Security Cheques and Section 138 NI Act: Latest Delhi High Court Judgment Explained.
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A complete guide to security cheques and Section 138 NI Act with major judgments, case digest, legal interpretation, and practical insights.
INTRO: Security cheques are widely used in commercial transactions across India. From vendor agreements to loan arrangements, parties often exchange cheques as a form of assurance or collateral. But a recurring legal question is:
Can dishonour of a security cheque lead to criminal prosecution under Section 138 of the Negotiable Instruments Act (NI Act)?
In a significant judgment, the Delhi High Court in Sri Sai Sapthagiri Sponge Pvt. Ltd. v. GNCT of Delhi (2025) has once again clarified that dishonour of a cheque issued purely as security does not attract Section 138 unless it is linked to a legally enforceable debt.
This decision reinforces the judicial stance that criminal law cannot be misused to enforce commercial arrangements where liability does not exist.
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Background of the case:
The complainant alleged that the accused company had issued cheques which were later dishonoured upon presentation. Based on this, a complaint under Section 138 NI Act was lodged, and the trial court issued a summoning order.
The accused company challenged this on the ground that:
- The cheques in question were security cheques.
- They were not issued for repayment or settlement of any debt.
- Their sole purpose was to be shown to banks as part of the business arrangement.
- The cheques were not intended for encashment.
Key Observations of the Delhi High Court:
(1) MOU Clearly Stated Cheques Were for Security Only
The Court examined the Memorandum of Understanding (MOU) between the parties.
It noted that the MOU expressly recorded that the cheques:
- Were meant only as a security measure
- Were to be shown to banks,
- And were not to be presented for encashment.
Thus, the Court held that the complainant’s claim that the cheques were later converted into enforceable debt was incorrect.
(2) No Legally Enforceable Debt = No Offence Under Section 138
Section 138 NI Act requires that:
- A cheque must be issued for discharge of an existing or legally enforceable debt.
- Mere issuance of a cheque does not create liability by itself.
Since the cheques were purely security instruments, the Court concluded that:
There was no legally enforceable debt at the time of their issuance. Therefore, dishonour of such cheques cannot lead to criminal prosecution under Section 138 NI Act.
(3) Misinterpretation by Complainant
The Court found that the complainant’s arguments were based on a misinterpretation of the MOU.
Simply possessing a cheque does not entitle a party to file a criminal case unless:
- There is a debt or liability, and
- The cheque was meant to satisfy that liability.
(4) Summoning Order Quashed
As a result, the Delhi High Court:
- Quashed the summoning order,
- Dismissed the Section 138 complaint,
- Reaffirmed that security cheques do not constitute an offence upon dishonour unless tied to enforceable liability.
Legal Significance of This Judgment
This judgment aligns with earlier decisions from the Supreme Court and various High Courts, strengthening the legal principle that:
Security Cheques ≠ Automatic Criminal Liability
A cheque issued as a part of a business assurance or collateral cannot be treated as evidence of debt unless the complainant shows:
- A clear legal obligation,
- Evidence that the cheque was meant for repayment,
- And actual liability at the time of issuance.
This case helps prevent misuse of criminal law in commercial disputes where:
- Parties hand over cheques for procedural or documentary requirements,
- Without any present debt.
Important tips for security cheque:
For businesses
- Clearly document the purpose of the check in MOUs and agreements.
- Clarify whether the check is for security, advance or final settlement.
For complainants
- proof of current liability is required to file a Section 138 case.
- Complaints based solely on security checks are likely to be dismissed.
For accused persons
- this defense is strong if the check was issued as a security instrument - especially when supported by a written agreement.
Conclusion:-
The Delhi High Court’s ruling in Sri Sai Sapthagiri Sponge Pvt. Ltd. v. GNCT of Delhi provides much-needed clarity on the legal standing of security cheques.
It reinforces the idea that:
Section 138 NI Act is not a tool for enforcing commercial security arrangements, but a remedy for dishonour of cheques issued towards genuine financial liability.
This judgment is a crucial reference for advocates, businesses, and individuals dealing with cheque-based transactions.
Disclaimer:
The information provided in this blog post is for general educational and informational purposes only. It is not intended as legal advice and should not be relied upon as a substitute for consultation with a qualified legal professional. Court judgments may vary based on facts, interpretations, and subsequent legal developments. If you require advice regarding a specific legal matter, please consult a licensed advocate or legal expert.
Important judgement click next page
Security Cheque vs. Legally Enforceable Debt: How Courts Interpret Section 138 NI Act.
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Security cheque dishonour and Section 138 NI Act explained through top court rulings, case summaries, and actionable legal insights.
What is security cheque
1.A cheque issued as a “security” is not automatically exempt from Section 138.2.But Section 138 applies only when a cheque is issued for discharge of a legally enforceable debt or liability.
Thus, the key question is:
Was there a legally enforceable debt on the date the cheque was issued or presented?
If the answer is Yes, Section 138 applies.
If No, Section 138 does not apply.
What Section 138 Says (Negotiable instrument act 1881)
- The cheque is drawn for payment of a legally enforceable debt or liability,
- It is presented within validity period,
- It is returned unpaid due to insufficient funds or similar reasons,
- A legal notice is issued within 30 days,
- Drawer fails to pay within 15 days of receiving notice.
How This Applies to Security Cheques
Since security cheques are often given before any debt arises (as a guarantee), the key legal principle is:
If a cheque is issued only as security and not against an existing enforceable debt, dishonour of such cheque will NOT attract Section 138 NI Act.
This is because Section 138 requires an existing debt, not a future or contingent one.
What Courts Have Consistently Held
(1) Security cheques are not automatically covered under Section 138
Courts repeatedly say:
- A cheque issued as security does not create liability by itself.
Liability must already exist at the time of issuance or presentation.
(2) If security later becomes debt, Section 138 CAN apply
Example:
- You give a security cheque for a loan.
- Later, you fail to repay the loan.
- The lender presents the security cheque.
Here, the cheque will be treated as if issued for debt, not security.
(3) If security cheque was never intended for presentation
- Then Section 138 does not apply
Important judgement for supreme court of India
(1) Indus Airways Pvt. Ltd. v. Magnum Aviation (2014)
SC held:
- Security cheque issued for advance purchase order is not for existing debt → Section 138 does not apply.
(2) Sampelly Satyanarayana Rao v. IREDA (2016)
SC held:
- If at the time of issuing a security cheque, the borrower already owes money, then dishonour is covered by Section 138.
(3) Sripati Singh v. State of Jharkhand (2021)
SC clarified:
- Security cheques can attract Section 138 if on the date of presentation an enforceable debt exists.
Case Digest: Leading Judgments on Security Cheques & Section 138 NI Act
(1) Indus Airways Pvt. Ltd. v. Magnum Aviation Pvt. Ltd., (2014) 12 SCC 539
Principle
A cheque issued as advance payment or security for a contract that later fails does not constitute an offence under Section 138 if there is no existing liability at the time of cheque issuance.
Court’s Observation
- Section 138 covers cheques issued towards discharge of debt/liability.
- A cheque issued for a contingent liability—which may or may not arise—is not covered.
(2) Sampelly Satyanarayana Rao v. IREDA, (2016) 10 SCC 458
Principle
If a cheque issued as "security" actually represents repayment of a loan or scheduled instalments, Section 138 is attracted.
Court’s Observation
- Even if labeled "security", the cheque must be tested based on the underlying transaction.
- If liability existed at the time of issuance, the dishonour is punishable.
Significance
This case draws a fine line:
- Security cheque without present liability → No offence.
- Security cheque representing future installments for an existing loan → Offence applies.
(3) Shripati Singh v. State of Jharkhand, (2021) 9 SC 153
Principle
Dishonour of a security cheque can attract Section 138 if:
- The liability crystallized later,
- And the cheque was meant to be presented upon default.
Court’s Observation
- Security cheques are often taken to ensure repayment.
- If the borrower defaults, such cheques become means of discharging liability.
Principle
- A security cheque may still be liable under Section 138 if the debt became enforceable later.
Court’s Observation
- The crucial test is whether there was an enforceable debt on the date of presentation, not on the date of issuance.
(5) M/s Sri Sai Sapthagiri Sponge Pvt. Ltd. v. GNCT of Delhi (Delhi HC, 2025)
Principle
- Dishonour of a cheque issued only for security, documented in an MOU as not intended for presentation, does not attract Section 138.
Court’s Observation
- MOU clearly stated cheques were for showing to banks only.
- No legal liability existed.
Complaint and summoning order quashed.
Principle
While not directly on security cheques, this case clarifies that:
- Section 138 is strict,
- Liability must be existing and enforceable at the time of presentation.
This supports the principle that security cheques without existing liability cannot form an offence.
Principle
A cheque issued as security for performance of an agreement does not attract Section 138 unless:
- A specific liability arises,
- And the cheque is meant to discharge it.
(8) Shanku Concretes Pvt. Ltd. v. State of Gujarat (Gujarat HC)
Principle
Security cheques given only to gain confidence of the other party, without engagement of debt, do not come within the purview of Section 138.
A clear guide to how Indian courts treat security cheques under Section 138 NI Act, with leading judgments, legal principles, and practical implications.
Section 138 of the Negotiable Instruments Act, 1881 (NI Act) is a key provision that makes it a criminal offence to dishonour a cheque for want of funds or similar reasons, even if the cheque has been issued for the discharge of a legally enforceable debt or other liability.
Main elements of the offence under Section 138
The offence is completed only if all the following conditions are fulfilled:
- A check is drawn to pay money for a legally enforceable debt or obligation.
- The cheque is presented to the bank within three months of its issuance (or its validity period, whichever is earlier).
- The cheque is dishonoured (e.g., due to 'insufficient funds,' 'account closed').
- The payee/holder issues a written demand notice to the drawer within 30 days of receiving the bank's return memo, demanding payment of the cheque amount.
- The drawer fails to make the payment within 15 days of receiving the notice.
- The complaint is filed in the appropriate court within 30 days after the expiry of the 15-day notice period.
For example:
(1) A cheque given at the start of a loan as security for repayment can attract Section 138 if the borrower subsequently defaults and the debt becomes due before the cheque is presented. (See: Sampelly Satyanarayan Rao v. Indian Renewable Energy Development Agency Ltd.)
(2) A cheque issued merely for auditing or assurance purposes, or one that is post-dated and presented prematurely before the underlying liability crystallizes, may not attract the provision.
Legal Disclaimer: The summary provided on Section 138 of the Negotiable Instruments Act, 1881 and Security Check is for general information and educational purposes only.
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