Cheques As ‘Security'- Should Lenders Finally Cheer?

Historically, the deposit of post-dated cheques by a borrower served a two-fold purpose for lenders – first, direct access to a borrower's account on a due date without a need to wait for the borrower to complete procedural formalities and secondly, the option of recourse under Section 138 of the Negotiable Instruments Act, 1881 ("the Act") which allows criminal liability to attach to a defaulter of a commercial transaction with otherwise only civil remedies. With the development of complexes crow mechanisms which give a lender absolute control over accounts of borrowers rendering the first purpose almost redundant, lenders started looking at these post-dated cheques predominantly as security to be used only in events of non-compliance.