In a very significant judgment which directly affects each and every citizen of India, the Supreme Court in a learned, laudable, landmark and latest judgment titled Sripati Singh (D) Through His Son Gaurav Singh vs The State of Jharkhand & Anr in Criminal Appeal Nos. 1269-70 of 2021 (Arising out of SLP (Criminal) No. 252-253/2020) delivered just recently on October 28, 2021 has observed in no uncertain terms that the dishonour of cheque issued as a security can also attract offence under Section 138 of the Negotiable Instruments Act. The Bench of Apex Court comprising of Justice MR Shah and Justice AS Bopanna made it clear that:
There cannot be a hard and fast rule that a cheque which is issued as security can never be presented by the drawee of the cheque. It must also be apprised here that the Bench added that such contention would arise only in a circumstance where the debt has not become recoverable and the cheque issued as security has not matured to be presented for recovery of the amount if the due date agreed for payment of debt has not arrived.

To start with, the ball is set rolling in para 1 of this brief, brilliant, bold and balanced judgment authored by Justice AS Bopanna for a Bench of Apex Court comprising of himself and Justice MR Shah wherein it is put forth that:
The appellant is before this Court assailing the order dated 17.12.2019 passed by the High Court of Jharkhand at Ranchi in Criminal M.P. No. 2635 of 2017 and Criminal M.P. No. 2655 of 2017. Through the said order, the High Court has allowed the said Crl. Miscellaneous Petitions and has set aside the orders dated 04.07.2016 and 13.06.2019 passed by the Judicial Magistrate First Class, Palamau in Complaint Case No. 1833 of 2015. The learned Judicial Magistrate by the order dated 04.07.2016 had taken cognizance of the offence alleged against the respondent No. 2 herein. By the order dated 13.06.2019 the learned Judicial Magistrate had rejected the petition filed by the respondent No. 2 seeking discharge in the said criminal complaint.

To put things in perspective, the Bench then while elaborating on the brief facts of the case envisages in para 2 that:
The brief facts leading to the present case as pleaded is that the appellant and the respondent No. 2 are known to each other inasmuch as the respondent No. 2 and the daughter of the appellant were pursuing their education together in London. On their return to India, the respondent No. 2 had settled in Bangalore and due to the earlier acquaintance, the cordial relationship amongst the families had continued. The respondent No. 2 on learning that the appellant was involved in business, had approached him at Daltonganj and sought financial business to the tune of Rs. 1 crore so as to enable the respondent No. 2 to invest the same in his business. Since the respondent No. 2 had assured that the same would be returned, the appellant placed trust in him and the appellant claims to have advanced further sum and in all a total sum of Rs. 2 crores during the periods between January 2014 to July 2014. The said amount was paid to respondent No. 2 by transferring from the account of appellant's daughter and also from the account of the appellant. Towards the said transaction, four agreements are stated to have been entered acknowledging the receipt of the loan. The said agreements were reduced into writing on non-judicial stamp papers bearing No. B489155, B489156, B489157 and B489159.

While continuing in the same vein, the Bench then points out in para 4 that, The respondent No. 2 on appearance filed a miscellaneous petition seeking discharge from the criminal proceeding, which was rejected by the order dated 13.06.2019. It is in that background, the respondent No. 2 claiming to be aggrieved by the order dated 04.07.2016 and 13.06.2019 approached the High Court in the said criminal miscellaneous petitions. The High Court, through the impugned order has allowed the petitions filed by the respondent No. 2. The appellant therefore claiming to be aggrieved is before this Court in these appeals.

Most significantly, the Bench then observes what forms the cornerstone of this extremely commendable judgment in para 16 that:
A cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance. 'Security' in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment. It is given, deposited or pledged to make certain the fulfillment of an obligation to which the parties to the transaction are bound. If in a transaction, a loan is advanced and the borrower agrees to repay the amount in a specified time-frame and issues a cheque as security to secure such repayment; if the loan amount is not repaid in any other form before the due date or if there is no other understanding or agreement between the parties to defer the payment of amount, the cheque which is issued as security would mature for presentation and the drawee of the cheque would be entitled to present the same. On such presentation, if the same is dishonoured, the consequences contemplated under Section 138 and the other provisions of N.I. Act would flow.

Be it noted, the bench then makes it clear in para 17 that:
When a cheque is issued and is treated as 'security' towards repayment of an amount with a time period being stipulated for repayment, all that it ensures is that such cheque which is issued as 'security' cannot be presented prior to the loan or the installment maturing for repayment towards which such cheque is issued as security. Further, the borrower would have the option of repaying the loan amount or such financial liability in any other form and in that manner if the amount of loan due and payable has been discharged within the agreed period, the cheque issued as security cannot thereafter be presented. Therefore, the prior discharge of the loan or there being an altered situation due to which there would be understanding between the parties is a sine qua non to not present the cheque which was issued as security. These are only the defences that would be available to the drawer of the cheque in a proceedings initiated under Section 138 of the N.I. Act. Therefore, there cannot be a hard and fast rule that a cheque which is issued as security can never be presented by the drawee of the cheque. If such is the understanding a cheque would also be reduced to an 'on demand promissory note' and in all circumstances, it would only be a civil litigation to recover the amount which is not the intention of the statute. When a cheque is issued even though as 'security' the consequence flowing therefrom is also known to the drawer of the cheque and in the circumstance stated above if the cheque is presented and dishonoured, the holder of the cheque/drawee would have the option of initiating the civil proceedings for recovery or the criminal proceedings for punishment in the fact situation, but in any event, it is not for the drawer of the cheque to dictate terms with regard to the nature of litigation.

Of course, the Bench then enunciates in para 18 that:
If the above principle is kept in view, as already noted, under the loan agreement in question the respondent No. 2 though had issued the cheques as security, he had also agreed to repay the amount during June/July 2015, the cheque which was held as security was presented for realization on 20.10.2015 which is after the period agreed for repayment of the loan amount and the loan advanced had already fallen due for payment. Therefore, prima facie the cheque which was taken as security had matured for payment and the appellant was entitled to present the same. On dishonour of such cheque the consequences contemplated under the Negotiable Instruments Act had befallen on respondent No. 2. As indicated above, the respondent No. 2 may have the defence in the proceedings which will be a matter for trial. In any event, the respondent No. 2 in the fact situation cannot make a grievance with regard to the cognizance being taken by the learned Magistrate or the rejection of the petition seeking discharge at this stage.

As a corollary, the bench then observes in para 19 that:
In the background of the factual and legal position taken note supra, in the instant facts, the appellants cannot be non-suited for proceeding with the complaint filed under Section 138 of N.I. Act merely due to the fact that the cheques presented and dishonoured are shown to have been issued as security, as indicated in the loan agreement. In our opinion, such contention would arise only in a circumstance where the debt has not become recoverable and the cheque issued as security has not matured to be presented for recovery of the amount, if the due date agreed for payment of debt has not arrived. In the instant facts, as noted, the repayment as agreed by the respondent No. 2 is during June/July 2015. The cheque has been presented by the appellant for realisation on 20.10.2015. As on the date of presentation of the cheque for realisation the repayment of the amount as agreed under the loan agreement had matured and the amount had become due and payable. Therefore, to contend that the cheque should be held as security even after the amount had become due and payable is not sustainable. Further, on the cheques being dishonoured the appellant had got issued a legal notice dated 21.11.2015 wherein interalia it has been stated as follows:

You request to my client for loan and after accepting your word my client give you loan and advanced loan and against that you issue different cheque all together valued Rs One crore and my client was also assured by you will clear the loan within June/July 2015 and after that on 26.10.2015 my client produce the cheque for encashment in H.D.F.C. Bank all cheque bearing No. 402771 valued Rs. 25 Lakh, 402770 valued Rs. 25 lakh, 402769 valued Rs. 50 lakh, (total rupees one crore) and above numbered cheques was returned with endorsement in sufficient fund. Then my client feel that you have not fulfil the assurance.

Needless to say, the Bench then adds in para 20 that:
The notice as issued indicates that the appellant has at the very outset after the cheque was dishonoured, intimated the respondent no. 2 that he had agreed to clear the loan by June/July 2015 after which the appellant had presented the cheque for encashment on 26.10.2015 and the assurance to repay has not been kept up.

Simply put, the Bench then hastens to add in para 21 that:
In the above circumstance, the cheque though issued as security at the point when the loan was advanced, it was issued as an assurance to repay the amount after the debt becomes due for repayment. The loan was in subsistence when the cheque was issued and had become repayable during June/July 2015 and the cheque issued towards repayment was agreed to be presented thereafter. If the amount was not paid in any other mode before June/July 2015, it was incumbent on the respondent No. 2 to arrange sufficient balance in the account to honour the cheque which was to be presented subsequent to June/July 2015.

Quite forthrightly, the Bench then observes in para 22 that:
These aspects would primafacie indicate that there was a transaction between the parties towards which a legally recoverable debt was claimed by the appellant and the cheque issued by the respondent No. 2 was presented. On such cheque being dishonoured, cause of action had arisen for issuing a notice and presenting the criminal complaint under Section 138 of N.I. Act on the payment not being made. The further defence as to whether the loan had been discharged as agreed by respondent No. 2 and in that circumstance the cheque which had been issued as security had not remained live for payment subsequent thereto etc. at best can be a defence for the respondent No. 2 to be put forth and to be established in the trial. In any event, it was not a case for the Court to either refuse to take cognizance or to discharge the respondent No. 2 in the manner it has been done by the High Court. Therefore, though a criminal complaint under Section 420 IPC was not sustainable in the facts and circumstances of the instant case, the complaint under section 138 of the N.I. Act was maintainable and all contentions and the defence were to be considered during the course of the trial.

As a corollary, the Bench then holds in para 23 that:
In that view, the order dated 17.12.2019 passed by the High Court of Jharkhand in Cr.M.P No. 2635 of 2017 with Cr.M.P No. 2655 of 2017 are set aside. Consequently, the order dated 04.07.2016 and 13.06.2019 passed by the Judicial Magistrate are restored. The complaint bearing C.C. No. 1839 of 2015 and 1833 of 2015 are restored to the file of the Judicial Magistrate, limited to the complaint under Section 138 of N.I. Act to be proceeded in accordance with law.

For the sake of clarity, the Bench then states in para 24 that:
All contentions of the parties on merit are left open. We make it clear that none of the observations contained herein shall have a bearing on the main trial. The trial court shall independently arrive at its conclusion based on the evidence tendered before it.

All said and done, the Apex Court has made it absolutely clear as to the indisputable fact that dishonour of the cheque issued as a security can also attract offences under Section 138 of the Negotiable Instruments Act. This is best elaborated in para 16 as already discussed hereinabove. So it is the bounden duty of all citizens to always ensure that they comply entirely with what has been stated very recently in this notable judgment delivered by a Bench of Apex Court comprising of Justice AS Bopanna and Justice MR Shah so elegantly, eloquently and effectively! There can be just no denying it!

Sanjeev Sirohi, Advocate,
s/o Col BPS Sirohi, A 82, Defence Enclave,
Sardhana Road, Kankerkhera, Meerut - 250001, Uttar Pradesh