The Delhi High Court has upheld a summoning order issued in a cheque bounce case and held that when a cheque is given as security and the liability arising from the contract or loan, crystallizes into a legally enforceable debt at a later date, the cheque assumes the character of a cheque issued in discharge of that debt for the purpose of Section 138 of the Negotiable Instruments Act, 1881.

The Petition before the High Court was filed by the Director of a company under Section 482 of the CrPC for the quashing of the Criminal Complaint and for setting aside the summoning Order issued in a case registered under Section 138 read with Section 141 Negotiable Instruments Act, 1881 (NI Act).

The Single Bench of Justice Neena Bansal Krishna held, “Where a cheque is given as security for a contract or a loan and the liability arising from that contract or loan, crystallizes into a legally enforceable debt at a later date, the cheque, even if originally a “security” one, assumes the character of a cheque issued in discharge of that debt for the purpose of Section 138.”

Advocate Rajnish Kumar Gaind represented the Petitioner while Advocate Umakant Kataria represented the Respondent.

Factual Background

The Respondent Company awarded a Work Order to the Petitioner’s Company, for the “Supply and Installation of GRC Grills” for a total consideration of Rs. 56,86,633. As per the terms of the contract, the Respondent paid a 15% mobilization advance of Rs. 6,82,416 to the Petitioner’s Company. Against this payment, the Petitioner’s Company issued an advance cheque (impugned cheque) for the equivalent amount of Rs 6,82,416 as security for the advance. 3. It is stated by the Petitioner that while the work was in progress, the Respondent illegally, arbitrarily, abruptly and unjustly terminated the contract. A dispute arose regarding the final accounts.

A bill was sent and the Respondent refuted the Petitioner’s Bill. The Respondent claimed that only Rs. 3,20,881 worth of work was completed and, therefore, demanded the refund of the unadjusted mobilization advance, which they calculated as Rs. 3,61,847. In 2015, the Petitioner received a statutory Notice under Section 138 of the NI Act for the dishonour of the Rs 6,82,416 cheque. The Petitioner’s Company reiterated that the cheque was for security and not against any existing liability. The Respondent filed the impugned Criminal Complaint. It was in such circumstances that the summoning Order was passed.

Reasoning

The Bench, at the outset, explained that where a cheque is given as security for a contract or a loan and the liability arising from that contract or loan, crystallizes into a legally enforceable debt at a later date, the cheque, even if originally a “security” one, assumes the character of a cheque issued in discharge of that debt for the purpose of Section 138. It was further noticed that the Security Cheques are only given to be utilised if subsequently, during the business transactions, certain liabilities arise which are not fulfilled by the Petitioners.

“Thus, this contention of the Petitioner that the impugned Cheque was merely a security cheque and could not have been presented, is untenable”, it stated while further adding, “The Complainant has specifically alleged about their being existing debt/liability on 09.12.2015, when the cheque was presented to the Bank. Thus, the next logical question that needs to be answered pertains to existence of a “legally enforceable debt”.

The Bench explained, “For an offence under Section 138 of the NI Act to be attracted, the cheque must be for the discharge of a debt or liability, and the debt must be equal to or greater than the amount of the cheque presented. Whether the cheque amount was for the existing liability or an excess amount, is a matter of trial and cannot be considered at the stage of summoning.”

On a perusal of the facts of the case, the Bench noted that the cheque was given to secure any loss that may be suffered by the Complainant. Furthermore, the Complainant had crystallized the outstanding liability under the Contract of Rs. 7,20,641 and consequently presented the Cheque of Rs 682416. “It cannot be at this stage, said that there is no legally enforceable liability. What exactly is the amount due and payable to the Complainant is a disputed fact which can be proved only during the trial”, it held.

Thus, finding no merit in the Petition to quash the Complaint or to set aside the Summoning Order, the Bench dismissed the same.

Cause Title: Manmohan Gaind v. Negolice India Pvt. Ltd. (Neutral Citation: 2025:DHC:9845)

Appearance:

Petitioner: Advocates Rajnish Kumar Gaind, Hemant Kaushik, Himanshu Gupta

Respondent: Advocates Umakant Kataria, Pulak Gupta

Click here to read/download Order


Delhi High CourtJustice Neena Bansal Krishna

Tulip Kanth

Assistant Editor

Tulip Kanth is an Assistant Editor at Verdictum having over 5 years of experience in the field of legal journalism and editing. She extensively covers judgments of the Supreme Court, High Courts as well as Tribunals. She has previously worked with a legal publishing website where she oversaw the work of other editors and has also created updates on notifications of different Government Ministries. She holds an English Honours Degree from SGTB Khalsa College, Delhi University and has completed her LLB course with specialisation in Corporate Law from Amity University.