Delhi High Court Quashes S.138 NI Act Complaints As Security Cheques Not Encashable For Existing Debt 

Summary:

The Delhi High Court has held that cheques issued purely as security instruments and not meant for deposit or encashment cannot be treated as issued “in discharge of any debt or other liability” under Section 138 of the Negotiable Instruments Act, 1881. Since the cheques in question were given only to be shown to a banker as security and not for repayment of an existing liability, their dishonour could not attract liabilities. The Court therefore quashed the summoning orders issued by the Trial Court and held that the S.138 complaints were not maintainable. 

Facts:

• Five criminal complaints under Section 138 NI Act were filed by Magnifico Minerals Pvt. Ltd., alleging that a sum of Rs. 1,91,72,159.51/- (Rupees One Crore Ninety-One Lakh Seventy-Two Thousand One Hundred Fifty-Nine and Paise Fifty-One only) was due and recoverable from the Petitioner as on 03.11.2014, besides interest. 

• It was alleged that to discharge this liability, the petitioner issued five cheques, which were later dishonoured on presentation with the endorsement “STOP PAYMENT”. 

• Sri Sai Sapthagiri contended that the cheques were not issued towards repayment, but were handed over only as security, with a clear understanding that they would not be presented for encashment. 

• According to the petitioner, the cheques were meant to be shown to the banker for security arrangements, and Magnifico Minerals had fraudulently and coercively deposited them to pressurise payment. 

• Magnifico Minerals argued that even if the cheques were initially given as security, they were issued against a contingent liability, and once the liability crystallised, the cheque amounts became payable. Reliance is placed on the judgment of Delhi High Court in K.S. Bakshi v. State, 2008 (3) JCC (NI) 267, It was held that where a cheque is issued as security for due performance of a contract, it becomes enforceable upon failure to perform the obligation.  

• The Trial Court accepted the complainant’s version and summoned the petitioner under Section 138 NI Act, prompting the challenge before the Delhi High Court. 

Issues:

• Whether cheques issued only for security purposes can constitute instruments drawn towards a “legally enforceable debt or liability” under Section 138 NI Act. 

Judgement:

• Security cheques cannot be treated as issued for existing debt– The Court held that the impugned cheques were security cheques, issued for a specific and limited purpose. They were not intended for encashment at the time they were handed over. Justice Neena Bansal Krishna observed: 

“The impugned cheques were security cheques given for a specific purpose and could not have been encashed for a liability which may have subsequently arisen. The Complaints under S.138 NI Act are therefore, liable to be quashed.” 

• No legally enforceable liability at the time of issuance- The Court found that the cheques were not issued against any subsisting liability. They were delivered merely to serve as a security cushion. Any liability that arose later could not retrospectively convert a security cheque into a cheque issued for repayment. Thus, presenting such cheques for encashment was contrary to the intended purpose. 

• Section 138 complaints not maintainable- The Court held that since the cheques were never intended to be encashed, their dishonour could not constitute an offence under Section 138 NI Act. The cheques in question were security cheques and were not issued or encashable for any legally enforceable liability or debt, and the complaints under Section 138 NI Act are not maintainable. The summoning orders were therefore quashed. 

• Defect in place of filing and invalid summoning orders- The Court also noted procedural defects relating to the place where the complaints were filed. Relying on the principles laid down in Bridgestone India (P) Ltd., the Court observed that once a complaint is returned for want of territorial jurisdiction, all proceedings in the earlier court become non-est. In this case, after the complaint was returned by the Magistrate at Bellary and re-filed in Delhi, the Magistrate at Patiala House Courts erroneously adopted the earlier summoning order instead of issuing a fresh one. Since a fresh summoning order was mandatory but not passed, the summoning orders were liable to be quashed on this ground as well. 

Analysis:

The High Court has once again clarified that the purpose for which a cheque is issued is central to determining whether its dishonour attracts penal consequences. If a cheque is handed over merely as a security assurance, without any existing and crystallised liability at the time of issuance, its dishonour does not amount to an offence under the NI Act. The ruling also highlights the importance of procedural correctness in cheque dishonour prosecutions. Once the earlier court returned the complaint due to lack of territorial jurisdiction, all proceedings therein became non-existent in law. Therefore, the failure of the Delhi Magistrate to issue a fresh summoning order and instead rely on the earlier one constituted a serious jurisdictional defect that independently warranted quashing of the proceedings.