Imagine a cheque issuer who, under some contract or arrangement, issues a cheque to a cheque holder — not as immediate payment, but as a security. A guarantee. A promise that says: “if a debt becomes due in the future, this cheque will cover it.”
The situation, at this stage, is not difficult to understand. A “security cheque” is exactly what it sounds like — security for a contingent, future liability. And “future debt due” precisely means that: a liability that does not exist today but may arise tomorrow.
So far, so simple. But here is where it gets complicated — what if that security cheque is presented to the bank and it bounces? Does that constitute dishonour of a cheque? And more critically, does it attract criminal liability under Section 138 of the NI Act? That is the question this blog sets out to answer.
But first, a brief introduction to the law itself.
The Negotiable Instruments Act, 1881 (“NI Act”) is a legislation that governs financial instruments used in everyday commercial and personal transactions — cheques, promissory notes, and bills of exchange being the most common among them. In simple terms, it is the law that regulates how these instruments work, and what happens when they do not.
Section 138 of the NI Act is one of its most consequential provisions. It deals with the dishonour of cheques — that is, when a cheque “bounces” due to insufficiency of funds or when the amount exceeds the arrangement with the bank. What makes Section 138 particularly significant is that it attaches criminal liability to such dishonour. A person whose cheque is dishonoured can face imprisonment of up to two years, a fine that may extend to twice the amount of the cheque, or both. The intent behind this provision is straightforward — to ensure that cheques are not issued carelessly or dishonestly, and to preserve the sanctity of cheque-based transactions.
The Issue: What About “Security Cheques”?
When a cheque is issued in a straightforward transaction — say, in payment for goods or services — the application of Section 138 is clear. The plain reading of the Act leaves little room for confusion in such cases.
However, a different and heavily debated situation arises when it comes to “Security Cheques.” A security cheque is a cheque given not in payment of a current debt, but as a security or guarantee against a future or contingent liability. Think of it as a safety net — a cheque handed over to a lender as assurance that if a borrower defaults, the lender can encash it. The question that has generated significant debate is: if such a security cheque is presented and dishonoured, does it attract criminal liability under Section 138 NI Act?
The answer, as we shall see, is not straightforward — it depends entirely on the facts and circumstances of each case. Let us understand this through the analysis of important judgments, which together gives us four clear governing principles.
What the Courts Have Said: Landmark Judgments
· I.C.D.S. Ltd. v. Beena Shabbir & Anrs.: 2002 (6) SCC 426 — The First Recognition
The Supreme Court, in this landmark case, was among the first to squarely address the question of security cheques under Section 138. The Court held unambiguously that security cheques also fall within the purview of Section 138 of the NI Act. A person cannot escape liability merely by stating that the cheque had been given as security.
The Court was clear: when a debt exists on the date of presentation of the cheque, and the security cheque issued against that debt is dishonoured, the accused will be held liable under Section 138. This case laid the critical first recognition — the law does not grant automatic immunity to security cheques.
· Collage Culture and Ors. v. Apparel Export Promotion Council: 2007 (99) DRJ 251 — Deepening the Understanding
Building on the recognition established in ICDS, this judgment went further and provided the conceptual framework for understanding exactly when a security cheque attracts Section 138 liability. The Court drew a critical distinction between two kinds of cheques:
- A cheque issued in discharge of a present debt, but payable in the future; and
- A cheque issued in respect of a debt that comes into existence only upon a contingent event — that is, a debt not yet in existence on the date the cheque was issued.
The Court held that the latter — a cheque issued for a contingent, future liability — being a security cheque, will not be covered under Section 138. Importantly, the Court defined the word “due” as “outstanding on the relevant date” — meaning the debt must exist as a crystallised, ascertained demand on the date of presentation of the cheque, akin to liquidated damages, and not a demand which may or may not come into existence in the future.
First Principle: For Section 138 to apply, an outstanding and crystallised debt must exist on the date of presentation of the security cheque.
· Suresh Chand Goyal v. Amit Singhal (Crl. A. 601/2015, decided on 14.05.2015) — No Magic in the Words
This judgment is perhaps the most direct and accessible articulation of the law on security cheques. The Court held:
“There is no magic in the word ‘security cheque’, such that, the moment the accused claims that the dishonoured cheque was given as a ‘security cheque’, the Magistrate would acquit the accused. The expression ‘security cheque’ is not a statutorily defined expression in the NI Act. The NI Act does not per se carve out an exception in respect of a ‘security cheque’…”
The Court further observed that there can be many situations in which a cheque may be called a security cheque — and while in some situations, the dishonour of such a cheque may attract Section 138, in others it may not. It all depends on the facts.
Second Principle: Merely calling a cheque a “security cheque” will not render it immune from Section 138 NI Act — and equally, it will not automatically attract liability. The label is irrelevant; the substance is everything.
· Credential Leasing & Credits Ltd. v. Shruti Investments & Anrs., 2015 (151) DRJ 147 — Case to Case Examination
Relying on the dicta in Suresh Chand Goyal, this Court reinforced and expanded the governing framework:
“…it would need examination on a case to case basis as to whether, on the date of presentation of the dishonoured cheque, the ascertained and crystallized debt or other liability did not exist. The onus to raise a probable defence would lie on the accused, as the law raises a presumption in favour of the holder of the cheque that the dishonoured cheque was issued in respect of a debt or other liability.”
· Sri Sai Sapthagiri Sponge Pvt. Ltd. v. State (GNCT of Delhi) & Anr., CRL MC 1034/2017, pronounced on 27th October 2025 — The Principle in Action
This recent judgment of the Delhi High Court is Principle 3 applied in practice. The Court observed that a cheque issued for purposes such as audit compliance, regulatory requirements, or any purpose other than the discharge of an enforceable debt or liability, will not be covered under Section 138. When examined on the facts of the case, no crystallised debt was found to exist — and accordingly, Section 138 was held to be inapplicable.
This judgment is a valuable illustration of what the case to case examination looks like when the debt fails the test of crystallisation — and equally, it ensures that Section 138 cannot be misused as a tool to harass individuals who have issued cheques for procedural or administrative purposes with no underlying financial obligation attached.
Third Principle: Whether a security cheque attracts Section 138 liability must be examined on a case to case basis — the decisive question being whether an ascertained and crystallised debt or liability existed on the date of presentation.
Fourth Principle: The onus to prove the non-existence of any crystallised debt lies on the accused. By virtue of the presumption of debt in favour of the cheque holder under Sections 118 and 139 of the NI Act, the accused must rebut this presumption on a preponderance of probabilities.
The Four Principles at a Glance
The judicial journey above gives us four clear, governing principles for deciding the criminal liability of a security cheque under Section 138 NI Act:
- Crystallised Debt Must Exist — An outstanding and enforceable debt must exist on the date of presentation of the cheque. A contingent or future liability is not sufficient.
- The Label Doesn’t Matter — Calling a cheque a “security cheque” is neither a shield nor a sword. It carries no statutory significance under the NI Act.
- Case to Case Examination — Each case must be examined on its own facts to determine whether the debt had matured and crystallised by the time the cheque was presented.
- Burden on the Accused — Due to the presumption of legally enforceable debt under Sections 118 and 139, the accused bears the onus to rebut the presumption on a preponderance of probabilities.
Conclusion: The One Question That Matters
After navigating through landmark judgments and settled legal principles, the answer to the central question appears with clarity. A security cheque’s criminal liability under Section 138 NI Act is not determined by its label — it is determined by the substance of the transaction behind it.
Whether you are a creditor seeking to recover a debt, or a debtor who issued a cheque as security, the fundamental question to ask is simple:
Does the “security cheque” have an enforceable liability attached to it?
If yes — and if that liability had crystallised and matured at the time the cheque was presented — Section 138 will apply, and the presumption of law will stand against the issuer. The issuer will then carry the burden of proving otherwise. If no enforceable debt existed, the cheque falls entirely outside the scope of Section 138.
The word “security” on a cheque is neither a get-out-of-jail-free card, nor a guaranteed path to criminal prosecution. It is the enforceable liability behind it that tells the real story.
Frequently Asked Questions:
1. Is a security cheque treated differently from a regular cheque under Section 138? Not automatically. The law does not distinguish between a “security cheque” and a regular cheque in terms of liability. What matters is whether an enforceable and crystallised debt existed at the time of presentation.
2. Can I escape Section 138 liability just by calling my cheque a “security cheque”? No. As held in Suresh Chand Goyal, there is no magic in the words “security cheque.” Courts look at the substance of the transaction, not the label.
3. Who bears the burden of proof — the creditor or the debtor? Once a cheque is presented and dishonoured, the law presumes under Sections 118 and 139 that it was issued for an enforceable debt. The burden then shifts to the accused (debtor) to rebut this presumption on a preponderance of probabilities.
3. Who bears the burden of proof — the creditor or the debtor? Once a cheque is presented and dishonoured, the law presumes under Sections 118 and 139 that it was issued for an enforceable debt. The burden then shifts to the accused (debtor) to rebut this presumption on a preponderance of probabilities.
3. Who bears the burden of proof — the creditor or the debtor? Once a cheque is presented and dishonoured, the law presumes under Sections 118 and 139 that it was issued for an enforceable debt. The burden then shifts to the accused (debtor) to rebut this presumption on a preponderance of probabilities.
