Security Cheque Defence Rejected: Himachal Pradesh HC upholds Conviction u/s 138 NI Act but Reduces Jail Term to 6 Months [Read Order]

The Himachal Pradesh High Court has upheld the conviction of the petitioner under section 138 of the Negotiable Instruments (NI) Act 1881 and has rejected the petitioner’s defence that the issued cheque was to be considered a security. The court observed that even as “security” it can attract liability under Section 138 of the Act.

The petitioner Sandeep Kumar Sharma has approached the respondent/ complainant, Punjab National Bnak for a loan of ₹26,66,000/- for the purchase of a new AMW 2518 Tipper. The bank sanctioned the same.The amount was to be repaid in 58 equated monthly instalments of ₹45,966/- along with a contractual interest at the rate of 12.5% per annum with monthly rests.

The petitioner defaulted on the repayment of the loan . He issued a cheque of ₹9,95,000/- to discharge part of his liability. But when the complainant presented the cheque it was dishonoured with an endorsement ‘insufficient funds’.

The complainant sent a legal notice to the accused, but it was returned with an endorsement ‘unclaimed’ and is deemed to be served. The accused failed to repay the amount. Hence, the complaint was filed before the learned Trial Court for taking action against the accused as per the law.

The trial court convicted him under Section 138 NI Act, sentencing him to two years’ simple imprisonment and compensation of ₹13 lakh. The appellate court upheld the conviction and sentence. Aggrieved, the petitioner approached the High Court in revision.

The petitioner argued that the loan was secured under CGTSME, and the insurance amount was claimed by the Bank. This amount was not deducted by the bank while calculating the balance. Further the petitioner contended that he had issued the cheque as security. It was also argued that the Courts erred in rejecting this plea and the loan amount has been recovered by the bank, and no further payment is to be made.

It was also contended that the Trial Court had imposed two years imprisonment, which is the maximum sentence, and no justification for imposing the maximum sentence was given.

Justice Rakesh Kainthla depended on the Supreme Court’s case of APS Forex Services (P) Ltd. v. Shakti International Fashion Linkers (2020), that when the issuance of a cheque and signature on the cheque are not disputed, a presumption would arise that the cheque was issued in discharge of the legal liability.

The case of N. Vijay Kumar v. Vishwanath Rao N.(2025), was also cited, wherein it was held as under:

“6. Section 118 (a) assumes that every negotiable instrument is made or drawn for consideration, while Section 139 creates a presumption that the holder of a cheque has received the cheque in discharge of a debt or liability. Presumptions under both are rebuttable, meaning they can be rebutted by the accused by raising a probable defence.”

It was observed that the accused had a liability of more than the cheque amount on the date of issuance of the cheque. Therefore, the complainant had the authority to present the cheque even if it was issued as security. It was laid down by this Court in Hamid Mohammad Versus Jaimal Dass 2016, that even if the cheque is issued towards the security, the accused is liable.

The court further observed that the Supreme Court in Sampelly Satyanarayana Rao vs. Indian Renewable Energy Development Agency Limited 2016 had held that issuing a cheque toward security will also attract the liability for the commission of an offence punishable under Section 138 of the NI Act.

This position was reiterated in Sripati Singh v. State of Jharkhand, 2021 in which it was held that a cheque issued as security is not waste paper and a complaint under section 138 of the NI Act can be filed on its dishonour.

Thus the court held that it was duly proved that the accused had issued a cheque in discharge of his liability, which was dishonoured with an endorsement ‘funds insufficient’, and the accused failed to repay the amount despite the deemed service of notice upon him.

Hence, all the ingredients of commission of an offence punishable under Section 138 of the NI Act were duly satisfied. Thus, the learned Trial Court had rightly convicted the accused of the commission of an offence punishable under Section 138 of the NI Act.

In view of the above, the revision was partly allowed, and the sentence of two years imprisonment imposed by the Trial Court was reduced to six months imprisonment as no aggravating circumstances justifying the imposition of the maximum sentence were brought on record.

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