SUPREME COURT OF INDIA – WHETHER A POST-DATED CHEQUE GIVEN AS “SECURITY” AND MENTIONED IN THE LOAN AGREEMENT IS COVERED BY SECTION – 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881 OR NOT?
Supreme Court of India
Date of Judgement: 19.09.2016
Whether the dishonour of a post-dated cheque given for repayment of loan installment which is also described as “security” in the loan agreement is covered by Section 138 of the Negotiable Instruments Act, 1881 or not?
The agreement recorded that post-dated cheques towards payment of installment of loan (principal and interest) were given by way of security.
Contention of the appellant in support of his case was that the cheques were given by way of security as mentioned in the agreement and that on the date the cheques were issued, no debt or liability was due. Thus, dishonour of post-dated cheques given by way of security did not fall under Section 138 of the Act.
The Hon’ble Judges of the Supreme Court of India are of the view that the question whether a post-dated cheque is for “discharge of debt or liability” depends on the nature of the transaction. 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. Though the word “security” is used in the agreement but the moment the loan was disbursed and installments have fallen due on the date of the cheque as per the agreement, dishonour of such cheques would fall under Section 138 of the Act.