Cheque Issued As Security Towards Loan Repayment Attracts Section 138 NI Act If Debt Exists On Presentation Date: Himachal Pradesh High Court

"A cheque issued as security pursuant to a financial transaction cannot be considered a worthless piece of paper under every circumstance; it matures for presentation if the loan amount is not repaid." Himachal Pradesh High Court, in a significant ruling, held that a cheque issued as "security" for a loan repayment attracts criminal liability under Section 138 of the Negotiable Instruments (NI) Act if a legally enforceable debt exists on the date of its presentation.

A bench of Justice Rakesh Kainthla observed that the penal provisions of the NI Act are intended to be a deterrent to the callous issuance of negotiable instruments and to infuse credibility into financial transactions. The Court emphasized that once the execution of a cheque is admitted, the statutory presumptions under Sections 118 and 139 of the NI Act mandate that the burden shifts entirely to the accused to prove the absence of a debt.

The present revision petition was directed against the concurrent findings of the Trial Court and the Appellate Court, which had convicted the petitioner for the dishonour of a cheque amounting to ₹2,23,000/-. The petitioner had obtained a vehicle loan of ₹15,00,000/- from Punjab National Bank (PNB) and issued the cheque towards repayment, which was returned with the endorsement “exceeds arrangement.” The lower courts had sentenced the petitioner to six months of simple imprisonment and directed the payment of ₹3,00,000/- as compensation.

The primary questions before the Court were whether a cheque issued specifically as security can attract the provisions of Section 138 of the NI Act and whether the seizure and sale of the loan vehicle by the bank extinguished the petitioner's liability. The Court was also called upon to determine the extent to which a High Court can re-appreciate evidence while exercising its narrow revisional jurisdiction under Section 397 of the CrPC.

Narrow Scope Of Revisional Jurisdiction

The Court began by outlining the limitations of its revisional powers, noting that a revisional court is not an appellate court and cannot routinely re-appreciate evidence. Citing the Supreme Court’s decision in Malkeet Singh Gill v. State of Chhattisgarh, Justice Kainthla noted that the High Court’s interference is restricted to rectifying patent defects, jurisdictional errors, or perversity in the findings of the lower courts.

Revisional Court Cannot Re-Appreciate Factual Findings

The bench observed that when two courts have arrived at concurrent findings of conviction after a detailed appreciation of evidence, the High Court must be reluctant to interfere unless the decision is grossly erroneous or based on no evidence. The Court reiterated that the object of Section 397 of the CrPC is to set right a well-founded error of law rather than to offer a second opportunity for factual dispute.

Presumption Of Legally Enforceable Debt

The High Court placed heavy reliance on the statutory presumptions under the NI Act, noting that once the signature on the cheque is admitted, the law assumes it was issued for consideration. Referencing APS Forex Services (P) Ltd. v. Shakti International Fashion Linkers, the Court held that the "reverse onus" clause under Section 139 requires the accused to lead cogent evidence to rebut the presumption that a debt exists.

Burden Of Proof Shifting To The Accused

The Court explained that it is not for the complainant bank to prove the debt at the threshold as if it were a civil suit for recovery. Instead, the issuance of the cheque itself creates a statutory presumption of consideration, and it is the accused who must establish a "probable defence" through independent materials or by cross-examining the complainant's witnesses to show that the debt did not exist.

"Security Cheque" Is Not Waste Paper

Addressing the petitioner's primary contention that the cheque was merely a "security" instrument, the Court held that such a label does not provide immunity from criminal prosecution. Justice Kainthla noted that a security cheque is a pledge of payment and matures for presentation if the borrower fails to repay the loan within the specified timeframe as per the agreement.

Liability On Presentation Of Security Cheques

The Court cited Sripati Singh v. State of Jharkhand to clarify that the only defence available regarding a security cheque is proof of prior discharge of the loan. If the loan remains unpaid on the date of presentation, the cheque represents an existing enforceable liability, and its dishonour squarely attracts the penalties under Section 138 of the NI Act.

"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."

Statement Under Section 313 CrPC Not Substantive Evidence

The Court rejected the petitioner’s reliance on his statement recorded under Section 313 of the CrPC, where he claimed to have repaid the instalments. Citing Sumeti Vij v. Paramount Tech Fab Industries, the bench held that a mere denial in a Section 313 statement does not constitute substantive evidence and is insufficient to rebut the statutory presumption under Section 139.

Failure To Produce Documentary Evidence Of Repayment

The bench observed that the petitioner failed to produce any receipts or account statements to prove the alleged repayments. While the bank admitted to seizing and selling the vehicle, the Court noted that a vehicle purchased for ₹15 lakh would unlikely realize the full loan amount upon resale, and the remaining liability of ₹2,23,000/- claimed by the bank was highly probable and acceptable in the absence of contrary proof.

Technical Defence Of Non-Receipt Of Notice

On the issue of the legal demand notice, the Court applied the principle laid down in C.C. Alavi Haji v. Pala Pelly Mohd., stating that an accused cannot complain about the non-receipt of a notice if they fail to pay the cheque amount within 15 days of receiving the court summons. The Court held that the requirement of notice is intended to protect honest drawers, not to provide a loophole for "trickster cheque drawers."

Compensation and Sentence Justification

Finally, the Court upheld the sentence of six months imprisonment and the compensation amount, noting that Section 138 allows for imprisonment up to two years. Given that the litigation had persisted for seven years, the Court found the compensation of ₹3,00,000/- (approximately ₹77,000/- over the cheque amount) to be reasonable and consistent with the compensatory and punitive objectives of the Act.

In conclusion, the High Court found no infirmity or perversity in the judgments of the lower courts. Affirming the conviction, the Court dismissed the revision petition and directed the return of the lower court records.

Date of Decision: 10 July 2026