Cheques as ‘security’- Should lenders finally cheer?
- Manisha Paranjape, Principal Associate, Dhaval Vussonji & Associates
Historically, the deposit of post-dated cheques by a borrower served a two-fold purpose for lenders – first, direct access to a borrower’s account on a duedate without a need to wait for the borrower to complete procedural formalities and secondly, the option of recourse under Section 138 of the Negotiable Instruments Act, 1881 (“the Act”) which allows criminal liability to attach to a defaulter of a commercial transaction with otherwise only civil remedies. With the development of complexes crow mechanisms which give a lender absolute control over accounts of borrowers rendering the first purpose almost redundant, lenders started looking at these post-dated cheques predominantly as security to be used only in events of non-compliance.

In a spate of decisions delivered by different High Courts it has been held that undated/ post-dated cheques given as ‘security’ would not attract the provisions of Section 138 of the Actas no debt or liability existed on the date of handing over of these cheques and therefore dishonour of such cheques would fall outside the purview of Section 138 of the Act. Thereafter the Supreme Court in Indus Airways Private Limited & Ors.v. Magnum Aviation PrivateLimited &Anr while affirming the views of the aforesaid High Courts held that drawing of a cheque in discharge of an existing or past adjudicated liability is sine qua non for bringing an offenceunderSection 138. In light of this, lenders have in recent times beenunsuccessfulin enforcing thesechequesassecurity under Section 138 of the Act.

The Supreme Court has now once again in Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited examined whether dishonour of a post-dated cheque given for repayment of a loan instalment which is also described as “security” in the loan agreement would be covered by Section 138 of the Act.

The facts of the case were that the loan agreement recorded (under a clause titled “Security”) that post-dated cheques towards payment of loan (principal and interest)were given. The cheques carried dates which were in fact the due dates for the repayment of instalments. The cheques were subsequently dishonoured and complaints under Section 138 of the Act were filed. The Delhi High Court was approached to quash these complaints. As the Delhi High Court found no reason to do so, an appeal was preferred to the Apex Court.

In its judgment given on 19th September, 2016, the Supreme Court has held that dishonour of such cheques being for discharge of existing liability would be covered by Section 138 of the Act.

Whether this changes the existing judicial position as laid down in Indus Airways (supra) ought to be analysed under two heads
  1. Whether post-dated cheques(PDCs) in such lending transactions represents  discharge of an existingenforceable debt or liability

    Intheinstantcase,theloanwasdisbursedpriortothedate(s)endorsedon the cheque and instalments had fallen due on the date of the cheque. The Supreme Court has held that the cheques undoubtedly represent an existing outstanding liability the moment the the instalment falls due and the loan becomes due and repayable. Since,liabilityordebtexists as on the date of the cheque, the Supreme Court has held that Section 138 is indeed available as a remedy to the lender.

    This is a departure from the position in Shanku Concretes Pvt. Ltd.v. State Of Gujarat and Balaji Seafoods Exports (India) Private Limited v. Mac Industries Limited wherein the liability which required due discharge was examined as on the date of delivery or handover of the cheque as opposed to the date inscribed on the cheque.

    Thus as long as post-dated cheques bearing due dates of specific instalments are handed over to the lender, the defence available to the borrowers under the earlier judgments of the various high courts would no longer be available henceforth.
  2. Would dishonour of a PDC handed over as ‘security’ attract the provisions of Section 138?

    The Supreme Court has in the instant case placed great emphasis on (i) the language used in the Loan Agreement and (ii) the pleadings of the Complainant.

    The Court has recorded that although the cheques have been placed under the head of “Security” in the Loan Agreement, the same clause refers to the cheques being towards repayment of the instalments and that the Loan Agreement records that the cheques have been deposited “towards repayment of instalments of principal of loan amount in accordance with agreed repayment schedule and instalments of interest payable thereon”. This, coupled with the pleadings of the Complainant that the cheques were towards partial repayment of dues under the loan agreement, led the Supreme Court to conclude that although the cheque was also described as security, the primary purpose of such a cheque was towards repayment of instalments which are immediately due as on the date of the PDC(s).

    The question which therefore remains to be decided is whether an undated or a blank cheque deposited with the lender with the same purpose (i.e., repayment of the loan which is in fact immediately due and payable) would also be now governed by the ratio laid down by the Supreme Court.