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No collateral damages

mumbai Updated: Feb 20, 2010 02:01 IST
HT Correspondent
HT Correspondent
Hindustan Times
Bombay High Court

A person issuing a cheque that then gets dishonoured cannot be prosecuted if it was issued as collateral for a loan, the Aurangabad bench of the Bombay High Court has said.

It said only cheques issued against an existing debt or liability come under the Negotiable Instruments Act.

It was hearing an appeal filed by Ramkrishna Urban Co-operative Credit Society (RUCCS), in a case filed against one Rajendra Warma in 2009.

RUCCS claims Warma borrowed Rs 2 lakh from it in 2000, giving 10 blank post-dated cheques (PDCs) as security. Warma’s bank, citing insufficient funds, returned one of the cheques dated January 2008.

After the cheque bounced, RUCCS approached a magistrate court’s in Ahmednagar in February 2008.

The magistrate acquitted Warma saying RUCCS had obtained 10 blank cheques from Warma before the loan was even disbursed. The magistrate also said the amount paid by Warma did not reflect in the extract of accounts produced.

RUCCS filed an application in the high court seeking permission to appeal the magistrate’s order.

Justice P R Borkar upheld the magistrate’s order, saying: “Provisions like Section 138 of the Negotiable Instruments Act give reliability, credibility and acceptability to negotiable instruments like cheques in daily life. The object (of the NI act) is not to provide effective and speedy remedy for the recovery of loans.”

He said it is doubtful if Section 138 would apply when a blank or post-dated cheque is obtained by a bank or moneylender before or while disbursing a loan as security for the loan.

The HC also said lawmakers would not have imagined that moneylenders or banks would obtain blank or post-dated cheques and later use them to make debtors repay a loan under threat of prosecution under the NI Act.

“In this case, Warma issued the cheque as security even before the loan amount was disbursed. So the cheque was not towards any existing debt or liability,” Justice Borkar said while dismissing RUCCS’s application and upholding Warma’s acquittal.