A two-judge Bench of Justice MR Shah and Justice AS Bopanna has held that if the due date of the payment of the loan amount has lapsed and no attempt is made by the party to pay the same, the cheques given as a security against the loan can be presented to recover the debt amount.

Counsel Mr. M.C. Dhingra appeared for the Appellant while Counsel Mr. Raj Kishor Choudhary and Counsel Mr. Keshav Murthy appeared for the Respondents.

Appeals were preferred against the order of the Jharkhand High Court at Ranchi which had set aside the orders passed by the Judicial Magistrate First Class. The Judicial Magistrate had taken cognizance of the offence under Section 138 of the Negotiable Instruments Act and Section 420 of IPC against the 2nd Respondent and dismissed the petition seeking discharge filed by the 2nd Respondent.

In this case, the 2nd Respondent had taken a loan from the Appellant to invest the same in his business. Both the parties were known to each other and had a cordial relationship. They had entered into written agreements and cheques were issued as security. When the cheques were presented for realization upon non-repayment of the loan, they were returned due to insufficient funds in the bank account of the 2nd Respondent.

A legal notice was issued under Section 138 of the NI Act, where the Appellant contended that the 2nd Respondent had deceived and cheated him. Accordingly, a complaint was filed under Section 420 IPC and Section 138 of the NI Act.

Aggrieved by the dismissal of petition seeking discharge and order of taking cognizance, petitions were filed in the High Court by the 2nd Respondent, which were allowed. The High Court had held that the offence alleged under Section 420 IPC and Section 138 NI Act were not made out.

The Appellant contended before the Supreme Court that the High Court had committed an error to hold that the cheque issued by the 2nd Respondent was towards security and that the same could not have been treated as a cheque issued towards the discharge of legally recoverable debt. Hence, the High Court wrongly concluded that the provisions of Section 138 of the NI Act could not be attracted.

While the Respondents contended that even if the loan amount was not repaid it would give rise only to civil liability and the Appellant could only file a civil suit for the recovery of the loan.

The two issues which were dealt with by the Court were –

i) Whether the cheques in question were still to be considered only as 'security' for the said amount and whether it was not liable to be presented for recovery of the legally recoverable debt?

ii) Whether the complaint filed by the appellant should be limited to a proceeding under Section 138 of N.I. Act or on the facts involved, whether the invoking of Section 420 IPC was also justified?

The Apex Court was in agreement with the findings of the High Court that no case was made out under Section 420 IPC. Further, it was held that mere dishonor of the cheque cannot be construed as a deliberate intention on the part of the 2nd Respondent to cheat and the mens rea in this regard could not be gathered. Hence, a case under Section 420 IPC against the 2nd Respondent could not be sustained, the Court held.

Concerning the first issue, the Court observed, "A cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance. 'Security' in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment."

Further, it was asserted by the Bench that if the loan amount remains unpaid and is not paid in any other form before the due date, the cheque which is issued as security could be used for the recovery of the amount and the drawee of such cheque would be entitled to present the same. Further, if on such presentation, the cheque gets dishonored, the consequences under Section 138 and other provisions of the NI Act would flow.

"If the cheque is presented and dishonoured, the holder of the cheque/drawee would have the option of initiating the civil proceedings for recovery or the criminal proceedings for punishment in the fact situation, but in any event, it is not for the drawer of the cheque to dictate terms with regard to the nature of litigation," the Court held.

The Court further observed, "Though a criminal complaint under Section 420 IPC was not sustainable in the facts and circumstances of the instant case, the complaint under section 138 of the N.I Act was maintainable and all contentions and the defence were to be considered during the course of the trial."

In the light of these observations, the Court set aside the impugned order of the High Court and restored the order of the Judicial Magistrate with a direction that the complaint be limited under Section 138 of NI Act and partly allowed the appeals.

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