Aryan Raj*
Introduction
The foundations of the contemporary Indian commercial system are dependent on the speed and security of credit instruments. In this expansive financial ecosystem, the workplace is rife with the deployment of “security cheques” for a range of purposes. In the micro, residential real estate market, tenement owners typically demand pre-dated cheques from tenants to secure against property damage or unpaid rent. In banking, retail banks and Non-Banking Financial Companies (NBFCs) routinely extract these cheques as security before lending personal and/or business loans. More recklessly, in the job and informal sectors, corporate companies often seek undated cheques for many potential hires as a condition of employment to sanitise the training period and prevent premature departures.
This assumption runs on sand, in stern contrast to legal prescriptions under the Negotiable Instruments Act, 1881 (hereinafter referred to as the “NI Act“). In 1989, the legislature introduced Chapter XVII into the Act criminalising the dishonour of cheques, to improve the negotiability and certainty of transactions and facilitate business, with an aim to check fraudulent drawers from issuing cheques with malafide intentions. As a result, the underlying argument proposed in recent jurisprudence is that the “security cheque” is a sham; it may be construed informally as a conditional security instrument between the parties to the transaction, but when presented for enforcement, is often construed by the law as an unconditional liability instrument.
Statutory Framework: Deconstructing Reverse Presumptions
In considering the legal character of a security cheque, one must first face a conspicuous gap in the law. Close perusal of the NI Act reveals that the term “security cheque” is nowhere in evidence in the Act; it does not per se create an exception or definition for such instruments. It is purely a creation of commerce.
The concept of “security” is informally built between parties since their trust with the presumption that the cheque will be encashed only in case of non-payment of the primary debt. Such an informal construction is strongly anchored to the fundamental concepts of the Indian Contract Act, 1872. Section 31 of the Contract Act defines a “contingent contract”as a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. The security cheque’s right to be encashed is contingent upon the uncertain future event, namely default on the primary financial obligation.
Moreover, Section 32 lays down that contingent contract, to do any act if an uncertain future event occurs, cannot be enforced by law until the happening of the future event. Despite the conditional nature of the Contract Act, the Negotiable Instruments Act is in starkly unconditional terms. For the banking system, a security cheque is the same as any other cheque. Consequently, the concept of “security” as a private contractual device is fine but once the instrument comes into the banking system, it loses its context and is governed only by banking laws.
Statutory Framework
The framework of the Negotiable Instruments Act is crafted to lean in favour of the payee’s interest to hasten the collection of commercial transactions, with austere main tenets and supercharged presumptions.
Core Provision: Section 138
Section 138 is the quintessence of the jurisprudence on cheque dishonour in India. It provides that where any cheque drawn by a person on an account maintained by him with any bank is returned by the bank unpaid either due to the amount of money standing to the credit of the person being insufficient or because of the excess over the amount arranged to be paid from that account, such person shall be presumed to have committed an offence. The penalty is imprisonment for a term that can extend to two years or fine that can extend up to twice the value of the cheque, or both. The courts have also declared that technical reasons for dishonour such as ‘Account Closed’ or ‘Signature Mismatch’ are also punishable under Section 138, so that drawers cannot escape criminal liability by banking tricks.
Presumptions: Sections 118 and 139
Section 118(a) provides for a “Presumption of consideration” by stating that until the contrary is proved, the court shall presume that every negotiable instrument was made or drawn for a valid consideration. More pertinent isSection 139, the “Presumption in favour of holder,” which provides that unless the contrary is proved, it shall be presumed that the holder of a cheque received it for the discharge of any debt or other liability.
These presumptions ruthlessly tilt the scales of proof against the accused. The complainant doesn’t have to prove its wealth or the complex legal ramifications of the debt in the initial stages; instead, the accused must rise to the occasion and negate this presumption by providing reasonable evidence on a “balance of probabilities” that there was no debt in the first place. A simple plea of “not guilty” or that the cheque was an instrument of security is not enough to shift this onerous burden.
The Construct of “Legally Enforceable Debt”
Section 138’s applicability revolves around the concept of “legally enforceable debt or other liability“. The key aspect of judicial reasoning emphasises the existence of liability at the time of presentation not at the time of issue. Where a cheque is issued as security, if the security obligation is defaulted upon, the cheque is ripe for presentation and its dishonour triggers the provisions of the statute because the debt has then crystallized.
Courts’ Perspective: A Death Knell To The “Security” Document
The “security cheque” argument has gradually lost ground in the last two decades in the Supreme Court of India. A historical examination of key cases demonstrates that there is a chronological progression to the decisions made, courts pay more attention to the nature of the liability rather than the form of the instrument.
ICDS Ltd. v. Beena Shabeer
In ICDS Ltd., the Supreme Court considered the liability of a cheque issued by a guarantor (as opposed to the principal debtor) under Section 138. Even though it was issued as a security for another loan, the liability is co-extensive. If there is a debt subsisting when the cheque is presented, the security cheque certainly attracts penalty, thereby laying to rest the argument that third-person guarantees are immunity from criminal action.
Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd.
In Sampelly, the Court recognised the different categories of cheques issued for “advance payment” and those issued for a “subsisting debt“. In this case, a borrower issued post-dated cheques only for the security of repaying particular instalments. The borrower claimed that the instalments were not due for repayment at the time the cheques were issued. However, the Court found that, upon the disbursement of the loan, the liability was established; thus, the post-dated security cheques were validly issued and legally enforceable as security for the liability to repay the loan.
Rangappa v. Sri Mohan
The Rangappa decision is the leading one on the operation of the reverse onus. The Court clearly stated that the heavy presumption under Section 139 includes the presumption that there is a “legally enforceable debt or liability”. This confirmed the factual reality that once an accused acknowledges their signature, the court is bound to presume that they owe the money, with no automatic leniency for “security” cheques.
Basalingappa v. Mudibasappa
In Basalingappa, the Supreme Court clarified how the burden translates for accused. Recognising the stringent legislative presumptions, the Court explained that all that’s required of the accused to overcome the presumption is a standard of “preponderance of probabilities”. An accused does not have to establish their defence beyond reasonable doubt, but must provide evidence, such as the complainant’s inability to pay, or breach of the underlying contingent contract, to place the onus back on the complainant.
The Judicial Trend
The distilled judicial trend is clear, Courts look beyond labels; The Supreme Court clearly mentioned in Sunil Todi that the words “debt or other liability“ include a sum of money promised to be paid on a future day by reason of a present obligation. “Security” makes no difference if liability exists: As observed in Sripati Singh, there is no mystic in the word “security cheque”, it is not a scruff of paper, and if the liability exists on the date of its presentation, then the label offers no immunity.
The Legal Fiction Explained
The fiction is born out of the dichotomy between the intention of the parties and statutory formalism. In truth, the parties intend the cheque’s use to be conditional. The security cheque, according to the Indian Contract Act, is a collateral security, an ‘innocent sneezewort’ that should lie dormant unless the underlying contract is breached. But, legally, it is an unconditional obligation. Since the Negotiable Instruments Act also aims to make cheques as valuable as money for the sake of business, it will never look beyond the face of the instrument to assess the contingent arrangements that it is built on.
Thus, there is a doctrine of constructive liability. The drawer has given constructively unconditional order to pay, regardless of his intentions. Moreover, the reverse burden of proof changes the presumption of criminal law innocent until proven guilty. In presuming guilt (debt) at the point a signature is confirmed, the fiction is abused.
Misuse And Abuse Patterns
The volatile mix of a reversing burden of proof and the risk of prison abuse leads inevitably to misuse in practice. The most obvious misuse is the case of writing in high amounts. Payees often take away blank or partly-filled cheques and thus have physical control over the amount they write, which often exceeds the subsisting liability by completely ignoring the part-payments made by the drawee in the past few years. Although the Supreme Court in Dashrath bhai has held that the offence of presenting a cheque without endorsing part-payments is invalid, the accused must prove this defence at great pain during a lengthy trial.
A second trend is the presentation of the cheque despite a dispute. For example, a supplier may supply defective goods, which prompts the buyer not to pay. The supplier then simply dates the reserve security cheque and deposits it into his account, instead of pursuing the civil matter over the defective goods.
This, in turn, involves criminal threats to recover the debt. The drawers are forced into extortion-like circumstances, paying under “unfair pressure” of criminal prosecution. The dread of social ostracism, warrants of arrest and the need for stamina to endure criminal proceedings makes drawers abandon perfectly legitimate civil claims and pay off unjust settlements, to avoid the criminal justice system.
Comparative Perspective
India’s muscular, quasi-penal approach to cheque bouncing contrasts with the law in other major common law countries. The UK system is largely civil. The Bills of Exchange Act 1882, makes bouncing a cheque primarily give the payee a civil right to sue for the value of the cheque, interest and noting charges, There is no automatic criminal liability for the mere dishonour of a cheque. Rather, the UK has adopted the Theft Act 1968 and Theft Act 1978,. For the offence to attract criminal liability, the prosecution must prove that the defendant was “dishonest” or “deceived” (e.g. evasion of liability by deception). For example, if a borrower issues a security cheque in good faith and subsequently experiences financial difficulties, it is a civil non-payment rather than a criminal fraud.
Bad check laws (NSF – Non-Sufficient Funds) at the state level in the US also adopt the fraud-based method. Although civil sanctions (such as triple damages) are widely used, criminal” penalties typically require the State to prove the drawer’s specific intent to defraud at the time of writing the cheque.
This comparison depicts how India’s system is hyper-punitive. Section 138 turns the law into a weapon in India in ways that have not occurred in the UK or the USA, by eliminating the need for the State to prove mens rea (criminal intent), and imposing strict liability by creating reverse presumptions.
Reform Proposals
To relieve the pressure on the courts, and to address the dire socio-economic effects of the fiction of security cheques, reforms are needed.
Legislative Reform
The Negotiable Instruments Act needs to explicitly address security cheques. Parliament should expressly define a “security instrument“ which differs from an instrument for immediate payment, so that payees must prove the failure of the contingent contract before the cheque becomes legally due for payment to the bank.
Judicial Guidelines
The Supreme Court ought to set up a more rigorous regime before the Section 139 presumption kicks in. Magistrates should be required under Section 202 of the Code of Criminal Procedure (CrPC) to undertake preliminary fact-finding to get to the heart of the transaction whether the cheque was secured based on coercive situations (such as employment bonds), before summoning the accused.
Mandatory Disclosure
The Reserve Bank of India (RBI) could require banks to have a written awareness agreement. Any cheque deposited by NBFCs or banks as collateral must be accompanied by an agreed, registered document to indicate its purpose, which will obviate the unilateral escalation of amount or the wilful dishonour of cheques without prior notice.
Decriminalization Debate
In June 2020, the Ministry of Finance proposed the decriminalization of Section 138 to increase the ease of doing business, free up the judiciary and attract foreign investment, while trade associations are vocally against the proposal, believing the coercive threat will slow down debt recovery, a compromise is required. Cleanly civil issues (such as deduction of security deposit or corporate training fees) should be wholly decriminalised while the penal provisions should only apply to clear cases of commercial fraud.
Conclusion
The “security cheque” in Indian commerce is a very paradoxical device. In society, it is considered a relatively innocuous collateral, a psychological weapon to prevent default. It is legally, however, an unconditional financial bomb. The fiction of law surrounding such instruments means that, once they are deposited, the veneer of “security” is lifted.
This study reveals that there is no statutory haven for a security cheque. Driven by the rigourous presumptions under Sections 118 and 139 of the NI Act, the judiciary favours the presence of a legally enforceable debt at the time of presentation, over the private, contingent understanding of the parties. Although this formalism successfully protects the speed of business, it unduly- privileges creditors, landlords and employers at the expense of the poor, causing enormous injustice to the common man. We urgently need to create legal awareness to pierce this myth, and doctrinal and legislative clarity and reform to decriminalise technical offences. There is a need to balance certainty in trade with the principles of fairness in collection of debt. In India, a cheque is not a document, but a presumption.
* The author is a second-year Law student at National University of Study and Research in Law, Ranchi. The author may be contacted at aryan@nusrlranchi.ac.in.
This blog reflects the personal views of the author and does not necessarily represent the views of The Policy Chronicle.