Cheque Given as Security: Does Section 138 Still Apply?

Security cheques are common in Indian business. A lender asks for signed cheques before releasing a loan, a supplier takes post-dated cheques as comfort against future dues, or a landlord holds a cheque against a deposit. When the arrangement goes wrong, the borrower says the cheque was only security and cannot be prosecuted, while the payee presents it and files a complaint under Section 138 of the Negotiable Instruments Act. Which side is right depends on what was owed on the day the cheque was presented.

What Does Section 138 Require?

Section 138 applies when a cheque is issued for the discharge, wholly or partly, of a debt or other liability that is legally enforceable, and is returned unpaid for insufficiency of funds or because it exceeds the arrangement with the bank. The payee must then send a notice within 30 days of learning of the dishonour, the drawer gets 15 days to pay, and the complaint must follow within a month of that period expiring. All of these conditions are strict; missing one defeats the complaint.

Section 139 raises a statutory presumption that the cheque was issued for a legally enforceable debt, which the accused can rebut by showing, on a preponderance of probabilities, that no such debt existed. The Supreme Court has said the presumption also covers blank signed cheques that were later filled in: in Bir Singh v. Mukesh Kumar (2019), the Court held that a person who signs a blank cheque and hands it over authorises the holder to complete it.

Does a Security Cheque Get Special Treatment?

Not as a category. The Supreme Court held in Sripati Singh v. State of Jharkhand (2021) that a cheque given as security is not exempt from Section 138 simply because of its label, and that if the liability it secures has become due, presenting the cheque and prosecuting its dishonour is lawful. The question is whether the debt was legally enforceable when the cheque was presented.

This gives two situations that look alike but end differently:

• Security for a loan already disbursed and now overdue: the debt exists, so Section 138 can apply
• Security for a future supply or a loan not yet advanced: no debt exists, so the complaint should fail
• Cheque presented after the debt was repaid or settled: the liability has ended, so the complaint should fail
• Cheque presented for an amount larger than what is due: the complaint is exposed to challenge

Indus Airways v. Magnum Aviation (2014) is often cited for a related point: a cheque issued as an advance for a transaction that did not materialise may not represent a legally enforceable debt or liability, unless a liability to refund has actually arisen.

What Defences Can an Accused Take?

The most common defences for a drawer of a security cheque are:

• No debt or liability existed on the date of presentation
• The underlying loan or supply was repaid, settled or cancelled
• The cheque was misused or filled in for a higher amount than agreed
• The debt is time-barred and not covered by a fresh written acknowledgment
• The statutory notice or complaint was out of time, or the notice was defective

In practice, the strength of the defence depends on documents. The loan agreement, ledgers, bank statements, repayment receipts and correspondence will show what was due. Rebutting the Section 139 presumption requires evidence, not only a statement that the cheque was security. Cross-examining the complainant on the underlying transaction is often where these cases are won or lost.

What Should a Lender or Supplier Do?

A payee relying on a security cheque should present it only when a real amount has become due, and only for that amount. Keep a clear ledger linking the cheque to the specific liability, and send the statutory notice on time. Many Section 138 complaints fail not because the debt was disputed but because the payee presented a cheque for the wrong amount, or after receiving part-payment without adjusting for it. Courts also allow a cheque to be presented more than once within its validity period, which gives some room, but each dishonour must be followed by a notice and, if payment is not made, a timely complaint.

What Should a Borrower or Buyer Do?

If you hand over a security cheque, record in writing what it secures and when it can be presented. When the debt is cleared, demand the cheque back, or at least a written acknowledgment that it is cancelled. Do not rely on stop-payment instructions as a shield: courts have held that stopping payment of a cheque issued for an existing liability can itself fall under Section 138. And if you receive a statutory notice, reply within the time allowed and keep your own records ready.

What About the Company's Directors?

Where a company issues the security cheque, Section 141 can extend liability to those in charge of its business, as discussed in our note on director liability in cheque bounce cases. The criminal complaint is also not the only way to recover: the underlying debt can be pursued separately, as explained in civil recovery after a cheque bounce.

Whether a particular security cheque supports a complaint, or a defence, turns on the underlying transaction. Our Commercial Disputes practice acts for both complainants and accused in Section 138 matters, and you can request a consultation to review your documents.