Cheques issued solely for security purposes under an MoU cannot be considered as legally enforceable debt

Delhi High Court Quashes Cheque Bounce Cases Against Sri Sai Sapthagiri Sponge Pvt. Ltd. Security cheques issued under an MoU cannot be treated as legally enforceable debt under Section 138 NI Act, rules court.

In a significant ruling, the Delhi High Court has quashed multiple complaints under Section 138 of the Negotiable Instruments Act, 1881, against Sri Sai Sapthagiri Sponge Pvt. Ltd. The court observed that cheques issued solely for security purposes under a Memorandum of Understanding (MoU) cannot be considered as legally enforceable debt or liability.

The case revolved around the issuance of cheques by Sri Sai Sapthagiri Sponge Pvt. Ltd. to Magnifico Minerals Pvt. Ltd. The cheques, totaling Rs. 1.75 crores, were issued as security under an MoU dated May 6, 2014. The Delhi High Court, presided by Justice Neena Bansal Krishna, ruled that these cheques were not meant to be deposited for clearing and were intended solely for audit and security purposes.

Magnifico Minerals Pvt. Ltd. had filed complaints under Section 138 NI Act after the cheques were dishonored due to a 'STOP PAYMENT' instruction. However, the court found that the MoU explicitly stated that the cheques were for security purposes only, and there was no legally enforceable debt at the time they were issued.

The court further clarified that the territorial jurisdiction for these cases was also improperly established. Initially, the complaints were filed in Bellary, Karnataka, but were returned due to lack of jurisdiction and subsequently filed in Delhi. The Delhi court found that fresh summoning orders were necessary after the transfer, which were not issued, rendering the proceedings non-est in law.

This judgment underscores the importance of clear agreements and the legal status of security cheques, providing clarity on the application of Section 138 NI Act in cases involving security cheques.

Bottom Line:

Cheques issued solely for security purposes under an MoU cannot be considered as legally enforceable debt or liability for maintaining a complaint under Section 138 of the Negotiable Instruments Act, 1881.

Statutory provision(s): Negotiable Instruments Act, 1881 Sections 138, 142, 142A; Criminal Procedure Code, 1973 Section 482

Sri. Sai Sapthagiri Sponge Pvt. Ltd. v. State (GNCT of Delhi), (Delhi) : Law Finder Doc Id # 2799466