signatures, to which bank was produced as witness. Drawer had no evidence that the cheque was stolen. High court has created a error in its conviction regarding the setting aside order as there were no sufficient ground for passing such order.

  • Sudheer Kumar Bhalla vs Jagdish Chandra Bhalla and others.

the Supreme Court in his case held that criminal liability under the provision of section 138 NI Act does attract only on account of dishonor of cheque issued in discharge of liability or debt but not on account of issuance of security cheque.

About the Author – Aditya Pratap

Aditya Pratap is a lawyer practising in Mumbai. He argues cases in the Bombay High Court, Sessions and Magistrate Courts, along with appearances before RERA, NCLT and the Family Court. For further information one may visit his website adityapratap.in or view his YouTube Channel to see his interviews. Questions can be emailed to him at aditya@adityapratap.com.

Cases argued by Aditya Pratap can be viewed here.

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