Karnataka HC Leaves Borrower’s Bank-Fraud Defence for Trial, Says Yes Bank’s Cheque Case Can Run Alongside DRT Recovery

Yes Bank filed a private complaint under Sections 138 and 142 of the Negotiable Instruments Act, 1881, alleging that a cheque issued by the petitioner was dishonoured for insufficiency of funds.

After cognizance was taken and summons issued, the petitioner sought to quash the proceedings pending before the XI Additional Small Causes Judge and ACJM, Bengaluru.

He contended that the cheque was issued only as security, that fraud by bank officials had tainted the loan and property transaction, and that the sale deed had been cancelled after the original owner disputed its execution.

He also argued that the Bank’s recovery proceedings before the Debt Recovery Tribunal precluded its Section 138 complaint.

Section 138 of the Negotiable Instruments Act applies where a cheque is presented against a legally enforceable debt or liability that is due and payable; describing a cheque as a “security cheque” does not, by itself, exclude its application.

Once the drawing and execution of a cheque are admitted or established, the presumptions under Sections 118 and 139 operate in favour of the holder, but are rebuttable by the accused.

Quashing proceedings is ordinarily not the occasion to resolve disputed questions of fact by accepting the accused’s defence.

Proceedings for recovery before the Debt Recovery Tribunal and a prosecution under Section 138 operate in different fields, and the former does not, by itself, bar the latter; any amount recovered must be accounted for so that the same liability is not recovered twice.

The petitioner did not dispute issuing the cheque or that it was drawn on his account.

Whether a liability was due when the cheque was presented depended on the loan terms, the amount disbursed and the outstanding balance; the security-cheque label alone could not resolve that question.

The alleged fraud, its connection to the loan, and the effect of the cancelled sale deed involved disputed facts and could be raised as defences at trial, where the petitioner could also seek to rebut the statutory presumptions.

The DRT recovery action did not prevent the Bank from pursuing the Section 138 complaint because the proceedings serve different purposes, subject to accounting for any recovery.

It reserved the petitioner’s liberty to raise all available contentions and defences before the Trial Court, without expressing an opinion on their merits.