Security Cheques cannot be invoked for individual instalment defaults while the underlying loan agreement remains subsisting.

The Petitioners, acting as Directors and Guarantors for KRPM Infrastructure Pvt. Ltd., challenged a complaint filed under Section 138 of the Negotiable Instruments (NI) Act and Section 420 of the IPC.

The Respondent Bank had sanctioned a term loan of Rs. 40 crores, against which the Petitioners provided undated, blank "security cheques".

On 20.02.2024, the Bank filled and presented four cheques of Rs. 70 lakhs each, which were dishonored for "insufficient funds".

The Petitioners contended that the loan account was active, EMIs were being paid, and a substantial sum of Rs. 2.68 crores was paid between February and June 2024.

They argued the Bank presented security cheques without a formal "Recall Notice" or a demand for the crystallized debt as required by the Guarantee Deed.

Whether the presentation of undated security cheques without a prior demand notice or formal declaration of default constitutes a valid basis for prosecution under Section 138 of the NI Act.

Whether the continuation of criminal proceedings is an abuse of process when the borrower is actively servicing the loan and the default has been rectified through restructured EMIs.

Whether the ingredients of cheating under Section 420 IPC are attracted in a commercial loan dispute lacking initial fraudulent intent.

The Court primarily applied Section 138 of the Negotiable Instruments Act, 1881, regarding the dishonor of cheques for discharge of debt.

The Court primarily applied Section 420 of the IPC regarding cheating.

It relied on the principle that a "security cheque" is only invokable upon the crystallization of a debt following a default.

It referenced *Sripati Singh v. State of Jharkhand* regarding the nature of security cheques.

It referenced *Syndicate Bank v. Channaveerappa Beleri* regarding the necessity of a demand notice to trigger a guarantor's liability.

The court applied the standard from *Suryalakshmi Cotton Mills Ltd. v. Rajvir Industries Ltd.*, which requires *mens rea* at the inception to maintain a charge of cheating.

The Court observed that under Clause 9.2 of the Master Facility Agreement and Clause 2 of the Deed of Guarantee, the Bank was contractually obligated to issue a prior notice of demand to the borrower and guarantors to rectify any alleged default before invoking security.

The Court found no evidence that such a notice was served or that the loan was formally recalled.

Crucially, the Court noted that the borrower was consistently paying revised EMIs and that the Bank had essentially restructured the loan by imposing higher interest rates, which the borrower was servicing.

Since the "default" was being addressed and the agreement remained subsisting, the Court reasoned that invoking criminal machinery for a commercial transaction being active-serviced was inequitable and far removed from the criminal intent required for Section 420 IPC.

It ruled that in a subsisting commercial venture where defaults are being rectified and no prior demand notice was issued as per contract, criminal prosecution is not in the interest of justice.

Consequently, the Court allowed the petitions (CRL.M.C. 4541/2025 & Ors.), quashed the Complaint Cases, the Cognizance Orders, and the Revisional Orders.