Dishonour of post-dated cheques taken as security

Using a post-dated cheque (PDC) as a security for repayment of a loan is a common practice among lenders and financial institutions. An unresolved question is whether issuing a PDC for the satisfaction of debt and issuing a PDC as a security have similar or a different meaning under section 138 of the Negotiable Instruments Act, 1881, for the purposes of prosecution.

In the case of Sampelly Satyanarayana Rao v Indian Renewable Energy Development Agency Limited the Supreme Court recently considered whether the dishonour of a cheque, which was issued after a loan was advanced, was covered by section 138. The court held that if on the date of the cheque, the liability or debt exists or the amount has become legally recoverable, section 138 is attracted and not otherwise. The court further explained that whether a PDC is for the discharge of a debt/liability depends on the transaction.

The litmus test applied by the court was whether the PDC is for the discharge of an existing enforceable debt/liability or whether it represents advance payment without there being a subsisting debt/liability. The court held that the repayment becomes due under the agreement the moment the loan is advanced and the instalment falls due. Therefore, if a PDC is issued after the loan is advanced, it would attract section 138, as it would satisfy the criteria of existing debt at the time of issuance of the cheque.

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