A cheque is defined under the Negotiable instrument act and if a cheque is bounced and liability on cheque is not discharged,it creates an offence under section 138 NI act, now the presumption under section 139 of the NI act  is a rebuttable presumption and that can be discharged by the accused if he can show there is no legally enforceable debt at the time cheque was issued. Now security cheque is on the different footing than ordinary cheque, but security cheque is still a cheque it attracts provisions of s. 138 and 139 though it can be countered. Basically a security cheque is issued to ensure the performance of the contract and in case there is a breach the security cheque can be realized. Now does breach of contracts creates a legally enforceable debt this needs to be tested and held by various case laws that

If the cheques were taken only as security for prompt repayment and those cheque were not indischarge of any debt or liability. The date on which cheques were taken there was no debt or liability Accused cannot be prosecuted under NI 138.

In the case of Joseph Vilangadan (Supra) the facts were that the Directors had given certain cheques as refundable security deposits to ensure due performance of their work. In the given facts and circumstances it was held that there did not exist any debt or liability and the cheques were given solely for the purpose of security and hence no action under section 138 of the Act was maintainable.

If there was no debt or liability at that point of time while issuing the cheque

In Shreyas Agro Services Pvt. Ltd. vs Chandrakumar S.B. on 16 February, 2006

The very scheme of procedure adopted shows that the cheques are not issued in respect of any current existing ascertained liability. The words “for discharge of any debt or other liability” inSection 138 of N.I. Act should be interpreted to mean current existing or past ascertained liabilities. The cheque issued in respect of future liabilities not in existence as on the date of cheque would not attract prosecution Under Section 138 of N.I. Act.

So even if security cheque is bounced the prosecution can be initiated and only defence is that there was no legally enforceable debt.

Thanks & Regards,

Nitish Banka

(Advocate Supreme Court)