Facts of the case
- The Appellant was Director of the company whose cheques have been dishonoured and who was also the co-accused.
- Vide the loan agreement, the Respondent agreed to advance loan for setting up of Power Project in the State.
- The agreement recorded that post-dated cheques towards payment of installment of loan (principal and interest) were given by way of security.
- The cheques carried different dates depending on the dates when the installments were due and upon dishonour thereof.
- The Appellant approached the High Court to seek quashing of the complaints.
- Contention of the Appellant in support of his case was that the cheques were given by way of security as mentioned in the agreement and that on the date the cheques were issued, no debt or liability was due.
- Thus, [ the Appellant pleaded ] dishonour of post-dated cheques given by way of security did not fall under Section 138 of the Act.
- The High Court held that when the post-dated cheques were issued, the loan had been sanctioned and hence the same fall in the first category
- the cheque were cheque issued for a debt in present but payable in future and declined to quash the complaints.
Held, while dismissing the appeal:
(i) 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. 
(ii) Though the word “security” is used in Clause 3.1(iii) of 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. The cheques undoubtedly represent the outstanding liability. 
(iii) As per the case of the Complainant, the cheques which were subject matter of the said complaint were towards the partial repayment of the dues under the loan agreement. While dealing with a quashing petition, the Court has ordinarily to proceed on the basis of averments in the complaint. The defence of the Accused cannot be considered at this stage. The Court considering the prayer for quashing does not adjudicate upon a disputed question of fact.  and
(iv) The question was answered in favour of the Respondent and against the Appellant. Dishonour of cheque in the present case being for discharge of existing liability was covered by Section 138 of the Act, as rightly held by the High Court.