Security cheques in a continuing loan facility cannot trigger Section 138 prosecution until liability crystallises and contractual conditions are met.

Undated security cheques issued for a continuing loan facility could not sustain prosecution under Section 138 of the Negotiable Instruments Act, 1881 where the loan account remained subsisting, repayments had been made, no final recall or definitive computation of outstanding liability was shown, and no prior demand or default notice had been issued. The court treated the alleged debt as uncrystallised and the cheques as contractual security rather than instruments for a settled due liability. On those facts, the complaint and connected criminal proceedings were quashed as not maintainable and as an abuse of process.

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Issues: Whether criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881 arising from undated security cheques could be quashed when the loan account was continuing, repayments had been made, no prior demand or default notice had been issued, and the alleged liability had not crystallised.

Analysis: The loan documents showed a continuing facility, with the cheques given as security for the overall loan and not for a specific instalment or settled due date. The record indicated substantial repayments during the relevant period and did not show a final recall of the facility or a definitive computation of the outstanding liability. The complaint also did not disclose any prior notice demanding rectification of default before presentation of the cheques. In these circumstances, the presentation of the security cheques without crystallisation of the debt or prior demand was held to be inconsistent with the contractual framework and unfair to the guarantors.

Conclusion: The complaint and the connected criminal proceedings were not maintainable on the facts and were quashed.

Final Conclusion: The continuation of the cheque dishonour proceedings was found to be an abuse of process in the circumstances of a subsisting and restructured loan account.

Ratio Decidendi: A security cheque issued for a continuing loan facility cannot sustain prosecution under Section 138 of the Negotiable Instruments Act, 1881 unless the liability has crystallised and the contractual preconditions for invocation have been satisfied.

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