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
- 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.”
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.
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 DevelopmentAgency 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.
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 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 judgment 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.