Cheque Issued as Security? Here’s What Indian Courts Have Said

Understanding Security Cheques: When a Security Turns into a Summons

In India’s business landscape, security cheques are ubiquitous. They appear in various contexts, from rental deposits and vendor agreements to startup loans and distributorship contracts. These cheques serve as assurance, not as immediate payment.

However, many recipients deposit these cheques as soon as a dispute arises. When they bounce, they quickly file a Section 138 complaint for cheque dishonour. This raises an important question: Does the law treat a security cheque the same as a payment cheque? The answer is nuanced and has evolved through years of judicial interpretation.

The Legal Framework — Section 138 of the NI Act

Section 138 criminalizes the dishonour of a cheque issued “for the discharge, in whole or in part, of any debt or other liability.” The key phrase here is “legally enforceable debt or liability.” If, at the time of cheque presentation, no debt or liability existed, then Section 138 may not apply.

This single phrase has been at the centre of India’s cheque-bounce jurisprudence for over two decades.

The Legal Question: Does a Security Cheque Represent an Existing Debt?

A security cheque is typically issued in advance to secure the performance of a future obligation. If that obligation later becomes payable, and the cheque is presented after default, it may represent an “existing liability.” If not, the drawer may have a complete defence. Let’s explore how courts have handled this distinction.

Landmark Judgments on Security Cheques

Indus Airways Pvt. Ltd. v. Magnum Aviation Pvt. Ltd.

Facts: The buyer issued post-dated cheques as advance payment for aircraft charter services. When the contract was cancelled, the cheques were returned unpaid.

Held:

“A cheque issued as advance payment for a contract that did not fructify cannot be said to have been drawn for a legally enforceable debt.”

🔹 Key takeaway: If the underlying transaction never matured, Section 138 does not apply.

Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd.

Facts: The borrower issued post-dated cheques as security against loan instalments. When an instalment defaulted, the cheque was presented and bounced.

Held:

“Where the loan had already been disbursed and instalments had fallen due on the date of cheque presentation, the cheque, though termed as security, represented a legally enforceable liability.”

🔹 Key takeaway: Even if labelled “security,” if the cheque covers an existing debt on the presentation date, prosecution under Section 138 is valid.

Sripati Singh v. State of Jharkhand

Facts: The borrower issued cheques described as “security” for a loan. They were later presented when the loan was unpaid.

Held:

“A cheque issued as security cannot be considered a worthless piece of paper. If on the date of presentation a debt existed, Section 138 applies.”

🔹 Key takeaway: Purpose + timing determine liability, not the label “security.”

Sunil Todi v. State of Gujarat

Held:

“Even in the case of post-dated or security cheques, the drawer’s liability is assessed as on the date of presentation, not issuance.”

🔹 Key takeaway: The status on presentation date is decisive — a critical principle now followed by most High Courts.

The Emerging Rule of Law

Indian courts have gradually converged on a pragmatic rule:

Stage	Legal Position
When cheque is issued purely as security, and no debt exists at that time	Not covered by Section 138
When the underlying obligation becomes due later, and the same cheque is presented	Section 138 applies
When transaction is cancelled / contract void / advance returned	No “enforceable debt” — no offence

In essence: The test is not what the cheque was called, but what it stood for at the moment of presentation.

Common Business Scenarios

A. Security Cheques in Loan Transactions

Banks and NBFCs often take undated security cheques from borrowers. Once the loan becomes due and unpaid, courts usually uphold prosecution if the cheque bounces.

B. Cheques for Rent or Lease Security

Landlords sometimes deposit the cheque prematurely. Unless rent arrears or other liabilities existed, Section 138 may not apply.

C. Cheques in Vendor or Distribution Agreements

If the cheque was intended to ensure performance, and no goods or services were supplied, prosecution usually fails.

Defences Available to the Drawer

If you’ve been summoned for a security-cheque bounce, you can build a defence around:

1. No existing liability: The contract was cancelled, or payment was not yet due.

2. Cheque misused: The recipient deposited it contrary to agreed terms.

3. Settlement already made: The debt was cleared through other means.

4. Notice defective: The demand notice was not issued within 30 days or filed beyond limitation.

5. Forgery or coercion: The signature was obtained under duress (requires evidence).

   
   

Remember, the burden of rebuttal under Section 139 is light. You only need to raise a probable defence, not prove innocence beyond doubt.

Apar Law’s Insight

Security cheques sit at the intersection of law. At Apar Law, we advise clients, both complainants and accused, on how to navigate this fine line:

• For businesses and lenders: We help structure transactions and draft agreements that make cheque enforcement legally sustainable.

• For individuals and directors: We defend against misuse of security cheques through quashing petitions and strategic settlements.

• For startups and investors: We vet financing documents to prevent criminal exposure arising from security cheques.

  
  

Our goal is simple — protect your rights while preserving commercial relationships.

Key Takeaways

Point	Insight
Label “security” is not decisive	What matters is liability on date of presentation
Cheque for advance / future payment	Not covered under Section 138
Loan instalment or overdue invoice	Section 138 applies
Always record the context of issuance	Helps establish defence if cheque is misused