Security Cheque and Territorial Jurisdiction in case of Cheque Dishonour under S.138 of Negotiable Instruments Act, 1881

Security Cheque and Territorial Jurisdiction in case of Cheque Dishonour under S.138 of Negotiable Instruments Act, 1881

Controversy

In a recent Judgment passed in the month of October 2025, the issue of security cheque in cases related to S.138 of Negotiable Instruments Act, 1881 was discussed. One can note that before the year 1988, NI Act, 1881 contained only 16 chapters. 17th Chapter was added through an Amendment Act in the year 1988 which amended not only the NI Act, 1881 but also various other Acts like RBI Act, 1934 as well. The imprisonment given under said Amendment Act of the year 1988 was for 1 year only. Later on, in the year 2002, another Amendment Act was made which enhanced the sentence given under S.138 of NI Act to 2 years ; this Amendment Act of the year 2002 not only amended NI Act, 1881 but it also amended Bankers' Books Evidence Act, 1891 and IT Act, 2000. 

Here in this case, the accused argued that cheques in question issued to the Complainant Company were only security cheques, given merely for the purpose of showing them to the Banks, not for any consideration. 

In support of its contention, accused has placed on record the MOU dated 06.05.2014, wherein the details of the cheques in question are specifically mentioned. 

On the other hand, the defence of the Complainant was that even if these cheques were issued as security, they subsequently crystallised into a legally enforceable debt and could be presented to the Bank in case of any outstanding dues. For this purpose, Complainant has relied upon the second paragraph of the said MOU to contend that although the cheques were issued as security, they were subsequently converted into a debt. 

MoU of the Transaction 

The perusal of the MoU clearly recorded that the cheques were issued only for the purpose of being shown as security to the Banks, and not for presentation. The plain reading of the second paragraph of the MOU dated 06.05.2014 makes it further clear that the said Clause pertains only to the Letters of Credit (LCs), which could be adjusted towards old outstanding dues, and not to the subsequent payments that may become due. mentioned therein. Therefore, it was held that Complainant has failed to read the complete terms of the MOU and has instead read the same in isolation. 

Further, Complainant through an email dated 01.08.2014, requested the accused to clear the outstanding payment and warned that in case of default, the Security Cheques would be presented for recovery of the dues. In reply, the Accused through an email dated 12.08.2014, requested Complainant not to present the cheques and clarified once again that they had been issued only for the limited purpose of showing them to the banker for audit requirements. Similar communications were also exchanged between the parties through Legal Notices. Therefore, it was held that the claim that the said cheques were later converted into a debt, is wholly incorrect and reflects a misinterpretation of the terms of the MOU dated 06.05.2014 by the Complainant. 

Principles of Quashing of Criminal Complaint

The principle laid down by Apex Court in the year 2022 were found useful here. In Rathish Babu Unnikrishnan v. State (NCT of Delhi), [2022] GCtR 2004 (SC), has observed as follows : "The proposition of law as set out above makes it abundantly clear that the court should be slow to grant the relief of quashing a complaint at a pre-trial stage, when the factual controversy is in the realm of possibility particularly because of the legal presumption, as in this matter. What is also of note is that the factual defence without having to adduce any evidence need to be of an unimpeachable quality, so as to altogether disprove the allegations made in the complaint."

It was further pointed out that Complainant has not disputed the MOU dated 06.05.2014; rather, it has itself relied upon the same to support its defence. It was held that to contend that the said MOU carries no evidentiary value would be wholly incorrect. The said document was held to be of impeccable and sterling quality and can rightly be relied upon at the stage while considering the quashing of the Complaints and consequent proceedings arising therefrom. 

Territorial Jurisdiction in Cheque-Dishonour Cases

The decision also noted the changes in territorial jurisdiction under the N.I. Act introduced in the last few years. It was noted that an Amendment was introduced in the N.I. Act, whereby sub-section (2) of Section 142 and Section 142-A were inserted with effect from 15.06.2015. It was held that "once a Complaint is returned, all proceedings conducted in that Court becomes non-est in the eyes of law."

Ultimately, the complaint under S.138 was quashed and petition filed by accused was allowed and it was concluded that in this case "cheques in question were security Cheques and were not issued or encashable for any legally enforceable liability or debt and the Complaints under S.138 NI Act on account of dishonour of such cheques, is not maintainable."

For more details refer "Sai Sapthagiri Sponge Pvt Ltd v. The State (GNCTD) [2025] GCtR 1664 (Delhi)".