Delhi High Court Quashes Cheque Bounce Cases Filed on Security Cheques

Parties Involved

Petitioner: Sri Sai Sapthagiri Sponge Pvt. Ltd. — a steel-sponge manufacturing company from Bellary, Karnataka.

Respondent No. 2 (Complainant): M/s Magnifico Minerals Pvt. Ltd., New Delhi — engaged in import and resale of steam coal.

Counsel: Advocates Girdhar Govind & Noor Alam for the Petitioner; APP Shoaib Haider for State; Advocates Alok Tripathi & Saurabh Mishra for the Complainant.

The complainant supplied imported coal to the petitioner on various occasions.

According to its accounts, a balance of ₹ 1,91,72,159.51 plus interest was due as of 3 November 2014.

To secure the running business, the petitioner company issued five cheques drawn on the State Bank of Mysore, Bellary:

| Cheque No. | Date       | Amount    | Dishonoured on | Legal Notice Date |

| ---------- | ---------- | --------- | -------------- | ----------------- |

| 332167     | 15-11-2014 | ₹ 25 lakh | 21-11-2014     | 06-12-2014        |

| 332168     | 15-12-2014 | ₹ 25 lakh | 09-02-2015     | 26-02-2015        |

| 332169     | 15-01-2015 | ₹ 25 lakh | 06-02-2015     | 26-02-2015        |

| 332170     | 15-02-2015 | ₹ 50 lakh | 26-02-2015     | 19-03-2015        |

| 332171     | 15-03-2015 | ₹ 50 lakh | 19-03-2015     | 24-03-2015        |

All cheques were returned unpaid with the remark “Stop Payment.”

Initially, five complaints under Section 138 NI Act were filed before the Addl. Civil Judge & JMFC, Bellary (Karnataka), which issued summons to the petitioner in 2015.

Subsequently, the Bellary Court found it had no territorial jurisdiction and returned the complaints to be filed in Delhi, where the cheques were presented.

The complaints were later re-filed before the Metropolitan Magistrate, Patiala House Courts, New Delhi.

However, instead of issuing fresh summons, the Delhi MM adopted the earlier Bellary summoning orders.

The accused challenged these actions before the High Court under Section 482 CrPC, asserting that:

1. The cheques were security cheques only, not against any enforceable debt.

2. The summoning orders were jurisdictionally invalid and could not be adopted.

Cheques Issued for Security Only

The petitioner produced a Memorandum of Understanding (MOU) dated 06 May 2014 signed by both parties.

The document categorically stated:

 “We are issuing following cheques for ₹ 1.75 crore for security purpose only.

  Cheques are being insisted for audit and banking demonstration and not for deposit into bank for clearing.”

It further recorded that the petitioner would open Letters of Credit (LCs) for fresh supply and clear old dues through RTGS.

Therefore, the cheques were never meant to discharge any existing liability; they were collateral instruments, not payment cheques.

The petitioner also relied on the fact that one LC for ₹ 31 lakh had already been encashed by the complainant on 1 July 2014 — proving ongoing compliance.

The complainant contended that:

 Even if the cheques were initially security, they later matured into a legally enforceable debt when the petitioner failed to pay.

 Under Section 139 NI Act, there is a statutory presumption that a cheque is issued in discharge of debt unless rebutted by        evidence.

 The petitioner could rebut that presumption only during trial, not at the quashing stage.

The complainant relied on Credential Leasing & Credits Ltd. v. Shruti Investments (2015 (4) JCC (NI) 252) to argue that a debt may crystallise after issuance.

1. Whether cheques issued as security can constitute a “legally enforceable debt” under Section 138 NI Act.

2. Whether the Delhi MM could adopt the summoning orders issued by the Bellary MM after return of the complaint.

  1. Nature of the Cheques — Security vs. Enforceable Debt

The Court noted that the MOU dated 06 May 2014 was undisputed and even relied upon by the complainant.

The first paragraph explicitly declared that the cheques were for security purpose only.

The second paragraph, referring to LCs, was misread by the complainant to suggest liability; however, the Court clarified that it applied only to LCs, not cheques.

Key Observation:

 “The MOU clearly records that the cheques were issued only for being shown as security to the banks and not for presentation. Hence, no consideration existed for their encashment.”

The Court emphasised that existence of debt or liability is the foundational ingredient of Section 138 NI Act.

Without it, prosecution is not maintainable.

 2. Evidentiary Value of the MOU

Relying on Harshendra Kumar D. v. Rebatilata Koley (2011 3 SCC 351), the Court held that documents beyond suspicion or doubt can be looked into even at the Section 482 stage.

 “To prevent injustice, the High Court may consider such unimpeachable documents placed by the accused.”

Since the MOU was signed by both parties and its authenticity was not disputed, it was treated as sterling evidence.

 3. Territorial Jurisdiction and Validity of Summoning Orders

Citing Dashrath Rupsingh Rathod v. State of Maharashtra (2014 9 SCC 129) and Bridgestone India Pvt. Ltd. v. Inderpal Singh (2016 2 SCC 75), the Court reaffirmed that:

A complaint under Section 138 NI Act lies where the cheque is dishonoured.

 When a complaint is returned for want of jurisdiction, all previous proceedings become non-est.

 Therefore, the Patiala House MM ought to have issued a fresh summoning order instead of adopting the void orders of Bellary MM.

After a 360° review of the facts and law, Justice Neena Bansal Krishna concluded:

“The impugned cheques were security cheques given for a specific purpose and could not have been encashed for a liability that may have subsequently arisen.

 The complaints under Section 138 NI Act are therefore liable to be quashed.”

Accordingly, all five cases — CC No. 15098/2016, 15410/2016, 15373/2016, 1540/2019, 1541/2019 — and their summoning orders dated 27-04-2015, 18-05-2015 & 08-04-2015 were quashed.

For Business Owners and Vendors:

 Always document the purpose for which a cheque is taken (payment vs security).

 Avoid depositing a cheque marked “security” unless written consent or liability acknowledgment exists.

 For Accused Persons / Companies:

 Maintain written MOUs, email trails, or ledger entries showing that the cheque was security only.

 Produce such evidence at the earliest possible stage; it can lead to quashing of proceedings.

  For Legal Practitioners:

 When defending Section 138 cases, focus on documentary admissions like MOUs, agreements, or audit correspondences.

 Challenge jurisdictional errors; even a valid complaint becomes void if filed in the wrong court or based on a non-existent summoning order.

This judgment is a crucial milestone for clients wrongly prosecuted on the basis of security cheques.

Courts have once again emphasised that criminal prosecution under Section 138 NI Act cannot be used as a tool of coercion.

 Proper documentation, clarity of purpose, and timely legal advice are your strongest defences.”

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