MISUSE OF COLLATERAL SECURITY UNDER SECTION 138

In a Fast Paced World, Buying desired products at a deferred payment method (Loan) is the only option left with majority of people who do not have that much purchasing power as that of commodity. In these instances, many times people intentionally provide misstatement or misrepresent in front of financier to get loan and misuse them or in another situation they may lure financer into giving loan and end up in using it for Illegal Means.
Collateral security can be understood as a form of secondary protection sometimes required by a bank and intended to guarantee a borrower’s performance on a debt obligation.
For an Example: A bought a Lorry out of loan given by B with an assurance to pay monthly installments until the full loan gets recovered to the creditor, A issues some postdated cheques for the installments, after some days, A with slight diligence A makes effort and hides the lorry and pretends in front of Creditor that lorry has been stolen and Your (creditor) legal fight would be with the insurance company and not me.
Here, A is Debtor and B being Creditor with the Lorry being the Collateral i.e. If A defaults on the payment, B has the right to sell the lorry and adjust the loan.
Debtors can very well take advantage of Section 138 of Negotiable Instruments act and can misuse collateral given to the creditor for the loan. After the dishonoring of cheques, debtors can take refuge under the term “Security cheque”.
This Point of researcher is very well balanced by a series of judgments given by several high courts and The hon’ble Supreme Court. In the case of Sampelly Satyanarayana Rao vs. Indian Renewable Energy Development Agency Limited, The question whether a post-dated cheque is for “discharge of debt or liability” depends on the nature of the transaction. If on the date of the cheque liability or debt exists or the amount has become legally recoverable, the Section is attracted and not otherwise. Though the word security was written in the Agreement, the said expression refers to the cheques being towards repayment of installments. The repayment becomes due under the agreement, the moment the loan is advanced and the installment falls due. Once the loan was disbursed and installments had fallen due on the date of the cheque as per the agreement, dishonour of such cheques would fall under Section 138 of the Act. Here the complainant was Held Liable and he could not take protection for “Security cheque”.
In an Another Case, Shanku Concretes Pvt. Ltd. & Ors. Vs. State of Gujarat, Complainant giving 15 lacs to accused and accused issued 7 postdated cheques in discharge of debt, cheques were dishonoured, Court Held that No Offence of under Section 138 was is made out as cheques were issued as collateral security byaccused and not to discharge any existing debt.In Another case of Goa Handicrafts, rural & small scale Industries Development Corporation Ltd. Vs. M/s/ Samudra Ropes Ltd., When the cheque is not to be deposited and it is deposited, it does not entail a penal liability.Another Case of M.S Narayana Menon also affirms the point of researcher that cheque if issued or for any other purpose the same does not come within the purview of sec. 138 of Negotiable instruments act.In Cheque Bounce cases, the creditor’s position is strong as he has a cheque. The creditor has to issue a demand notice letter keeping in view the provisions of Section 138, the complaint application should contain the provisions of Section 138 only then the creditor is entitled to the benefit of Sections 139 and 118. Otherwise, the defendants can avail the benefit of lack of pleading. If the provisions of Section 138 (a) (b) (c) are not present in the complaint application, the position is not valid and can be dismissed.

Therefore, with the gap in law, collaterals continue to suffer.