Brief Facts:

 We have been served with a legal notice under Sec 138 r/w Sec 141 of the Negotiables
Instruments Act for failing to fulfill contractual obligation in delivering refractory bricks.
 They cashed in an undated cheque we gave them which was serving as a security in case
of failing to meet delivery schedule. We stopped that by contacting the bank.
 There is a dispute surrounding this. The document uploaded is the notice which outlines
opposing party’s perspective and below I have summarised our Client’s perspective.

Notice from Gita's Perspective:

1. Delayed Inspection: Gita states that they manufactured the products in June 2022, but
Tuaman Engineering procured them in December 2022, causing a delay of 6 months from
the date of manufacture. Gita argues that Tuaman Engineering should have inspected and
accepted the products earlier.
2. Quality Dispute: Gita mentions that Tuaman Engineering rejected the second lot of
refractory bricks citing quality issues. Gita maintains that the quality dispute remains
unresolved and disputed.
3. Non-Compliance with Obligations: Gita claims that Tuaman Engineering failed to
comply with its obligations as per the purchase order dated 07/03/2022. Gita states that
they have stocks worth Rs. 2 crores ready for inspection and procurement, but Tuaman
Engineering has not inspected or procured them despite repeated reminders.
4. Financial Loss: Gita asserts that they have incurred significant financial stress and
investment based on the purchase order issued by Tuaman Engineering. Gita mentions
the deterioration of raw materials worth approximately Rs. 3 crores, which are pending
inspection and causing losses to them.
5. Mala fide Intentions: Gita raises concerns about Tuaman Engineering's contradictory
actions. They accuse Tuaman Engineering of instructing them to stop manufacturing
while presenting the cheques provided as security deposit. Gita interprets this as mala
fide intentions to gain undue advantage at their cost.

Legal Notice Sec 138 _ Gita [Link]

Research Queries:

 When can a security cheque be cashed, in the context of continual dispute surrounding
(joint) inspections of goods and if the production and delivery of goods itself have been
paused? Can the purchaser just surprise us by enchasing the undated security cheque
without any communication or notice to us?
1)

- Here in the preset case, the cheque was issued is not in the nature of discharge of any debt or
liability but only as a deposit, security cheque. The case can not attract section 138 of NIA 1.
- Here the cheque is issued as a security deposit for the due performance of the terms of
contract. In case of failure of the performance of the agreement, the other party could encash
the cheque and recover the security deposit 2.
- Even though civil liability can be looked into but the criminal proceedings can not be initiated.

In the Case of Indus Airways Pvt. Ltd & Ors. V. Magnum Aviation Pvt. Ltd

- P.19 If the cheque is issued as an advance payment for purchase of goods and for any reason
purchase order is not carried to its logical conclusions either because of cancellation or
otherwise and material or goods for which purpose order was placed, that cheque cannot be
said to have been drawn for an existing debt or liability.
- P.5 when a blank cheque is given, as a security can not be under s.138 NIA.
- Section 46 of the NIA, shows that the instrument was delivered conditionally or for a special
purpose only. On the date of contract entered there was no subsisting liability thus, it is a clear
cheque handed over as a security.
- Section 138 of NIA thus cannot be maintained. 3

The ‘Security’ defense in cases relating to Dishonour of cheques- Not a get out of jail free card

- In case of Sripati Singh v. The state of Jharkhand&Anr, the SC has clarified the status of ‘security’
cheque and its proceedings under NIA.
- It referred to the case of Sudhir Bhalla v. Jagdish Chand, and held that a cheque merely being in
name of ‘security’ does not absolve the liability under section 138 of NIA. It is contingent on the
nature of the transaction and on the date on which it is issued there must exist no previous
liability or debt to be repaid.
- A ‘security’ is given, deposited or pledged to ensure the fulfilment of obligation undertaken.
- Here it was the case of just advance payment without there being a subsisting debt or liability.
This was not of the nature to attract section 138 of NIA 4.

1
MS Narayan Menon v. State of Kerala (2006) 6 SCC 39.
2
Joseph Vilangadan v. Phenomenal Health Care Services Ltd & Anr. CRL No.2243 2009.
3
Balaji Seafoods Exports v. Mac Industries Ltd. (1999) 1 CTC 6.

4
Indus Airways Private Limited v. Magnum Aviation Private Limited