2016 (9) TMI 867 - SC - Indian Laws

Post-dated cheques as loan security: Supreme Court decision on Section 138

Sampelly Satyanarayana Rao Versus Indian Renewable Energy Development Agency Limited

The Supreme Court upheld the High Court's decision, ruling that the dishonour of post-dated cheques given as security for repayment of a loan installment ... Dishonour of a post-dated cheque given for repayment of loan - Negotiable Instruments Act - Held that:- Reference to the facts of the present case clearly shows that though the word “security” is used in clause 3.1(iii) of the agreement, the said expression refers to the cheques being towards repayment of installments. The repayment becomes due under the agreement, the moment the loan is advanced and the installment falls due. It is undisputed that the loan was duly disbursed on 28th February, 2002 which was prior to the date of the cheques. Once the loan was disbursed and installments have fallen due on the date of the cheque as per the agreement, dishonour of such cheques would fall under Section 138 of the Act. The cheques undoubtedly represent the outstanding liability. In the present case, reference to the complaint (a copy of which is Annexures P-7) shows that as per the case of the complainant, the cheques which were subject matter of the said complaint were towards the partial repayment of the dues under the loan agreement (para 5 of the complaint). The question has to be answered in favour of the respondent and against the appellant. Dishonour of cheque in the present case being for discharge of existing liability is covered by Section 138 of the Act, as rightly held by the High Court. Issues Involved:1. Whether the dishonour of a post-dated cheque given for repayment of a loan installment, described as 'security' in the loan agreement, is covered by Section 138 of the Negotiable Instruments Act, 1881.Issue-wise Detailed Analysis:1. Applicability of Section 138 of the Negotiable Instruments Act, 1881 to Post-Dated Cheques Given as Security:The central question in this case was whether the dishonour of post-dated cheques, described as 'security' in the loan agreement, falls under Section 138 of the Negotiable Instruments Act, 1881. The appellant, a director of the company whose cheques were dishonoured, contended that these cheques were given as security and not for the discharge of any debt or liability at the time of issuance. The High Court rejected this argument, stating that the cheques were issued for a debt in present but payable in the future, thus falling under Section 138.2. Interpretation of 'Debt or Other Liability' under Section 138:Section 138 of the Act stipulates that dishonour of a cheque for insufficiency of funds or if it exceeds the amount arranged to be paid, constitutes an offense if the cheque was drawn for the discharge of any debt or other liability. The appellant argued that since the cheques were issued as security, they did not represent a debt or liability in presenti. The Court, however, clarified that the nature of the transaction determines whether a post-dated cheque is for the discharge of debt or liability. If the debt or liability exists on the date of the cheque, Section 138 is attracted.3. Distinguishing from Previous Judgments:The appellant relied on the Supreme Court's decision in Indus Airways Private Limited versus Magnum Aviation Private Limited, where it was held that a cheque issued as advance payment for a purchase order, which was later cancelled, did not constitute a discharge of legally enforceable debt. The Court distinguished this case, noting that in Indus Airways, the cheque was for an advance payment for a purchase order that was cancelled, whereas, in the present case, the cheques were for repayment of loan installments that had fallen due.4. Legal Enforceability of Debt at the Time of Cheque Issuance:The Court emphasized that the crucial question is whether the cheque represents the discharge of an existing enforceable debt or liability. In this case, the loan had been disbursed, and the installments were due on the date of the cheques, thus representing an outstanding liability. The Court held that the description of the cheques as 'security' in the loan agreement did not change their nature as instruments for repayment of a due loan.5. Procedural Aspects in Quashing Petitions:The Court reiterated that in a petition for quashing under Section 482 of the Code of Criminal Procedure, the Court should ordinarily proceed based on the averments in the complaint and not consider the defense of the accused. The Court cited previous judgments to support the principle that the factual defenses of the accused should be determined by the trial court after recording evidence.6. Presumption of Legally Enforceable Debt:The Court referred to the presumption under Section 139 of the Negotiable Instruments Act, which states that once the issuance of a cheque and signature are admitted, it is presumed that the cheque was issued for the discharge of a legally enforceable debt. The accused must rebut this presumption, which cannot be done merely by a statement but requires substantial evidence.Conclusion:The Supreme Court upheld the High Court's decision, concluding that the dishonour of the cheques in this case, being for the discharge of an existing liability, is covered by Section 138 of the Negotiable Instruments Act. The appeal was dismissed, and the appellant was given the liberty to contest the matter in the trial court.