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LVI Addl. City Civil & Sessions Judge, Bengaluru: In an appeal against conviction under Section 138, Negotiable Instruments Act (NI), 1881, arising from the dishonour of a ₹5,00,000 cheque issued under an employment bond, the Single Judge Bench of I.P. Naik, J., set aside the conviction and acquitted the accused. The Court held that the cheque had been obtained at the time of joining as a security towards the service bond and not in discharge of an existing debt. Emphasising the principles under Sections 73 and 74, Contract Act (ICA), 1872, the Court observed that a claim for liquidated damages must be founded on actual and reasonable loss. Since the employer failed to establish any such loss, the stipulated bond amount could not be treated as a legally enforceable liability, rendering the prosecution under Section 138, NI Act unsustainable.
Background
In the instant case the complainant company appointed a trainee employee and upon appointment he executed non-disclosure agreement and service agreement in favour of complainant company. Accused was to undergo a two-year training period on a stipend of ₹15,000 per month and undertook to pay ₹5,00,000 if he violated the service agreement. After working for about six months, he left the company before completing the bond period. Treating this as a breach of the service agreement, the company presented the cheque which was dishonoured for “exceeds arrangement”, after which notice was issued and a complaint under Section 138, NI Act was filed.
The trial court convicted the accused for offence under Section 138, NI Act on 29 August 2024, aggrieved thereby the accused filed the present appeal.
Analysis and decision
Relying upon Section 73 and 74 ICA and Kailash Nath Associates v. DDA, (2015) 4 SCC 136, for liquidated damages, the Court noted that the accused had issued the ₹5 lakhs cheque at the time of joining the company as part of the employment bond and that the agreement treated the amount as liquidated damages payable in the event of resignation or breach of the bond conditions. The Court observed that any claim towards liquidated damages must be reasonable and that a party alleging breach of contract is entitled to compensation for the actual loss or damage suffered and further found that the stipulation of ₹5,00,000 was in the nature of a penalty or liquidated damages. Since the actual loss allegedly caused to the complainant company on account of the accused’s breach of the terms and conditions had not been determined, the same required adjudication by a competent court of law.
The Court observed that the complainant company did not present the cheque they obtained from the accused and which thus showed the misuse by the them. Since the complainant had not established any actual loss suffered due to the alleged breach of the agreement, the Court found that no legally enforceable liability existed against the accused on the date of issuance of cheque and, therefore, the complaint under Section 138, NI Act was not maintainable.
Accordingly, the Court allowed the appeal, set aside the judgment of conviction and order of sentence passed by the trial court, and acquitted the accused of the offence punishable under Section 138, NI Act. The bail bond executed by the accused stood cancelled and the surety was discharged.
[Sandeep Iragouda Taradale v. APPSTEC ERP Solutions (P) Ltd., Crl. App No. 1678/2024, decided on 8-6-2026]
Advocates who appeared in this case:
For the appellant: R.P, Advocate
For the respondent: G.P. advocate
