The Punjab and Haryana High Court has reaffirmed that cheques issued as security in commercial transactions remain fully actionable under Section 138 of the Negotiable Instruments Act if dishonoured, provided the signature is admitted and a legally enforceable liability is prima facie apparent. This ruling clarifies a persistent misconception in commercial litigation that security cheques are immune from criminal prosecution.
Background & Facts
The Dispute
The petitioners, Aarti Trehan and her firm, were engaged in a business relationship with M/s Super Oils, a supplier of industrial oils and lubricants. Over several months, the petitioners made purchases and made partial payments, which were reflected in GST returns and bank records. As of 1 November 2022, a balance of Rs. 2,11,073/- remained outstanding. In response, the petitioners issued two cheques for Rs. 1,13,245/- and Rs. 96,146/- respectively. Both cheques were presented and returned with the remark "Payment stopped by drawer".
Procedural History
- August 2022: Petitioners issued cheques to settle outstanding dues.
- November 2022: Cheques dishonoured; legal notice issued under Section 138 NI Act.
- December 2022: Complaint filed by respondent before Judicial Magistrate First Class, Ludhiana.
- March 2023: Magistrate found prima facie case and summoned petitioners.
- 2023: Petitioners filed criminal petition under Section 482 Cr.P.C. seeking quashing of complaint and summons.
Relief Sought
The petitioners sought quashing of the criminal complaint and the summoning order, arguing that the cheques were issued solely as security due to defective goods supplied by the respondent, and that no legally enforceable liability existed at the time of issuance.
The Legal Issue
The central question was whether Section 138 of the Negotiable Instruments Act applies when a cheque is issued as security rather than as immediate payment, and whether the presumption of liability under Section 139 can be rebutted at the pre-trial quashing stage.
Arguments Presented
For the Petitioner
Counsel argued that the cheques were issued only as security against potential civil claims arising from defective goods. They contended that no legally enforceable liability existed at the time of issuance because the goods were substandard and the parties were engaged in a pending civil dispute. Further, they claimed the cheque amounts did not precisely match the alleged liability, suggesting fabrication. Reliance was placed on the principle that security cheques cannot be weaponised for criminal prosecution.
For the Respondent
The respondent countered that the cheques were issued to discharge an existing and acknowledged debt, as evidenced by payment history and GST records. The stoppage of payment was intentional and constituted a breach of commercial obligation. The Magistrate had rightly found a prima facie case under Section 138, and the High Court lacked jurisdiction to re-appreciate evidence at the quashing stage.
The Court's Analysis
The Court examined the scope of Section 482 Cr.P.C. and reaffirmed that quashing is permissible only in exceptional cases where the complaint is legally unsustainable or the allegations are inherently improbable. It emphasized that at the stage of summoning, the Magistrate need not determine the truth of allegations, only whether they prima facie disclose an offence.
"There is no requirement that the complainant must specifically allege in the complaint that there was a subsisting liability. The burden of proving that there was no existing debt or liability, was on the respondents. This they have to discharge in the trial."
The Court held that the petitioners did not dispute the authenticity of their signatures on the cheques. Under Section 139 NI Act, this triggers a statutory presumption that the cheque was issued for a legally enforceable liability. The claim that the cheques were "security" was rejected as legally insufficient to defeat prosecution at this stage.
"Security is not a deterrent for the drawer against dishonouring his financial commitment but it can also be legally and validly utilized towards the discharging of liability of the drawer."
The Court cited Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited and Shalini Enterprise v. Indiabulls Financial Services Ltd. to affirm that security cheques are part of commercial practice and their dishonour attracts criminal liability under Section 138. The Court refused to entertain factual disputes regarding defective goods or payment amounts, noting that such issues require full trial and evidence evaluation.
The Verdict
The petition was dismissed. The Court held that Section 138 NI Act applies to cheques issued as security if the signature is admitted and a prima facie liability exists. The presumption under Section 139 stands unchallenged at the quashing stage, and factual defences must be raised during trial.
What This Means For Similar Cases
Security Cheques Are Not Immune from Criminal Liability
- Practitioners must advise clients that issuing cheques as security does not automatically shield them from prosecution under Section 138 NI Act.
- The mere assertion that a cheque is "for security" is not a defence at the quashing stage.
- Courts will presume liability if the signature is admitted, regardless of the cheque’s stated purpose.
Pre-Trial Quashing Requires Clear Legal Defects, Not Factual Disputes
- Petitioners cannot use Section 482 Cr.P.C. to litigate evidentiary conflicts over defective goods, payment amounts, or oral agreements.
- Any factual defence - such as non-existence of debt or prior settlement - must be raised during trial.
- High Courts will not interfere with summoning orders unless the complaint is legally void or absurd on its face.
Burden of Rebuttal Shifts to the Accused at Trial
- The accused must now prepare to rebut the Section 139 presumption with documentary evidence, witness testimony, or correspondence proving absence of liability.
- Oral claims of "security" without supporting documentation will not suffice.
- Legal notices and GST records remain critical evidence for establishing prima facie liability.
