Dishonour of a cheque which was furnished as ‘security’ would be covered under Sec 138 of NI Act if a legally enforceable debt or liability has arisen.

In the matter of Sunil Todi & Ors. Vs. State of Gujarat & Anr. Criminal Appeal No. 1447/2021, decided by the Hon’ble Supreme Court of India on 03.12.2021.

Facts of the case-

The Appellant company entered into a Power Supply Agreement (PSA) on 24.07.2016 with the Respondent No. 2 wherein it was agreed between the parties that payment would be made by Letter of Credit (LC) on every 10th day of the month and for the purpose of security, the Appellant had issued a post-dated cheque for Rs. 2.67 crore on 28.08.2017. Consequently, three LC’s were issued at the behest of the Appellant for payment of the consumed electricity for three months, however, they were rejected by the bankers of Respondent No. 2 as they were not in the correct format. The Appellant Company terminated its agreement on 20.10.2016 and the Respondent No. 2 deposited the security cheque issued by the Appellant.

On the institution of complaint under section 138 of NI Act, the Appellant Company moved to respective High Court for quashing of complaint under sec 482 of CrPC, which was dismissed by the Court on 24.06.2019. Aggrieved by the same, the Appellant approached the Hon’ble Supreme Court.

It is the contention of the Appellant that the said cheque was intended at all material times to be a security towards payment which is also evident from the endorsement made on the reverse of the cheque and is thus not against a legally enforceable debt or liability. The counsel for the Respondent No. 2 on the other hand contended that the law does not prohibit the invocation of Sec 138 of NI Act even in a situation where the cheques have been issued initially as a security.

The primary issue appeared before the Hon’ble Court is whether the dishonour of a cheque furnished as a ‘security’ is covered under the provisions of Section 138 of the NI Act.

Analysis and observations of the Court-

The explanation to Section 138 of the NI Act provides that ‘debt or any other liability’ means a legally enforceable debt or other liability. Referring to the definition of ‘debt’ as per Aiyar’s Judicial Dictionary, the Hon’ble Court held that the term debt also includes a sum of money promised to be paid on a future day by reason of a present obligation. A post-dated cheque issued after the debt has been incurred would be covered by the definition of ‘debt’. However, if the sum payable depends on a contingent event, then it takes the color of a debt only after the contingency has occurred. Therefore, in the present case, a debt was incurred after the Respondent No. 2 began supply of power for which payment was not made because of the non-acceptance of the LCs.

Coming to the issue as to whether Section 138 only covers a situation where there is an outstanding debt at the time of the drawing of the cheque or includes drawing of a cheque for a debt that is incurred before the cheque is encashed, the Court observed that the true purpose of Section 138 would not be fulfilled, if ‘debt or other liability’ is interpreted to include only a debt that exists as on the date of drawing of the cheque.

In the present case, the issuance of the cheque was followed close on its heels by the supply of power. If the company were to fail to provide a satisfactory LC and yet consume power, the cheques were capable of being presented for the purpose of meeting the outstanding dues. Therefore, once payments for electricity supply became due in terms of PSA, and the company failed to discharge its dues by way of correct LCs, the Respondent No. 2 was entitled in law to present the cheque for payment.

The Court further held that “merely labelling the cheque as a security would not obviate its character as an instrument designed to meet a legally enforceable debt or liability, once the supply of power had been provided for which there were monies due and payable. There is no inflexible rule which precludes the drawee of a cheque issued as security from presenting it for payment in terms of the contract. It all depends on whether a legally enforceable debt or liability has arisen.”