Security cheques and contingent liability do not trigger Section 138 unless the debt has crystallised.

A cheque issued only as security or against a future contingent liability does not attract Section 138 of the Negotiable Instruments Act unless the contingency has occurred and a legally enforceable debt has crystallised. Here, the agreement to sell made encashment of the undated cheques dependent on performance of the contract and delivery of possession, but the condition was not fulfilled and the land was not shown to be in the complainant's name or possession. On those facts, the complaint was held not maintainable and the criminal proceedings were quashed.

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Issues: Whether the complaint under Section 138 of the Negotiable Instruments Act, 1881, and the cognizance order were liable to be quashed on the ground that the cheques were issued as security and no legally enforceable liability existed when the cheques were presented.

Analysis: The agreement to sell made encashment of the undated cheques contingent upon performance of the contract and taking possession of the land. The material on record showed that the contractual condition had not been fulfilled and that the land was not found in the name or possession of the complainant. In such circumstances, the cheques could not be treated as issued towards an existing legally enforceable debt or liability. A cheque issued only as security or towards a future contingent liability does not attract Section 138 of the Negotiable Instruments Act, 1881, unless the contingency has occurred and the liability has crystallised.

Conclusion: The complaint under Section 138 of the Negotiable Instruments Act, 1881, was held not maintainable on the facts of the case, and the proceedings were quashed in favour of the petitioner.

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