The Delhi High Court has held that where a cheque is issued purely for the purpose of security, rather than as payment of an existing debt or liability, it cannot be presented for encashment under Negotiable Instruments Act, 1881 (NI Act), especially under Section 138.
In its decision, the Court emphasised that a “security” cheque involves a contingent liability or an obligation that may arise in future, and unless there is a legally enforceable debt or other liability at the time the cheque is drawn or on the date of presentation, the provisions of Section 138 will not automatically apply.
The Court made it clear that a cheque issued in advance or as mere collateral cannot serve as the basis of a criminal complaint for dishonour unless the underlying debt is already crystallised. Accordingly, in such situations, the drawer cannot be subjected to the penal consequences envisaged under Section 138 simply because the cheque bounces.
