The Dishonor of Security Deposit Cheques & Enforceability of Debt

Case Name: M.S. Nagabhushan Vs. D.S. Nagaraja

Case Number: SLP(CRL.) NO(S). 11002-11009 OF 2024

Date: March 04, 2025

Quorum: Justice Vikram Nath, Justice Sandeep Mehta

 

FACTS OF THE CASE

 

The appellant-accused and respondent-complainant entered into a lease-cum-rent agreement on May 12, 2014, concerning a residential flat. The respondent-complainant had paid Rs. 9,00,000/- as the security deposit. The rent was further set at rupees. 2,500 per month, and the agreement was valid for 11 months, which was terminating on April 11, 2015. Upon the termination, the appellant-accused was further required to refund the security deposit.
Due to the financial difficulties, the appellant-accused issued four post-dated cheques the total of which was Rs. 9,00,000/-, which were subsequently dishonored due to the insufficiency of funds. The respondent-complainant consecutively filed four criminal complaints under Section 138 of the Negotiable Instruments Act, 1881. The trial court had convicted the appellant-accused and it also imposed a fine of Rs. 3,00,000/-, directing Rs. 2,95,000/- as compensation to the complainant. The appellate court further enhanced the compensation to Rs. 9,00,000/-. The High Court upon hearing the matter upheld the conviction and compensation enhancement. The appellant-accused approached the Supreme Court for the furtherance of the case.

ISSUES

 

1. If the dishonored security deposit of the cheques constituted a legally enforceable debt under Section 138 of the NI Act?
2. Whether the respondent-complainant’s continued unauthorized occupation of the flat negated the obligation to refund the security deposit?
3. Whether the High Court was justified in enhancing the compensation from Rs. 3,00,000/- to Rs. 9,00,000/-?

 

LEGAL PROVISIONS

 

1. Section 138, Negotiable Instruments Act, 1881 – Dishonor of cheques due to insufficient funds.
2. Karnataka Rent Act, 1999 – Governs the rental agreements and eviction procedures.

 

ARGUMENTS

 

Petitioner’s Arguments:

 

1. The cheques were all issued as security, thefore it cannot be not be considered a legally enforceable debt, and thus, Section 138 NI Act does not apply.
2. The respondent-complainant did not vacate the flat for nearly five years, therefore also justifying retention of the security deposit..
3. A civil suit for ejectment and damages was further decreed against the respondent-complainant, affirming his unauthorized possession..

Respondent’s Arguments:

 

1. The cheques were issued towards the refund of the security deposit amount, therefore constituting a legally enforceable debt.
2. The appellant-accused should have initiated a civil suit for deductions, rather than dishonoring the cheques.
3. The trial and appellate courts correctly found the appellant-accused guilty under Section 138 of the NI Act.

ANALYSIS

 

The Supreme Court critically examined the enforceability of security cheques under Section 138 NI Act. The Court found that:
The security deposit refund was conditional upon the respondent-complainant vacating the premises. Since he continued unauthorized occupation for five years, the appellant-accused was justified in retaining the deposit.
Cross-examination evidence established that the respondent-complainant had not vacated the premises despite multiple notices. The appellate and High Court in this case had wrongly treated the security cheques as an unconditional debt.
The respondent-complainant also failed to prove that the entire amount under the cheques was legally enforceable.

JUDGEMENT

 

1. The conviction which is made under Section 138 of the NI Act is upheld, but compensation is limited to Rs. 3,00,000/- as per the trial court’s order..
2. The enhanced compensation of Rs. 9,00,000/- awarded by the appellate and High Court is set aside.
3. The trial court’s original judgment is restored with directions for reimbursement of excess deposited amounts to the appellant-accused.
4. The appeal is therefore only partly allowed.

 

CONCLUSION

 

This judgment with reference to the aforementioned case clarifies that security cheques do not automatically constitute a legally enforceable debt under Section 138 NI Act unless the particular underlying obligation is unconditional. The Supreme Court has further reaffirmed that the rent disputes and security deposits are primarily with regard to the civil matters and they should not be converted into criminal liability under cheque bounce cases unless the legal obligation is conclusively established. This ruling of this case reinforces the necessity for tenants and landlords to clearly document financial transactions to avoid legal disputes in the future.

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WRITTEN BY POOJA PARAMESWARAN