Cheques Issued As Security Are Covered By Section 138

Mar 10 2003, 00:00 IST
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The provisions of section 138 has resulted in major consequences in commercial dealings. It has restored the respect (at least that arising out of fear) of cheques not only for the creditor but for the debtor also. It has resulted in being an important weapon of debt recovery. In any case, it has resulted in tremendous legal literature in the form of numerous court decisions. Considering that non-realisation of cheques can result in imprisonment, debtors too, once having issued the cheque try to find imaginative arguments to escape prosecution.

Let us consider one recent decision where an important such argument and defence has been laid to rest. Had such defence been successful, it would have placed an important hurdle in recovery particularly of borrowings. This is in the form of a Supreme Court decision in the case of Icds Ltd. V. Beena Shabeer And Another (2002) 111 Comp. Cas. 742 (SC). Incidentally, it may be noted that this defence was found to be a valid one at the level of several High Courts and now this Supreme Court decision closes the issue once and for all.

Post-dated cheques are frequently used to secure payments that arise in the future. The classic example is the use of post dated cheques to secure monthly installments that are payable against a loan granted. The legal question that can be raised is whether a cheque that is given as a security and not as a repayment of debt can be covered by section 138 of the Negotiable Instruments Act. More so, whether such a cheque that has been issued not by the borrower but by a guarantor can be so considered as covered by that section. The facts of the case were as follows.

The appellant was a company that had granted finance to the respondent for purchase of a car on instalment basis. The husband of the respondent entered into a hire purchase agreement with the appellant for this purpose. The respondent stood as a guarantor in respect of the hire purchase facilities being made available to her husband.

The respondent on account of the aforesaid transaction and towards part payment issued a cheque to the appellant. The said cheque was dishonoured and returned to the appellant with a remark “insufficient funds”.

The question was that whether a complaint would lie under section 138, assuming further acts, notices, etc. as required under this section and related provisions were carried out.

Interestingly, the High Court took a view that section 138 did not cover such cheques and hence in such a case, even if otherwise the dishonour was of such a nature as to be otherwise covered by this section, a complaint was not maintainable.

The High Court observed, “Reading of the above section would make it clear that issuance of a cheque must be for payment of amount of money from out of the account.

In the case of a guarantor or surety, even if a cheque is issued, that cannot be said to be for immediate payment of money : Section 138 of the Act further says that issuance of cheque to another person is towards discharge, in whole or in part of any debt or other liability.” The Supreme Court, however, did not agree with the above reasoning.

It observed that the language of section 138 is very clear. Section 138 reads, “Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability”. Emphasis was placed by the Supreme Court on the words “any cheque” and “other liability” to support its view that cheques issued as security were also so covered. The Supreme Court thus observed, “The language, however, has been rather specific as regard the intent of the Legislature.

The commencement of the section stands with the words ’where any cheque’. The above noted three words are of extreme significance, in particular, by reason of the user of the word ’any’ - the first three words suggest that in fact for whatever reason if a cheque is drawn on an account maintained by him with a banker in favour of another person for the discharge of any debt or other liability, the italicised words if read with the first three words at the commencement of section 138, leave no manner of doubt that for whatever reason it may be, the liability under this provision cannot be avoided in the event the same stands returned by the banker unpaid.

The Legislature has been careful enough to record not only discharge in whole or in part of any debt but the same includes other liability as well. This aspect of the matter has not been appreciated by the High Court, neither been dealt with or even referred to in the impugned judgement.”. It further observed, “ ‘Any cheque’ and ‘other liability’ are the two key expressions which stand as clarifying the legislative intent so as to bring the factual context within the ambit of provisions of the statute. Any contra interpretation would defeat the intent of the Legislature.

The High Court, it seems, got carried away by the issue of guarantee and guarantor’s liability and, thus, has overlooked the true intent and purport of section 138 of the Act.”

On the issue that the cheque has been issued by the guarantor also, the Supreme Court rejected as the issue of having any relevance for section 138. In fact, it laid down simply the rule that when a cheque has been issued by whomsoever for discharge of whatsoever liability, and such a cheque is dishonoured for prescribed reasons, section 138 is attracted.

The sum of this provisions can thus be observed in the words of the Supreme Court as follows:- “The language of the statute depicts the intent of the law-makers to the effect that wherever there is a default on the part of one in favour of another and in the event a cheque is issued in discharge of any debt or other liability there cannot be any restriction or embargo in the matter of application of the provisions of section 138 of the Act”.

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