No prosecution in cheque bounce case if issued as security

Last Updated: Friday, February 19, 2010 - 17:58

Mumbai: The Bombay High Court has held that if a blank post-dated cheque -- which has been issued only as a "collateral security" for a loan -- bounces, the debtor cannot be prosecuted under the Negotiable Instruments (NI) Act.

Very often banks accept blank post-dated cheques from borrower as a security for repayment. Criminal case under NI Act can not be lodged if such cheques bounced, Justice PR Borkar held in his judgment last week.

The judgment was passed on a petition filed by Ramkrishna Urban Cooperative Credit Society (RUCCS) in Ahmednagar district.
RUCCS had given a loan of Rs 2 lakh to a person named Rajendra Varma in 2000. Varma had issued 10 blank post-dated cheques at the time as a security for repayment.

One of these cheques, dated January 2008, bounced following which RUCCS filed criminal complaint against Varma.

However, the magistrate`s court held that Varma was not guilty under the NI Act and acquitted him. The Society filed an application in Aurangabad bench of High Court seeking its permission to file appeal in sessions court.

The High Court noted that NI Act was intended to give more credibility to cheque as a financial instrument; "however, the object was not to provide effective and speedy remedy for recovery of loans," it said.
"Law makers must not have intended or imagined that money lenders or banks would obtain blank or post dated cheques while sanctioning/disbursing loans as securities and would use them to make debtors/borrowers to repay loan under threat of prosecution and punishment under Section 138 of NI Act," Justice Borkar held dismissing the application.

"It is doubtful if provisions of Section 138 attracted to a case in which a blank or post dated cheque is obtained by a bank or money lender before or while sanctioning or disbursing loan amount as security for the loan," the judge said.

"In this case the accused respondent issued the cheque in question as security for loan before loan amount was disbursed. So, cheque was not towards any existing debt or liability (which is a requirement under section 138)," the High Court observed confirming the order of acquittal.


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First Published: Friday, February 19, 2010 - 17:58

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