23 June 2020   |    Common Post Research

Receiving blank cheques as a mode of securing performance and payment obligations in a supply chain contract / agreement, brand sharing and franchise agreement or distributorships - Challenges. Mapping  changes and standardizing practices to secure payments


Distributors, Dealers or Franchisees making advance payments or securing certain transaction during the course of business relation with the Manufacturer or Franchisor has been in existence for the last 70 years. Now let us dissect this transaction and understand are cheques valid modes of payment to secure performance of obligations, provide assurances to perform or make repeated defined payment for future time period.


‘Cheques’ are valid bill of exchange and commonly used in any business to business agreements. There are usual practices of Distributor handing over a cheque or multiple cheques to secure payments for materials they receive from Manufacturers. There may be varied situations wherein a cheque is handed over in a business to business arrangement (distributorship, dealership, franchise, service agreement, marketing and promotion etc). One such notable situation is when the distributors (company/partnership/individual) have issued blank cheques towards ‘security’ or ‘security deposit’ to the Manufacturer. There is significant ramification on the terminology a Manufacturer uses while accepting a blank cheque towards fulfilment of any present or future obligations.


Situation “A”

Some of the distributors have issued undated and blank cheques as security in the names of Manufacturer. The distributors after doing business for one (1) year have consequently started defaulting in their payment obligation. They have taken the materials from Manufacturing Company on credit but have defaulted in paying the amount after such credit period. The Manufacturer now wants to present the blank cheque adding the amount and date. The Manufacturer has to give a written intimation before presenting the cheque. If they fail to make payments to the Manufacturer and latter presents the cheque and the same bounces. Action is initiated for cheque bouncing under Section 138 of Negotiable Instruments Act, 1888 (Negotiable Instrument Act).

The issuance of a blank cheque would be an inchoate instrument and would give the holder thereof an implied authority to fill it up and complete it (Section 20 NI Act). It would not amount to a material alteration of the instrument so as to render it void under Section 87 of the Negotiable Instrument Act. This is fairly well settled by several decisions.


Amount inserted in the blank cheque should not exceed the amount actually owed by each distributor to the Company.

The Company/Manufacturer seeking to encash the blank cheque must through internal coordination of accounts, procurement and supply chain management teams substantiate the calculation of the exact amount outstanding from a distributor. There must be documents to support the same and a basis/ rationale as to why the amount is owned. The same may be adduced from purchase orders, invoices, lorry receipt, indirect tax receipts and challans (viz e-sugam etc) and electronic communications (email, whatsapp messages) around the same.

In Angu Parameshwati Textiles (P) Ltd V Sri Rajam and Co[[][[]]i] , the High Court of Madras held that cheque must be issued towards discharge of whole or part of the debt and if a cheque is issued for a higher amount than the amount due or payable and is dishonoured, the cheque would not create any cause of action under Section 138 of the Negotiable Instruments Act. The Supreme Court also in T.Nagappa V Y.R.Muralidhar[[][[]]ii] has observed that S.20 NI Act only states that prima facie, an inchoate instrument conveys authority to the holder of the cheque to fill it in, but no authority is conveyed to enter any figure that was not intended to be filled in. Therefore if a figure is entered which is not substantiated as the liability, then the action under S. 138 will fail.

How long can you present a blank cheque?

Assume a cheque is undated and without amount being specified but signed by the Distributor. There is a document recording the handing over of blank cheque either a letter, email or receipt which is dated. It may be 1s July, 2019. The cheque per se do not have any date. The Manufacturer after 18 months of 24 months now fills up the date and amount and presents the cheque. In respect of this situation of filling up of an undated cheque more than 6 months after it has been signed by the drawer, there is a divergence of opinion among courts. 

 In Ramakannan V Chettiar and Co[[][[]]iii]  the undated cheque was issued in furtherance of a business transaction and as a collateral security. The cheque was presented after one and half years from the date of handing over the cheque. The High Court of Madras held that the validity of a cheque is only for 6 months from the date of issuance and the implied authorization for filling up the cheque should certainly be within the limitation of six months and not more than the period of limitation. Therefore, by this decision, once the cheque is signed by the drawer, it has to be filled up and dated within 6 months thereof and if it is filled thereafter, it would not be valid.

However, the above decision proceeds on the basis that the validity of the cheque is for 6 months from when it is issued or drawn and the date of issuance or date when it is said to be drawn is the date of signing of the cheque. This seems to be incorrect, in as much as the Supreme Court in two decisions in Anil Kumar Sawhney V Gulsan Rai[[][[]]iv] and Ashok Yeshwant Badave V Surendra Madhav Rao Nighojakar and Anr[[][[]]v] has held that the validity of the cheque is 6 months from the date which it bears and not the date when it is signed and when it is undated, it is technically not a cheque at all and it becomes a cheque when dated. Though the decisions were rendered in cases of post dated cheques where the date had been filled in by the drawer, the principle in our opinion would apply to a case where the payee fills in the date. Therefore, this would seem to indicate that the cheque does not become invalid when it is dated 6 months after it is signed, because the validity is to be reckoned from the date it bears.   

On this basis, the Delhi High Court in MOJJ Engineering Systems Ltd. V A.B.Sugars Ltd[[][[]]vi] has held that a complaint filed on the basis of a cheque signed in 2005 and filled in 2008 cannot be quashed on the basis that the cheque was invalid. In our opinion the Delhi High Court view is preferable to that of the Madras High Court and hence there is no prohibition against undated cheques more than 2 or 3 years old being filled in and dated. However, there being conflicting views, it is possible that different High Courts may take different views on this point and the matter is still to be settled by a pronunciation of the Supreme Court

There is no requirement under law that a notice has to be issued to the drawer before filling up the cheques.

We will first consider the cases of blank cheques issued as and by way of security (as distinguished from cheques issued towards payment of security deposit). Under S.138 of NI Act, criminal proceedings would lie only if the cheque were to be issued towards a legally enforceable debt or liability. That would mean that at the time of issuance of the cheque, there must be an existing debt or liability towards the discharge of which the cheque is issued.

There is overarching inference that cheques issued as security are not enforceable under Section 138 Negotiable Instruments Act, 1888. However, this part will carefully classify the plethora of court decisions in different scenarios.


Wherein cheques are handed over by service providers or contractors as security to secure performance of their obligation under a legal arrangement or contract whether time is the essence of the contract or not.

In cases of cheques issued as security, at the time of their being drawn, there is no debt or liability existing, they are drawn with the intention of being used in a contingency, that is of a debt or liability arising in future, Therefore it could be said that the cheque given for security is not towards discharge of an existing liability.        

In Jitendra Singh Flora V Ravikant Talwar[[][[]]vii] , post dated cheques were issued as security to complete construction work on time. The accused argued that the security cheques were not issued in discharge of any legally enforceable debt or other liability, but merely for timely discharge of the construction of buildings. The Madhya Pradesh High Court concurred with the argument, and held that the accused did not owe any money to the complainant.

Wherein Cheques are handed over by a Debtor or Loan Availer to the Lender (Cooperative Society or Bank) as security to secure debt repayment obligations, prior to the such loan actually getting disburse, such blank cheques cannot be construed to be a issued towards any existing debt or liability and section 138 of the Act is not attracted. [[][[]]Read Ramakrishna Urban Cooperative Credit Society Ltd V Shri Rajendra Bhagchand Warma[[][[]]viii]] The Bombay High Court observed that cheques issued as security for loan amount shall not attract Section 138 of the Act and since blank cheques were issued prior to disbursement, “the case does not fall within the four corners of offence punishable under section 138 of the Act”.

The Probability Test – Is it probable that the cheques were given as security?

In another scenario wherein cheque was given to secure loan amount,  the Bombay High Court acquitted the accused and held referring to several decisions of Judgments of the Supreme Court and various High Courts that the presumption which is raised under Section 139 of NI Act has to be rebutted by the Accused on preponderance of probability and not beyond reasonable doubt. Goa Handicrafts, Rural & Small Scale Industries Development Corporation Ltd., V/s. Samudra Ropes Pvt. Ltd. & Anr. Read para 12, 15, 16, 18


Karekar Finance Pvt. Ltd. vs Shri M.N. Bashyam And State, once again Bombay High Court held ‘Once the defense that the cheque was issued by way of security is accepted as probable, the cheque, therefore, cannot be held to have been issued in discharge of a debt and the same would not come within the purview of Section 138 of the Act.’
Read para 4, 10 and 11


[[][[]]i]  2001 (105) Comp Cases 105

[[][[]]ii] AIR 2008 SC 2010

[[][[]]iii] MANU/TN/7845/2006

[[][[]]iv] MANU/SC/0578/1993

[[][[]]v]  MANU/SC/0170/2001

[[][[]]vi] MANU/DE/1462/2008

[[][[]]vii]  MANU/MP/0025/2001

[[][[]]viii] MANU/MH/0211/2010


Hear the full Article


There are instances when at the time of signing any exclusive or territorial distributorship agreement, a manufacturer requests for a blanket signed cheque to be handed over. There are instances wherein there are several contenders for the contract and the contending dealers have to furnish blank cheques to authenticate their existence and firm up the relationship with the manufacturing company. Such cheques are clearly not advanced for payment of any debt or liability.

In M.S.Narayan Menon V State of Kerala[[][[]]i] the Supreme Court held that “If a cheque was issued for security, it would not come within the purview of Section 138.”

In Sudhir Kumar Bhalla[[][[]]ii] , the Hon’ble Supreme Court of India has held that Criminal liability of the appellant under the provisions of Section 138 of the Act is attracted only on account of dishonour of the cheque issued in discharge of liability or debt, but not on account of issuance of security cheques.

The High Court of Delhi, in Bumpi Udyog and M/s. Exports India[[][[]]iii] has held that the complaint is not maintainable when an undated cheque issued at the time of signing of the agency agreement by holding that there was no debt or liability when the cheque was handed over to the drawee.

Karnataka High Court has also predominantly taken a view that cheques issued as security will not attract S. 138.

In Assoo Hajee V Abdul Lateef[[][[]]iv] , the Kerala High Court held that a blank cheque which is issued as a security becomes a cheque only on the date when the liability is acknowledged and entered in the cheque and accordingly found accused guilty of offence under section 138 of the Act.

In Laxminivas Agarwal V Andhra Semi Conductors Private Limited & ors[[][[]]v], the High Court of Andhra Pradesh observed that the three cheques were taken only as security for prompt repayment and those cheques were not issued by the accused towards the discharge of any debt or other liability and dismissed the appeal filed by the Complainant. In fact, by the date on which the cheques were taken there was no debt or liability borrowed/incurred by the accused and dismissed the appeal filed by the Complainant.

Placing reliance on the reasoning that a cheque even though signed on  a particular date (say 1st June, 2019) are valid for 6 months from the date the particulars of the date are added which may be (say 2nd January, 2020), on the reasoning that prior to 2nd January, 2020 in they are not cheques at all, but become cheques only when the dates are filled, it is possible to argue, that in cases of undated cheques issued as security, upon them being dated and on that date borne on them, if there is a debt or liability existing, then it would be deemed that the cheques are drawn as on that date borne on them, for the discharge of such debt or liability. But in our opinion, though technically this argument is attractive, and has not been directly answered in any of the cases mentioned above, S. 138 being a criminal offence creating section, considering the logic and rational mentioned in judgements to hold that cheques issued as security will not attract penal consequences, it is unlikely that such an argument will find favour. Therefore, in our opinion, as per present stance taken by Courts ‘cheques issued solely as ‘security’ are unlikely to succeed.’

            Further, cheques have to be issued towards discharge of a legally recoverable debt or liability. Even if the cheques could be dated and filled after 6 months after they are signed, if by the time, the cheques are dated and filled, the debts themselves have become time barred, there would be a strong case to argue that the cheques have not been issued towards discharge of a legally recoverable debt, and in such cases actions under. S 138 NI are likely to fail.

In so far as those limited cases where blank cheques are issued towards payment of security deposit, they would stand on a different footing.
In such a case presumably, the cheques are issued to pay the security deposit, which is required to be paid at the time of taking on distributorship. In such cases there is a present, existing liability, even at the time of signing of the cheques to pay the security deposit. The cheques having been issued towards discharge of this liability would attract S.138 NI Act. In such cases the cheques could be filled for the amount of the security deposit, dated and presented. However, if the recovery of the security deposit itself has otherwise become barred by limitation, then in such cases a strong argument could be made that the issuance of the cheque is not towards a legally enforceable debt and in such cases, action under. S. 138 is likely to fail.  

Whether S. 138 NI Act action would lie if Distributor’s bank account as mentioned on the cheque ceases to be continuing and valid with the bank?

The Supreme Court in NEPC Micon Ltd V Magna Leasing Limited[[][[]]i] has held that return of a cheque on account of the account being closed would be similar to a situation where the cheque is returned on account of insufficient of funds in the account of the drawer of the cheque. Therefore, cheques returned by the bank with an endorsement ‘account closed’ are covered by section 138 of the Act.

Whether S. 138 NI Act action would lie if the Distributor instructs “stop payment” to its bank.

The Supreme Court in Modi Cements Limited V Shri Kuchil Kumar Nandi[[][[]]ii] has held that if a cheque is dis-honoured, because of “stop payment” instructions to the bank, Section 138 would get attracted. It also amounts to dishonour of the cheque with the meaning of section 138 when it is returned by the bank the endorsement like (i) in this case, “referred to the drawer” (ii) “instructions for stoppage of payment” and stamped (iii) “exceeds arrangement”. The decision was reiterated in Goaplast Private Limited V Shri Chico Ursula D’Souza and Anr[[][[]]iii] wherein the Court has examined the applicability of Section 138 of Negotiable Instruments Act, 1881 to a case in which a person issuing a post-dated cheque stops its payment by issuing instructions to the drawee bank before the due date of payment and the Court has held that Section 138 of the Act will be attracted. The Drawee in order to escape the consequences has to show that the cheque was not issued towards discharge of a debt or liability, and not merely that he had sufficient funds in his account at that time.

How important is the signature in the cheque? How important is forensic analysis of the cheque?

If the signature on the cheque is admitted by the authorised signatory or person signing on the cheque the presumptions inherent in the Negotiable Instruments Act will come into effect. Once a cheque is signed and handed over to Person ‘X’ and consequently X fills up the other particulars and then presents the cheque. Person X automatically get a right to fill up the blank particulars and present it.  In Section 20 of the NI Act in itself provides a power or authority to holder of inchoate instrument to fill up the blanks and to negotiate the instrument. So when a relief was prayed in Chidambaram vs P.T. Ponnuswamy for forensic examination to identify the difference between the handwriting on amount inserted and the signature of the Bank Account Holder, the Madras High Court dismissed the application to order for a forensic examination of the handwriting and signature on the cheque on the ground that it is immaterial to the facts of the case.

In Ravi Chopra Vs. State & Anr, The Delhi High Court referred to Section 20 NI Act talks of "inchoate stamped instruments" and clarified that if a person signs and delivers a paper stamped in accordance with the law and "either wholly blank or have written thereon an incomplete negotiable instrument" such person thereby gives prima facie authority to the holder thereof "to make or complete as the case may be upon it, a negotiable instrument for any amount specified therein and not exceeding the amount covered by the stamp.

One may raise a defense contention that the amount and particulars in the cheque issued were left blank and thus leading uncertainity. The Courts have held if the person signing the cheque has admitted that it is his or her signature the above defense may not hold good. In Kusum Rani vs. Vandana on 28 November, 2019 it was held there is no rule of banking business that the name of the payee as well as the amount and the date should be written by the drawer himself, as no law provides that in case of cheque the entire body has to be written by the drawer only. [[][[]]Read para 38,39 and 40]

What happens if Cheques are issued at the time of transfer of shares?


M.S. Narayana Menon @ Mani vs State Of Kerala the Supreme Court held If a cheque is issued for security or for any other purpose the same would not come within the purview of Section 138 of the Act.’ [[][[]]Read para 30 and 51]


Parameters and tests set out above have to weighed on a case to case basis.

The Delhi High Court held – “Thus, I am of the considered view that there is no merit in the legal submission of the respondent accused that only on account of the fact that the cheque in question was issued as security in respect of a contingent liability, the complaint under Section 138 of the NI Act would not be maintainable. At the same time, I may add that it would need examination on a case to case basis as to whether, on the date of presentation of the dishonoured cheque the ascertained and crystallized debt or other liability did not exist.”Credential Leasing & Credits Ltd. vs. Shruti Investments and Anr   [[][[]]Read para 29, 30 and 31]


What other options are available to the company?

Manufacturers / Companies can opt to file recovery suits (either regular or summary suits). In summary suits, defendants are not allowed to defend without seeking leave. Court may impose conditions as to deposit of part or whole of the suit amount, before granting leave to defend. However, this lies in the discretion of the court. However in cases where cheques are issued as security, that too a long time before presentation, the distributors are likely to raise disputes about the amounts, claim that they are not due amounts, that debts have got time barred, in which case, courts may be liberal in granting them leave to defend and may not even impose conditions for deposit. Once leave to defend is granted, the suits will be tried like ordinary suits and the company will have to prove its claim in respect of the cheques by producing accounts, and other relevant material for proving the debt.  In such suits, company could also look at seeking attachment before judgement of properties of the distributors if they make out a case that there is a real threat of them being disposed of with a view to frustrate a decree.  



[[][[]]i] MANU/SC/0306/1999

[[][[]]ii]  AIR 1998 SC 1057

[[][[]]iii] MANU/SC/0940/2003

[[][[]]i] AIR 2006 SC 3366

[[][[]]ii] MANU/SC/7595/2008


[[][[]]iv]  2005(123)Comp Case112(Ker)

[[][[]]v]  MANU/AP/1065/2005

The contents in this article should not be understood or read as an advice. It is a working research paper. Any feedback/ comments please write to us.

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