Security cheques can attract Section 138 liability when loan repayment has fallen due and the debt remains unpaid.

Cheques issued in a loan transaction are not excluded from Section 138 of the Negotiable Instruments Act merely because they are described as security. The decisive test is whether, on the date of presentation, an existing and legally recoverable liability had arisen. Here, the loan had been advanced, the repayment period had expired, and the cheques were dishonoured for insufficiency of funds; the unrebutted evidence showed the liability remained unpaid. The Court held that dishonour of such cheques attracted criminal liability under Section 138, set aside the acquittal, and restored the conviction and sentence.

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Issues: Whether cheques issued under a loan transaction and described as security nevertheless attracted criminal liability under Section 138 of the Negotiable Instruments Act, 1881 when the loan had been advanced, the repayment period had expired, and the cheques were dishonoured for insufficiency of funds.

Analysis: The loan agreement showed that the amount had already been advanced and the cheques were handed over on the same date with a stipulation that they could be presented if repayment was not made within the agreed period. A cheque described as security is not outside Section 138 merely because that label is used in the agreement. The decisive question is whether, on the date of presentation, an existing and legally recoverable liability was present. The Court relied on the principle that where a loan is advanced and the cheque is issued to secure repayment of an amount that has fallen due, dishonour of such cheque falls within Section 138. The complainant's evidence remained unrebutted, and the defence did not establish prior discharge of the liability.

Conclusion: The cheques were not treated as mere inert security instruments. They represented a liability enforceable at the time of presentation, and their dishonour attracted Section 138. The acquittal by the appellate court was set aside and the conviction and sentence restored.

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