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Post Dated Cheques

Can a Post Dated Cheque or a Cheque issued as Security be considered for the purposes of Cheque Bouncing proceedings under Section 138 of the Negotiable Instruments Act - YES, if there exists a payment liability.

- By Divya Sharma, Sr. Associate, Delhi Office

The Supreme Court of India recently, in the case of Sempelly Satyanarayana Rao V. Indian Renewable Energy Development Agency Ltd. (Renewable Energy Case) has held that a cheque tendered towards “security” under the Loan Agreement against the loan so advanced, was certainly payable in discharge of debt if the Loanee failed to repay the loan; and if this security cheque bounced, an action under section 138 NI Act was clearly maintainable.

Facts in the Renewable Energy Case :

The Appellant Sempelly Satyanarayana Rao was the Director of a Company involved in the business of power generation whereas the Respondent is the Govt. of India Enterprise (in respect of Renewable Energy). On 15th March, 2001, the Respondent advanced a Loan of Rs.11.50/- Crores to the Appellant for setting up of a 4 MW Biomass Power Generation Plant in Andhra Pradesh by way of Loan Agreement, where it was agreed that the Appellant would pay back the amount in installments by way of post-dated cheques, which are “security” and would mature at regular intervals of time and the amount so paid by this process would be deducted from the loan amount.

The Appellant failed to pay his installments and the cheques were also dishonored at the time when they become due. Respondent-Complainant filed the Complaint for dishonor of 18 cheques (amounting to Rs.10.3/- Crores in aggregate) under section 138 of the N.I. Act and the Appellant approached the High Court for quashing these Complaints.  The issue before the HC was whether these 18 cheques amounted to “Security” under the loan agreement and if so, whether the proceedings for their dishonor would attract liability under section 138 of the N.I. Act.

High Court’s View

The Appellant raised contentions saying that the Post-dated Cheques given to the Respondent were in the form of security as per Clause 3.1(iii) of the Loan Agreement and further that the 1st installment of loan was payable before the 1st cheque matured for payment.  Therefore, the cheques were not issued / tendered in discharge of debt or repayment of loan but for the amount payable in future. The High Court found this reasoning quite vague and held that the post-dated cheques were issued for a debt in present though payable in future and that there is no reason for the court as to why the complaints be quashed.

Against the decision of the HC, the Appellant approached the Supreme Court, contending all over again that the dishonour of cheques would not be deemed to mean non-repayment of debt or liability as they were furnished as a security and not as the direct mode of repayment of the debt taken and according to Section 138 of the N.I. Act, the liability would arise only  if the cheque issued for the purpose of repayment of debt (whether in full or in part) was returned by the bank for insufficiency of funds which is not done in the present case. The Appellant also cited a recent judgement of the Supreme Court in the case of “Indus Airways Private Limited versus Magnum Aviation Private Limited” where the Purchaser had given two post-dated cheques in favour of the Supplier, as an advance payment for purchasing spare parts of aircraft, which were later dishonoured. But before the maturity date of the post-dated cheques the Purchaser had sent a letter to the Supplier for cancelling the Purchase Orders with a request to return the Cheques. The Supreme Court interpreted the explanation to section 138 of N.I. Act which is projected below with respect to the case law cited and construed that:

Explanation. For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.”

“If a cheque is issued as an advance payment for purchase of the goods and for any reason the Purchase Order is not carried to its logical conclusion, either because of its cancellation or otherwise, and material or goods for which Purchase Order was placed is not supplied; in our considered view, the cheque cannot be held to have been drawn for an existing debt or liability. The payment by cheque in the nature of advance payment indicates that at the time of drawal of the cheque, there was no existing liability.”

The Supreme Court considered the above case law as was cited by the Appellant as being contrary to the facts of the case in hand, for the issue was totally different in both the cases. In the case law cited, the post-dated cheques were made as an advance payment under an PO for supply of goods which goods were later cancelled by the purchaser by cancelling the PO. While in the case in hand, the post-dated cheques were given by way of “security” for securing the payment of loan and therefore both the cases are clearly distinguishable. Also, the Supreme Court said that in the above cited case law, an action could have been brought by the Supplier for breach of contract under the Contract Act but this action for liability under Section 138 is not tenable.

The Supreme Court then held in the case in hand that “the present case clearly shows that though the word “security” is used in clause 3.1(iii) of the Loan Agreement, the said expression refers to the cheques being towards repayment of installments. The repayment becomes due under the Agreement, the moment the loan is advanced and the installment falls due.” Final Decision:

The Supreme Court resolved both the issues identified above and upheld the decision of the High Court in the present case. It held that the post-dated cheque is a valid mode of repayment of debt and it can be clearly inferred from the agreement that no intention was there of advancing the cheques as a “Security” even though phrase “securing the payment” is used in the agreement. Therefore, in the present case the proceedings under Section 138 will continue.

Conclusion:

Though the cheque was tendered as security in both the cases mentioned above, the said security was clearly not payable in the former case due to cancellation of the PO – due to which goods were not delivered and consequently, there arose no liability to pay.   As such, there was no debt in question in this case.   However, in the latter case, the cheque under security was payable as the Appellant had failed to repay his loan and the Respondent had no choice but to encash the security cheque for the debt payable by the Appellant. 

Applicability of the above SC Judgment:

Where a Security Cheque is taken, in advance, by the Companies from their Dealers / Distributors, and during business, goods are supplied by the Company and repayment becomes due by these Dealers / Distributors OR in the alternative, where advance payments are made by these Dealers / Distributors against which Company supplied goods, it should be analyzed as to whether these Dealers / Distributors have any payment liability against the Company at any relevant point of time.   If yes, then the Company can encash the Security Cheques towards the said payment liability of the Dealer / Distributor and where any such security cheque bounces due to insufficiency of funds, an action u/s 138 of NI Act is certainly maintainable.