Dishonour Of Post-dated Cheque For Discharge Of Existing Liability Shall Be Covered By NI, Act. | Semantic Taxgen Pvt Ltd
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Dishonour of Post-dated cheque for discharge of existing liability shall be covered by NI, Act.

January 22, 2017

The Supreme Court of India in the case of SampellySatyanarayan Rao V Indian Renewable Energy Development Agency Ltd [2016] 74 68/138 SCL 73 held that dishonour of post dated cheques issued for discharge of existing liability (though given as security) shall be covered under Section 138 of the Negotiable Instruments Act. This Article highlights the circumstances under which a person is liable for dishonour of post date cheque with comparison with other judgments of the Supreme Court on the same.


1. If a drawer of a cheque issues a cheque for consideration and if it is dishonoured then he is liable under Section 138 of the Negotiable Instruments Act. In other words, the drawer of the cheque is liable for debt or other liability which is legally enforceable debt or other liability and not for dishonour of cheque given for security of the total loan. Usually, the cheque for repayment of the loan will be given as a post dated cheque as “security”. This means that the drawer of the cheque is liable even for dishonour of the cheque given for security if on the date of the cheque liability or debt exists or the amount has become legally recoverable. This article highlights the fact that the Supreme Court in the case of Sampelly Satyanarayan Rao v. Indian Renewable Energy Development Agency Ltd, [2016] 74 68/138 SCL 73 has given the judgment that dishonour of post dated cheques issued for discharge of existing liability shall be covered by the Negotiable Instruments Act.

Provisions of Section 138 of the Negotiable Instruments Act

2. Section 138 reads as under

“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 provisions of this Act, be punished with imprisonment for a term which may be extended to two years, 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:-

(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;
(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 thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
(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.”

Facts of the case-Sampelly Satyanarayan Rao v. Indian Renewable Energy Development Agency Ltd. [2016] 74 68/138 SCL 73 (SC)

3. The appellant is the Director of the company whose cheques have been dishonoured. He has also been arrayed as the co-accused. The company is engaged in the power generation. The Respondent is engaged in development of renewable energy and is a Government of India Enterprise. Through the loan agreement dated 15th March, 2001, the respondent agreed to advance a loan of Rs. 11.50 crores for setting up of 4 MW Biomass based power project in the State of Andhra Pradesh. In the agreement, it was also recorded that post dated cheques towards payment of instalment of loan ( i.e. Principal and interest) were given by way of security. The cheques were in different dates as it was depending on the dates when the instalments were due and upon dishonour thereof, complaints including the one dated 27th September, 2002 were filed by the Respondent in the Court of the concerned Magistrate at New Delhi. It is to be noted that these cheques were given for the repayment of instalment loan in total (i.e. principal and interest) and apart from this EMI was payable as per the loan agreement.

Appeal before High Court

4. The Appellant being aggrieved approached the High Court to seek quashing of the complaints arising out of various cheques (18 in number) totalling to Rs. 10.3 crores. The contention of the appellant in support of his case was that the cheques were given by way of security as mentioned in the agreement and that on the date the cheques were issued, no debt or liability was created or it was due. Thus, dishonour of post-dated cheques given by way of security did not fall under Section 138 of the Negotiable Instruments Act. It was also contended that clause 3.1(iii) of the agreement mentions that the effect of deposit of post-dated cheques towards repayment of instalments was of “security”. Thus, it was not given for any debt or liability. Even the first instalment as per the agreement became due subsequent to the handing over of the post-dated cheque. Thus the Appellant contended that the post dated cheques were not given towards any debt or liability but for the amount payable in future.

Judgment of the High Court

5. The High Court turned down the contention of the Appellant and held that

10. In the present case when the post dated cheques were issued, the loan had been sanctioned and hence the same fall in the first category that is they were cheque issued for a debt in present but payable in future. Hence I find no reason to quash the complaints. However, these observations are only prima facie in nature and it will be open for the party to prove to the contrary during the trial.”

Appeal before the Supreme Court

6. Aggrieved by the aforesaid order, the Appellant filed an appeal before the Apex Court and placed reliance on the decisions of the Apex Court in Indus Airwarys (P.) Ltd. v. Magnum Aviation (P.) Ltd. [2014] 12 SCC 539. The Supreme Court noted that the question therein was whether post dated cheque issued by way of advance payment for a purchase order could be considered for discharge of legally enforceable debt. The cheque was issued by way of advance payment for the purchase order but the purchase order was cancelled and payment of the cheque was stopped. Accordingly, this Court held that while the purchaser may be liable for breach of the contract, when a contract provides that the purchaser has to pay in advance and cheque towards advance payment is dishonoured, it will not give rise to criminal liability under Section 138. Thus it was summarised that the issuance of cheque towards advance payment could not be considered as discharge of any subsisting liability.

Relevant clause in the Loan Agreement between the Parties

7. The relevant clause of the agreement for consideration before the Supreme Court was as under:-

3.1 Security for the Loan

The loan together with the interest, interest tax, liquidated damages, commitment fee, upfront fee prima on repayment or on redemption, costs, expenses and other monies shall be secured by:

(i) & (ii)** ** **

(iii) Deposit of Post dated cheques towards repayment of instalments of principal of loan amount in accordance with agreed repayment schedule and instalments of interest payable thereon.

Observation of Supreme Court

8. The Apex Court observed that though the word “security” is used in clause 3.1.(iii) of the loan agreement, the said expression refers to the cheques being towards repayment of instalments. The repayment becomes due under the agreement, the moment the loan is advanced and the instalment falls due. It is undisputed that the loan was duly disbursed on 28th February, 2002 which was prior to the date of the cheques. 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. Thus, the cheques undoubtedly represent the outstanding liability.

The Apex Court distinctly distinguished between the judgments in Indus Airways (P.) Ltd. Case (supra) and mentioned that dishonour of cheque issued for discharge of later liability is clearly covered by the Statute in question. Admittedly, on the date of the cheque there was a debt/liability in existence in terms of the loan agreement, as against the case of Indus Airways (P.) Ltd’s. (supra) where the purchase order had been cancelled and cheque issued towards advance payment for the purchase order was dishonoured. In that case, it was found that the cheque had not been issued for discharge of liability but as advance for the purchase order which was cancelled. Keeping in mind this fine but real distinction, the said judgment cannot be applied to a case of present nature where the cheque was for repayment of loan instalment which had fallen due though such deposit of cheques towards repayment of instalments was also described as “security” in the loan agreement. It was further noted that in applying the judgment in Indus Airways (P.) Ltd. (supra), one cannot lose sight of the difference between a transaction of purchase order which is cancelled and that of loan transaction where loan has actually been advanced and its repayment is due on the date of the cheque.

Thus the crucial question to determine applicability of Section 138 of the N.I. Act is whether the cheque represents discharge of existing enforceable debt or liability or whether it represents advance payment without there being subsisting debt or liability.

Further, it was also noted by the Apex Court that the question whether a post dated cheque is for “discharge of debt or liability” depends on the nature of the transaction. If on the date of the cheque liability or debt exists or the amount has become legally recoverable, the Section is attracted and not otherwise.

HMT watches Ltd. v. M.A. Abida [2015] 130 SCL 511/56 328 (SC)

9. The aforesaid case was relied upon on behalf of the respondent, wherein the Apex Court dealt with the contention that the proceedings under Section 138 were liable to be quashed as the cheques were given as “security” as per defence of the accused. The Apex Court negativing the contention and held as under:-

“Having heard the learned counsel for the parties, we are of the view that the accused (Respondent 1) challenged the proceedings of criminal complaint cases before the High Court, taking factual defences. Whether the cheques were given as security or not, or whether there was outstanding liability or not is a question of fact which could have been determined only by the trial court after recording evidence of the parties. In our opinion, the High Court should not have expressed its view on the disputed questions of fact in a petition under Section 482 of the Code of Criminal Procedure, to come to a conclusion that the offence is not made out. The High Court has erred in law in going into the factual aspects of the matter which were not admitted between the Parties. The High Court further erred in observing that Section 138(b) of the N.I. Act stood un-complied with, even though Respondent 1 (accused) had admitted that he replied to the notice issued by the complainant. Also, the fact as to whether the signatory of demand notice was authorised by the complainant company or not, could not have been examined by the High Court in its jurisdiction under Section 482 of the Code of Criminal Procedure when such plea was controverted by the complainant before it.

Balaji Seafoods Exports (India) Ltd. v. Mac Industries Ltd. [1999] 1 CTC 6 (Mad)

10. The High Court noted that the cheque was not handed over with the intention of discharging the subsisting liability or debt. There is, thus no similarity in the facts of that case simply because in that case also loan was advanced. It was noticed specifically therein – as was the admitted case of the parties – that the cheque was issued as “security” for the advance and was not intended to be in discharge of the liability, as in the present case.

Rallis India Ltd. v. Poduru Vidya Bhushan [2011] 108 SCL 159/12 184 (SC)

11. The Apex Court expressed its views on this point as under:-

“At the threshold, the High Court should not have interfered with the cognizance of the complaints having been taken by the trial court. The High Court could not have discharged the respondents of the said liability at the threshold. Unless, the parties are given opportunity to lead evidence, it is not possible to come to a definite conclusion as to what was the date when the earlier partnership was dissolved and since what date the respondents ceased to be the partners of the firm.”

Suryalakshmi Cotton Mills Ltd. v. Rajvir Industries Ltd. [2008] 13 SCC 678

12. This Court has made the following observations:-

“The parameters of jurisdiction of the High Court in exercising its jurisdiction under Section 482 of the Code of Criminal Procedure is now well settled. Although it is of wide amplitude, a great deal of caution is also required in its exercise. What is required is application of the well-known legal principles involved in the matter.

** ** **

Ordinarily, a defence of an accused although appears to be plausible should not be taken into consideration for exercise of the said jurisdiction. Yet again, the High Court at that stage would not ordinarily enter into a disputed question of fact. It, however, does not mean that documents of unimpeachable character should not be taken into consideration at any cost for the purpose of finding out as to whether continuance of the criminal proceedings would amount to an abuse of process of court or that the complaint petition is filed for causing mere harassment to the accused. While, we are not oblivious of the fact that although a large number of disputes should ordinarily be determined only by the civil courts, but criminal cases are filed only for achieving the ultimate goal, namely, to force the accused to pay the amount due to the complainant immediately. The Courts on the one hand should not encourage such a practice, but, on the other, cannot also travel beyond its jurisdiction to interfere with the proceeding which is otherwise genuine. The Courts cannot also lose sight of the fact that in certain matters, both civil proceedings and criminal proceedings would be maintainable.”

Rangappa v. Sri Mohan [2010] 100 SCL 389 (SC)

13. In the aforesaid case, the Apex Court held that once issuance of a cheque and signature thereon are admitted, presumption of a legally enforceable debt in favour of the holder of the cheque arises. It is for the accused to rebut the said presumption, though accused need not adduce his own evidence and can rely upon the material submitted by the complainant. However, mere statement of the accused may not be sufficient to rebut the said presumption. A post dated cheque is a well recognized mode of payment. [Goaplast (P.) Ltd v. Chico Ursula D’Souza [2003] 44 SCL 472 (SC)]

Final judgment

14. After going through the various judgments and also hearing the arguments of both the sides, the Apex Court noted that the cheques which were subject matter of the said complaint were towards the partial repayment of the dues under the loan agreement. Also, it is clear from the various observations, it is well settled that while dealing with a quashing petition, the Court has ordinarily to proceed on the basis of averments in the complaint. The defence of the accused cannot be considered at this stage. The Court considering the prayer for quashing does not adjudicate upon a disputed question of fact. Thus, the dishonour of cheque in the present case being for discharge of existing liability is covered by Section 138 of the N.I.Act, as rightly held by the High Court. The Apex Court has also mentioned that it has gone only into the question whether on admitted facts, the case for quashing has not been made out, the appellant will be at liberty to contest the matter in trial court in accordance with law.


15. It can be concluded that dishonour of cheque issued for discharge of later liability is clearly covered by the Statute. It is to be noted that whether a post-dated cheque is for “discharge of debt or liability” depends on the nature of the transaction. If on the date of the cheque liability or debt exists or the amount has become legally recoverable, then the Section under 138 of the N.I. Act is attracted and not otherwise.

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