A Cheque Issued as Security Is Still Legally Enforceable: Himachal Pradesh High Court Upholds Conviction Under NI Act

“Even if a cheque is issued as security, it is not a waste paper. Law presumes it was issued towards legally enforceable debt or liability” –  Himachal Pradesh High Court reaffirmed the binding legal principle under Section 138 of the Negotiable Instruments Act, 1881, that a cheque issued even as a security does not escape criminal liability if dishonoured due to insufficient funds. The Court upheld the concurrent findings of the Trial Court and Appellate Court, convicting the petitioner and sentencing him to one year of simple imprisonment with a reduced compensation of ₹9 lakh.

The case arose from a land sale agreement between the accused and the complainant in June 2015, in which the accused received ₹6 lakh as advance for the sale of land but repeatedly failed to execute the sale deed. Subsequently, the accused issued a cheque of ₹6 lakh, which was dishonoured on presentation with the endorsement “funds insufficient.” The complainant served a statutory demand notice, which was deemed delivered, but no payment was made.

The Trial Court convicted the accused under Section 138 NI Act, sentencing him to one-year simple imprisonment and imposing a compensation of ₹12 lakh. The Sessions Court upheld the conviction. Aggrieved, the accused filed a revision petition.
 

The primary contention raised by the accused was that the cheque was issued as a security and was misused. Rejecting this defence, the Court relied heavily on a catena of precedents, noting:
“It is well-settled that even a blank cheque voluntarily signed and handed over by the accused attracts the presumption under Section 139 of the NI Act.”

Citing Sampelly Satyanarayana Rao v. IREDA, the Court observed: “If on the date of the cheque, liability or debt exists or the amount has become legally recoverable, the section is attracted and not otherwise.”
 

The Court categorically rejected the “security cheque” defence, stating: “The agreement to sell shows ₹6 lakh was paid by the complainant. Thus, the accused had a liability to return the amount when he failed to execute the sale deed. Even if the cheque was issued as security, he is liable.”
 

The High Court also relied on Bir Singh v. Mukesh Kumar, noting: “Even a blank cheque filled by another person but signed by the drawer attracts presumption of legal liability under Section 138.”
Further, the Court emphasized that: “Mere denial in statement under Section 313 CrPC is not enough to rebut presumption under Sections 118 and 139.”

While upholding the conviction, the Court modified the sentence regarding compensation. Finding the initial award of ₹12 lakh (double the cheque amount) excessive, it reduced it to ₹9 lakh, in light of judicial principles laid down in Kalamani Tex v. P. Balasubramanian:
“Unless there exist special circumstances, the courts should uniformly levy a fine up to twice the cheque amount along with simple interest at the rate of 9% per annum.”

The Court also confirmed that default of compensation can attract imprisonment, citing K.A. Abbas v. Sabu Joseph and Hari Singh v. Sukhbir Singh.
 

The High Court's ruling is significant in reaffirming that a cheque issued as “security” is not immune from prosecution under Section 138 if there exists a present enforceable debt or liability at the time of its dishonour. The judgment bolsters the deterrent and compensatory spirit behind the NI Act and ensures that statutory presumptions under Sections 118 and 139 are not rendered illusory by flimsy defences.
 

Date of Decision: April 24, 2025