Your Security Cheque Is Not a Debt: What the Bengaluru Sessions Court Just Told Every Employer in India

A legal analysis of Sandeep Iragouda Taradale v. APPSTEC ERP Solutions (P) Ltd., where a court acquitted an employee by holding that an employment bond amount cannot be recovered under Section 138 of the NI Act without proof of actual loss

A Practice That Has Become Routine, and Routinely Misused

Walk into almost any mid-sized Indian IT or services company as a trainee or fresher, and somewhere in the stack of documents you sign on day one will be an employment bond. The terms vary but the structure is consistent: you agree to stay for a fixed period, typically one to three years, and you hand over a signed cheque for a fixed sum, typically somewhere between Rs 1 lakh and Rs 5 lakh, as a security against early departure. If you leave before the bond period ends, the employer deposits the cheque. If it bounces, they file a complaint under Section 138 of the Negotiable Instruments Act and you face criminal prosecution.

This practice has become so embedded in certain sectors of Indian employment that many employers treat it as a standard risk-management tool, and many employees accept it as a condition of entry into the workforce without understanding what they are signing. The result has been a steady flow of Section 138 complaints arising from employment bond breaches, and a corresponding body of litigation in which employees have faced criminal prosecution not because they defrauded anyone, but because they resigned.

On 8 June 2026, the LVI Additional City Civil and Sessions Judge, Bengaluru, delivered a ruling in Sandeep Iragouda Taradale v. APPSTEC ERP Solutions (P) Ltd. that directly challenges this practice at its legal foundation. The Sessions Court set aside the trial court's conviction of the employee and acquitted him, holding that a cheque given as security under an employment bond cannot form the basis of a Section 138 prosecution unless the employer can first establish that it suffered actual and quantifiable loss from the employee's early departure.

This ruling has implications that go well beyond the facts of this particular case.

The Facts: Six Months of Work, a Resigned Employee, and a Criminal Case

APPSTEC ERP Solutions appointed Sandeep Iragouda Taradale as a trainee employee. At the time of joining, he signed a non-disclosure agreement and a service agreement with the company. The terms of the service agreement required him to complete a two-year training period, during which he would receive a monthly stipend of Rs 15,000. As part of the agreement, he issued a cheque for Rs 5,00,000, designated as liquidated damages payable in the event that he violated the terms of the service agreement, specifically if he resigned before completing the bond period.

After approximately six months, Taradale left the company. He had not completed the two-year bond period. The company treated his departure as a breach of the service agreement and presented the Rs 5 lakh cheque for payment. The cheque was dishonoured by the bank for "exceeds arrangement." The company issued a legal notice as required under Section 138 of the NI Act and filed a criminal complaint.

The trial court convicted Taradale under Section 138. He appealed to the Sessions Court.

The Law: What Section 138 Actually Requires

Section 138 of the Negotiable Instruments Act, 1881 creates a criminal offence when a cheque drawn by a person is returned unpaid because of insufficient funds or because the amount exceeds the arrangement maintained with the bank. The critical statutory condition, and the one at the heart of this case, is that the offence is only committed when the cheque has been issued for the discharge of a legally enforceable debt or liability. Where no legally enforceable debt or liability exists on the date the cheque is presented, Section 138 simply does not apply, regardless of whether the cheque bounced.

Sections 118 and 139 of the NI Act create a statutory presumption in favour of the payee: once execution of the cheque is admitted, it is presumed that it was issued for consideration and in discharge of a legally enforceable debt. This presumption is rebuttable, and the burden of rebutting it falls on the accused drawer.

The question in employment bond cases is whether the bond amount itself constitutes a legally enforceable debt or liability on the date the cheque is presented. And this is where the law of liquidated damages becomes decisive.

The Key Legal Principle: Liquidated Damages Require Actual Loss

Sections 73 and 74 of the Indian Contract Act, 1872 govern the recovery of damages for breach of contract. Section 73 entitles an aggrieved party to receive compensation for the loss or damage that naturally arose from the breach, or which the parties knew was likely to result from it. Section 74, which specifically deals with pre-agreed or stipulated sums in contracts, provides that where a contract contains a stipulation for a sum payable in case of breach, the party complaining of breach is entitled to receive reasonable compensation not exceeding that stipulated sum, but only for the actual loss suffered.

The Supreme Court settled the interpretation of Section 74 definitively in Kailash Nath Associates v. DDA, reported at (2015) 4 SCC 136. The Court held that even where a contract specifies a fixed amount as liquidated damages, a court cannot award the full amount automatically. The claiming party must still prove that it suffered actual loss, and the court must assess whether the stipulated sum represents a genuine pre-estimate of that loss or functions merely as a penalty. If actual loss is not established, or if the stipulated sum is unreasonable in relation to the actual loss suffered, it will be treated as a penalty clause and will not be enforceable in full.

Applied to the employment bond context, the legal position becomes clear: the Rs 5 lakh stipulated in the service agreement is not a debt that automatically crystallises and becomes enforceable the moment the employee resigns. It is a pre-agreed estimate of the loss the employer might suffer from the breach. For that amount to be recoverable, the employer must first demonstrate, before a competent court, what actual loss it suffered as a result of the employee's early departure. Until that loss is established and quantified, the Rs 5 lakh does not constitute a legally enforceable liability within the meaning of Section 138 of the NI Act.

The Sessions Court's Ruling

The Sessions Court examined the facts and applied exactly this reasoning. It found that the Rs 5 lakh cheque had been obtained from Taradale at the time of his joining, as a security towards the service bond, and not in discharge of an existing or crystallised debt. At the time the cheque was issued, there was no existing liability: there was a contingent obligation that would arise only if the employee breached the bond, and even then only to the extent of the actual loss suffered.

The Court noted that APPSTEC ERP Solutions had not placed any evidence before the trial court establishing what actual loss it had suffered as a result of Taradale's departure after six months. The company had not demonstrated the cost of training him, the value of the work lost, the expense of replacing him, or any other head of damage that a court could treat as quantifying the actual impact of the breach. Without that foundation, the Court held, the Rs 5 lakh bond amount could not be treated as a legally enforceable liability on the date the cheque was presented.

It also observed that the employer had presented the cheque they had obtained from the accused at joining, which showed misuse of the instrument by the company. Since no legally enforceable liability had been established, the prosecution under Section 138 was not maintainable. The Court allowed the appeal, set aside the trial court's conviction and sentence, and acquitted Taradale. The bail bond was cancelled and the surety discharged.

How This Sits Within the Broader Legal Picture

The Bengaluru Sessions Court's ruling is consistent with a line of judicial thinking that has been developing across Indian courts on the question of security cheques and Section 138.

The distinction the law draws is between a cheque issued to discharge an existing, crystallised, and enforceable debt, which attracts Section 138 when dishonoured, and a cheque issued as security for a contingent obligation that has not yet become a liquidated and enforceable liability, which does not. The Supreme Court articulated this distinction clearly in Indus Airways Private Limited v. Magnum Aviation Private Limited, where it held that a post-dated cheque issued as an advance payment could not qualify as a cheque in discharge of a debt where no liability was subsisting at the date of drawal.

The Delhi High Court, in Sri Sai Sapthagiri Sponge Pvt. Ltd. v. State (GNCT of Delhi) decided in October 2025, reiterated the same principle, holding that security cheques issued for audit or assurance purposes rather than in discharge of a crystallised liability cannot attract Section 138. And in November 2025, the Delhi High Court clarified the other side of the line in a case involving post-dated cheques given as security for a loan: once a liability crystallises and falls due, the security cheque can mature into an instrument in discharge of that crystallised liability and Section 138 can then apply.

The takeaway from reading these cases together is that the legal test is not whether the cheque was labelled "security" but whether a legally enforceable and quantified liability existed on the date the cheque was presented for payment. In an employment bond context, that liability does not automatically crystallise on resignation. It crystallises only when a court or competent forum has determined that a breach occurred and assessed the actual loss flowing from it.

What This Means for Employers

The ruling sends an important and overdue message to employers who routinely use employment bonds backed by security cheques as a deterrent against attrition.

Using a bounced security cheque to initiate a Section 138 complaint against a departing employee, without first establishing the actual loss suffered from their departure, is legally unsustainable. The Bengaluru Sessions Court has now confirmed what the law has said for some time: the bond amount is not a debt. It is a pre-agreed estimate of loss that can only be enforced to the extent that actual loss is proven before a competent civil court.

This does not mean employment bonds are unenforceable. An employer who can demonstrate genuine loss from an employee's early departure, such as documented training costs, recruitment expenses, or client losses directly attributable to the departure, can still pursue recovery through a civil suit for damages. What employers cannot do is bypass the requirement to establish actual loss by using a criminal complaint under Section 138 as a collection mechanism.

For HR and legal teams reviewing employment bond structures in light of this ruling, the practical implication is to ensure that any bond is supported by a proper accounting of the actual costs it is intended to recover, that security cheques are understood internally as instruments of last resort requiring civil court quantification before criminal action can be taken, and that the process for addressing bond breaches starts with assessment of actual loss rather than immediate presentation of the cheque.

What This Means for Employees

For employees who have signed or are being asked to sign employment bonds backed by security cheques, this ruling is a meaningful clarification of their rights.

A security cheque given under an employment bond does not automatically translate into a criminal liability upon resignation. An employer who presents that cheque and it bounces does not automatically have a valid Section 138 case. The employer must first prove, before a court, that it suffered actual and quantifiable loss from the employee's departure and that the bond amount reasonably reflects that loss.

If you are facing a Section 138 prosecution arising from an employment bond security cheque, the defence outlined in this judgment, that no legally enforceable liability was established at the time the cheque was presented, is directly applicable to your situation and is worth placing on record at the earliest stage of proceedings.

This Blog is for general informational purposes and does not constitute legal advice. For guidance on employment bonds, Section 138 NI Act matters, or employment contract disputes, please contact our team.