The High Court has reaffirmed that cheques issued merely as security cannot attract criminal prosecution under Section 138 of the Negotiable Instruments Act, 1881, unless there exists a legally enforceable debt or liability at the time of dishonour.

A rice miller was prosecuted for dishonour of multiple cheques allegedly issued towards payment for paddy supplied under a government milling scheme. The trial court convicted the accused, and the conviction was upheld on appeal. The matter eventually reached the High Court in revision.

The accused argued that all dues had been settled—the rice had been delivered to the Food Corporation of India (FCI), and the payment was duly received by the complainant. The cheques were issued only as security during the business transaction and were later misused despite there being no outstanding liability.

The Court observed that:

The entire quantity of rice had been accounted for.

Payments for the rice supplied were received by the complainant from FCI.

The photocopy of an affidavit relied upon by the complainant was inadmissible as evidence.

The arbitration award cited by the complainant had already been set aside.

Holding that no legally enforceable liability existed, the Court ruled that Section 138 NI Act cannot apply to cheques issued as security. The conviction and sentence were accordingly set aside, and the accused were acquitted.

Section 138 prosecutions must be founded on a subsisting debt or liability. Security cheques, without such liability, do not constitute an offence upon dishonour.