Cheque for repayment of installment but described as “security” covered by S. 138 of NI Act

The Supreme Court has held that dishonour of a post-dated cheque given for repayment of loan installment which is described as “security” in the loan agreement is covered by Section 138 of the Negotiable Instruments Act, 1881 (Act)..The decision was rendered by a Bench of Dipak Misra and AK Goel JJ. in an appeal filed against a Delhi High Court judgment. The cheques in question were post-dated cheques given pursuant to the loan agreement between the company and the respondent, Indian Renewable Energy Development Agency Limited..The relevant clause in the loan agreement pertaining to the cheques was titled “Security for the Loan” and it stated the following:.“The loan together with the interest, interest tax, liquidated damages, commitment fee, up front fee prima on repayment or on redemption, costs, expenses and other monies shall be secured by ;.(i) xxxxx.(ii) xxxxx.(iii) Deposit of Post dated cheques towards repayment of installments of principal of loan amount in accordance with agreed repayment schedule and installments of interest payable thereon.”.This clause was the cause for the dispute because though it fell under the head “security”, the clause stated the post-dated cheques were towards repayment of installments..The contention of the appellant 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 due. Thus, dishonour of post-dated cheques given by way of security did not fall under Section 138 of the Act..Reliance was placed by the appellant on Indus Airways Private Limited in which it was held that 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 of the Act..The Court, however, held that though the word “security” is used in clause 3.1(iii) of the agreement, the said expression refers to the cheques being towards repayment of installments..“The repayment becomes due under the agreement, the moment the loan is advanced and the installment falls due…. Once the loan was disbursed and installments 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 court also distinguished the case of Indus Airways on the ground that while in Indus Airways, the cheque was towards an advance payment and the contract itself was cancelled, the cheques in the present case were issued for discharge of a liability..“Crucial question to determine applicability of Section 138 of the 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. While approving the views of different High Courts noted earlier, this is the underlying principle as can be discerned from discussion of the said cases in the judgment of this Court.“.It, therefore, dismissed the appeal holding that dishonour of cheques in the present case being for discharge of existing liability, is covered by Section 138 of the Act..Read the judgment below.