IndiaCorpLaw

Supreme Court on Dishonour of Post-Dated Cheques Issued as Security

[The
following post is contributed by Sneha
Bhawnani
, who is an Assistant Legal Advisor at Vinod Kothari & Co. She
can be contacted at sneha@vinodkothari.com.]

In the present era of commercial
dealings, the issuance of post-dated cheques has become a common phenomenon and
therefore the significance of such post-dated cheques cannot be
under-emphasized. In this context, a predominant question arises, i.e., whether the issuance of post-dated
cheques for satisfaction of a subsisting liability and those issued as security
yield identical or similar consequences. The aim of this post is delve upon the
nature of a post-dated cheque, the importance of the intention of the parties while
executing a contract and the circumstances in which dishonour of post-dated
cheques will attract the penal provisions of law with reference to landmark
case law.

At the very outset, it must be
understood that the nature of post-dated cheques is such that it acts as a
two-fold weapon in the hands of the lenders by means of which they pressurise
the borrowers as well as create a deterrent impact on all the other borrowers
or debtors so that there is no room for default on repayment of outstanding
debt to the creditors. The major penal consequences of dishonour of cheques
have been codified in section 138 of the Negotiable Instruments Act, 1881 (hereinafter
referred as the “Act, 1881”) which has created a sense of fear and anxiety in
the minds of the borrowers.

The impact of Section 138 of the
Act, 1882 operates differently on the borrowers on one hand and the lenders on
the other. In other words, this provision of law is hailed by the lenders
whereas the borrowers dread it the most as the dishonour of cheques may lead to
months of imprisonment. The text of the said section is reproduced below-

Dishonour
of cheque for insufficiency, etc., of funds in the account

138. Dishonour of cheque for
insufficiency, etc., of funds in the account. 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, is returned by
the bank unpaid either because of the amount of money standing to
the credit of that account is insufficient to honour the cheque or that it
exceeds the amount arranged to be paid from that account by an agreement made
with that bank, such person shall
be deemed to have committed an offence and shall, without prejudice to
any other provision of this Act, be
punished with imprisonment for a term which may extend to one year, or with
fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this
section shall apply unless-

(138.a) the cheque has been, presented
to the bank within a period of six months from the date on which it is drawn or
within the period of its validity, whichever is earlier;

(138.b) the payee or the holder in due
course of the cheque as the case may be, makes a demand for the payment of the
said amount of money by giving a notice, in writing, to the drawer of the
cheque, within fifteen days of the receipt of information by him from the bank
regarding the return of the cheque as unpaid; and

(138.c) the drawer of such cheque fails
to make the payment of the said amount of money to the payee or, as the case
may be, to the holder in due course of the cheque, within fifteen days of the
receipt of the said notice.

Explanation.-For the purposes of this
section, “debt or other liability” means a legally enforceable debt or other
liability.”

Essential Components of Post-Dated Cheques

At the
very outset, it is imperative to highlight the essential components of a
post-dated cheque in order to analyse whether the dishonour of such post-dated
cheque given as security would attract Section 138 of the Act, 1882. In this
context, reference must be made to a landmark judgement of the Supreme Court in
the case of
Anil Kumar Sawhney vs
Gulshan Rai
(1993 Supp 3 SCR 204) in which the following was
held-

A
“Bill of Exchange” is a negotiable instrument in writing containing
an instruction to a third party to pay a stated sum of money at a designated
future date or on demand. A “cheque” on the other hand is a bill of
exchange drawn on a bank by the holder of an account payable on demand. Thus a
“cheque” under Section 6 of the Act is also a bill of exchange but it
is drawn on a banker and is payable on demand. It is thus obvious that a bill
of exchange even through drawn on a banker, if it is not payable on demand, it
is not a cheque. A “post-
dated cheque” is only a bill of exchange when it is written or drawn, it
becomes a “cheque” when it is payable on demand. The post-dated
cheque is not payable till the date which is shown on the face of the said
document. It will only become cheque on the date shown on it and prior to that
it remains a bill of exchange under Section 5 of the Act. As a bill of exchange
a post-dated cheque remains negotiable but it will not become a “cheque”
till the date when it becomes “payable on demand”.

Thus, the Apex Court has
elucidated that at the time when a post-dated cheque is drawn then it is nature
of a negotiable instrument (“bill of exchange”) whereas it attains the nature
of a cheque from the date appearing on the face of such cheque.

Application of Section 138 to Post-Dated Cheques

In simple terminology, section
138 of the Act, 1881 shall have application when the cheque issued by the
borrower to the lender is dishonoured in relation to a subsisting debt or
liability. Therefore, keeping in mind the essential elements of post-dated
cheques, as elucidated above, it can be concluded that section 138 of the Act,
1881 shall be attracted only when such post-dated cheque attains the nature of
a cheque, i.e.,  with effect from such date as is mentioned
on it. However, when the post-dated cheque retains the nature of a negotiable
instrument (bills of exchange) then such post-dated cheque cannot be presented
to the bank and subsequently the question of return or dishonour of cheque does
not arise.

 

The ambit of Section
138 to punish for dishonour of cheques

 

After
analysing the significant elements of post-dated cheques and Section 138 of the
Act 1881, this post shall now embark on the law in relation to dishonour of
such post-dated cheques which are given as security. However, at this juncture,
reference must be made to the case of
I.C.D.S Ltd. v Beena Shabeer and Another ((2002) 111 Comp Cas 742) in which the Supreme Court
elucidated the broad ambit and scope of Section 138 of the Act, 1881 in the
following words-

The language, however, has been
rather specific as regards 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 highlighted 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.

Therefore, the
Court emphasized that the language of section 138 of the Act, 1882 being clear
and specific leaves no iota of doubt that when there
is default on part of one person in favour of another person and the issued
cheque is for the purpose of discharging a debt or liability then Section 138
shall apply.

Dishonour of Post-Dated Cheques given as security

After
the above analysis, the central issue arises whether the ambit of Section 138
to have application of dishonour of post-dated cheques given as security. The
Supreme Court has extensively dealt with this question in the case
Sampelly Satyanarayana
Rao v Indian Renewable Energy Development Agency
Limited
(2016 SCC 954). A brief facts and judgement
shall provide insight on whether the dishonour of post-dated cheques given as
security would attract Section 138 of the Act, 1882.

Facts
of the case

Sampelly
Satyanarayana Rao (“appellant”) is the director of a company which is engaged
in power generation activities. Indian Renewable Energy Development Agency
Limited (“respondent”), a Government of India enterprise, is engaged in the
field of renewable energy development. On 15 March, 2011 both the parties
entered into a loan agreement by means of which the respondent consented to
grant loan of Rs. 11.50 crores for the purpose of establishing 4.00 MW Biomass
Power Project. Clause 3.1(iii) of the said loan agreement provided that
post-dated cheques shall be issued by the appellant as a security for discharge
of loan instalments (principal and interest). The post-dated cheques carried
different dates based on the due loan instalments. The said post-dated cheques
were dishonoured and complaint was filed by the respondent.

Issue
involved in the case

The substantial question of law involved in this
case was whether the dishonour of post-dated cheques issued as security by the
appellant will attract Section 138 of the Act, 1881

Ratio
decidendi of the case

The
Supreme Court held that whether a post-dated cheque has been issued for
discharge of an outstanding liability shall depend on the nature of transaction
and Section 138 of the Act, 1881 shall be attracted only on the date of the
cheque there is a legally recoverable outstanding debt or liability. Further,
the Court held that although according to Clause 3.1(1) of the loan agreement
provided that the post-dated cheques are given as security, however, the
expression “security” must be understood to refer to cheques that have been
issued by the appellant for payment of the loan instalments to discharge the
existing outstanding debt or liability. The relevant extract of the judgement
is provided below-

Once the loan was
disbursed and instalments have fallen due on the date of the cheque as per the
agreement, dishonour of such cheques would fall under Section 138 of the Act.
The cheques undoubtedly represent the outstanding liability
.”

The Indus Airways ruling
has been distinguished from this case.

The Supreme Court distinguished the
landmark case of Indus Airways Private Limited v Magnum Aviation Private Limited
((2014) 12 SCC 539) from this case on the grounds that in the
Indus Airways case the purchase order was cancelled and therefore the dishonour
of cheque, issued for advance payment for the said purchase order, did not
represent any subsisting outstanding liability or debt and therefore Section
138 of the Act, 1881 was not attracted. In other words, the dishonour of
post-dated cheque would not be considered an offence under Section 138 of the
Act, 1881 when the said cheque cannot be considered as discharge of a legally
enforceable liability or debt. However, in the present case, although the
post-dated cheques were described as “security” in the loan agreement but in
essence the issuance of the same was for the purpose to repay the loan
instalments for satisfaction of outstanding liability.

Thus, in
this judgement the Court has held that there is difference between a purchase
order transaction which was cancelled and a loan transaction in which the loan
has been granted to the borrower and the repayment of the loan instalments is
due on the date of the cheque.

 

The Balaji Seafoods Exports ruling has been
distinguished from this case

In the case Balaji Seafoods Exports v Mac Industries Ltd (1999 (1) CTC 6) the
Madras High Court held that an undated cheque, issued as security, did not
represent any legally enforceable debt or liability, that is to say, it was not
issued with the intention to satisfy any subsisting debt. Therefore, the
dishonour of such a cheque did not attract Section 138 of the Act, 1881.
However, regarding the present case the Supreme Court held that since the
post-dated cheques were issued for discharge of an existing liability therefore
the dishonour of the same would constitute an offence under Section 138 of the
Act, 1881.

 

Conclusion

The judgement of the Supreme Court
in this case will have far reaching consequences as the distinction between a
post-dated cheque given as security and post-dated cheque issued for
satisfaction of subsisting liability has been clearly elucidated. Henceforth,
there is sufficient clarity that all the expressions and terminologies used in
an agreement between the parties shall be understood keeping in mind the
context of the agreement and the intention of the parties. Therefore, when a
post-dated cheque is described as a “security” in an agreement and then
eventually is dishonoured then Section 138 of the Act, 1881 shall stand
attracted because the intention or purpose for the issuance of the said
post-dated cheque is discharge or satisfaction of existing outstanding
liability or debt. Undoubtedly, this judgement provides enough respite to the
borrowers because now there is sufficient guidance as to events and
circumstances which shall lead to an offence under the most dreaded provision
of law, i.e., Section 138 of the Act,
1881 and therefore by virtue of such clarity the possibility of unfairly
coercing the borrowers has been drastically reduced.

– Sneha Bhawnani