Are Security Cheques Legally Valid for Debt Recovery?

In commercial transactions across India, issuing post-dated cheques as “security” has become a routine business practice. These cheques are often provided to ensure the performance of a contract or repayment of dues that may arise in future. However, the legality of invoking criminal prosecution under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) for dishonour of such “security cheques” has been a matter of persistent judicial scrutiny.

Delhi High Court’s judgment in Sri Sai Sapthagiri Sponge Pvt. Ltd. v. State (GNCT of Delhi) & M/s Magnifico Minerals Pvt. Ltd. (CRL.M.C. 1034/2017 and connected matters, decided on 27 October 2025) has revisited this issue, reaffirming that cheques issued purely for security and not against an existing debt or liability cannot attract penal consequences under Section 138 NI Act.

This article analyses the judgment in detail, explores statutory interpretation, precedents, and policy rationale, and discusses how courts distinguish between “security cheques” and “cheques issued in discharge of debt.”

Background of the Case

The petitioner company, Sri Sai Sapthagiri Sponge Pvt. Ltd., was engaged in the purchase of imported coal from M/s Magnifico Minerals Pvt. Ltd. As per the complainant’s records, a sum of ₹1.91 crore was outstanding. To secure ongoing transactions, the petitioner issued five cheques drawn on the State Bank of Mysore, Bellary, each for substantial amounts ranging between ₹25–50 lakh.

When the cheques were presented, they were dishonoured with the remark “Stop Payment.” The complainant initiated five separate complaints under Section 138 NI Act, which criminalises dishonour of cheques issued towards the discharge of “a legally enforceable debt or other liability.” Summons were initially issued by the Judicial Magistrate at Bellary, later transferred to Delhi due to territorial jurisdiction amendments under Section 142(2) NI Act.

Petitioner’s Argument

The petitioner contended that the cheques were not issued for repayment, but merely as security instruments pursuant to a Memorandum of Understanding (MoU) dated 6 May 2014 between the parties.

The MoU explicitly stated:

“We are issuing following cheques for Rs. 1.75 Crores for Security Purpose only... not for depositing into bank for clearing. These cheques are insisted for audit purpose and to show to banker as security.”

According to the petitioner, this unequivocal recital negated any element of “consideration” or “enforceable liability.” It was further alleged that the complainant had fraudulently presented the cheques despite clear contractual stipulations prohibiting encashment.

The petitioner also emphasised that letters of credit (LCs) were issued and encashed for ₹31 lakh to adjust outstanding dues, showing that payments were made through alternate banking channels. Therefore, the subsequent presentation of the “security cheques” was not legally tenable.

Respondent’s Counter-Argument

The complainant (Magnifico Minerals Pvt. Ltd.) argued that even if the cheques were initially given as security, they were issued against contingent liabilities that later crystallised into an enforceable debt when the petitioner defaulted on payments.

Reliance was placed on Section 139 NI Act, which presumes that every cheque is issued for discharge of debt or liability unless proved otherwise. The complainant maintained that the burden to rebut this presumption lay on the drawer.

They also cited precedents such as:

1. MMTC Ltd. v. Medchl Chemicals & Pharma (P) Ltd., (2002) SCC (Cri) 121 — where the Supreme Court held that the onus to prove non-existence of liability is on the accused.
2. K.S. Bakshi v. State, 2008 (3) JCC (NI) 267 — distinguishing between a “pure security cheque” and a cheque issued towards contractual performance, which becomes enforceable upon default.
3. HMT Watches Ltd. v. M.A. Abida, (2015) 11 SCC 776 — holding that whether a cheque is security or not is a factual issue to be decided at trial.

Thus, the respondent urged that the petitions under Section 482 Cr.P.C. seeking quashing were premature, as disputed questions of fact required trial.

Issue 

The central issue before the Delhi High Court was:

• Whether cheques issued merely for security purposes, without any existing debt or liability, can be treated as valid instruments for initiating prosecution under Section 138 of the NI Act.

Court’s Analysis

1. Nature of Security Cheques

Justice Neena Bansal Krishna examined the Memorandum of Understanding dated 06.05.2014 in detail. The Court noted that the MoU clearly restricted the cheques to being used only as security for audit and banking formalities and explicitly prohibited presentation for clearance.

The second clause of the MoU referred to the issuance of Letters of Credit (LCs) which could be adjusted against old dues, but this did not extend to the security cheques. Hence, the Court found that the complainant had misread the terms by treating the cheques as enforceable debt instruments.

2. Legal Presumption and Its Rebuttal

While Section 139 NI Act raises a statutory presumption that a cheque is issued for a debt, the Court reiterated that such presumption is rebuttable. If documentary evidence such as a written agreement (here, the MoU) unambiguously shows the cheque’s purpose as security, the presumption stands displaced.

The Court reasoned that the MoU was not disputed by the complainant, and hence, it carried “impeccable evidentiary value” capable of rebutting the presumption even at the pre-trial stage.

3. Reliance on Precedents

The Court relied on several Supreme Court decisions that carved out exceptions permitting High Courts to consider unimpeachable documents while exercising jurisdiction under Section 482 Cr.P.C. for quashing criminal proceedings:

1. Harshendra Kumar D. v. Rebatilata Koley, (2011) 3 SCC 351 — permitting quashing when defence documents are beyond suspicion.
2. Rathish Babu Unnikrishnan v. State (NCT of Delhi), 2022 SCC OnLine SC 513 — cautioning courts to be slow in quashing but allowing it when factual defences are unimpeachable.
3. Mohd. Akram Siddiqui v. State of Bihar, (2019) 13 SCC 350 — recognising exceptions where documents are undisputed or public in nature.

Applying these principles, the Court held that since the MoU’s authenticity was uncontested and its contents clearly defined the cheques’ non-enforceable purpose, continuation of prosecution would amount to abuse of process of law.

4. Jurisdictional Defect

The Court further examined the jurisdictional irregularity in summoning orders. The original Magistrate at Bellary had returned the complaint for lack of territorial jurisdiction, yet the Delhi Magistrate adopted the earlier summons without passing a fresh summoning order.

Since proceedings before a court lacking jurisdiction are non-est, the subsequent adoption of those orders by the Delhi court was illegal. The High Court emphasised that once a complaint is returned under Section 142(2) NI Act read with Dashrath Rupsingh Rathod v. State of Maharashtra (2014) 9 SCC 129, fresh cognizance must be taken by the court of competent jurisdiction.

5. Final Finding

On cumulative analysis, the High Court held that:

“The impugned cheques were security cheques given for a specific purpose and could not have been encashed for a liability which may have subsequently arisen. The complaints under Section 138 NI Act are therefore liable to be quashed.”

Judgment

The Court quashed five complaint cases pending before the Metropolitan Magistrate, Patiala House Courts, along with the earlier summoning orders dated 27.04.2015, 18.05.2015, and 08.04.2015. It reaffirmed that dishonour of a “security cheque” does not constitute an offence under Section 138 unless the cheque represents an existing, legally enforceable debt or liability on the date of presentation.

Conclusion

Delhi High Court’s ruling in Sri Sai Sapthagiri Sponge Pvt. Ltd. offers crucial guidance in interpreting the fine line between a “security cheque” and a cheque issued in discharge of debt. It reiterates that the penal machinery of Section 138 NI Act cannot be invoked where no enforceable liability exists on the date of presentation.

Security cheques — often demanded for commercial comfort — are not per se illegal. But their misuse to initiate criminal prosecution violates both contractual understanding and legislative intent.

Ultimately, the judgment strikes a pragmatic balance: while upholding business integrity and financial discipline, it prevents the criminalisation of purely civil disputes. Parties must thus rely on clear documentation, mutual trust, and contractual remedies, rather than the threat of prosecution, to enforce legitimate claims.

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