In commercial leasing, a settlement rarely brings genuine closure. A tenant may clear outstanding rent, vacate the premises, and sign a compromise deed, yet the landlord's Section 138 complaint may continue unless it is compounded or otherwise terminated by the court. Conversely, a landlord issuing a cheque to refund a security deposit may face criminal proceedings if that cheque bounces. The reason is a built-in structural asymmetry: under Section 138 of the Negotiable Instruments Act, 1881, the criminal track often survives ordinary civil resolution because compounding the offence requires the complainant's consent.

This is more than procedural overlap. It turns Section 138 into a strategic leverage tool in landlord-tenant disputes, rather than a straightforward debt recovery mechanism.

The Policy Narrative Courts Promote

Indian courts have repeatedly described Section 138 cases as having a strong civil character despite their criminal form. In P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021), the Supreme Court highlighted the compensatory nature of these proceedings. Section 147 of the Act makes the offence compoundable, and recent judgments reflect a clear preference for settlement.

In Gian Chand Garg v. Harpal Singh (SLP (Crl.) No. 8050 of 2025, decided 11 August 2025), the Supreme Court set aside a conviction after a voluntary compromise deed was placed on record, illustrating the Court's willingness to give full effect to voluntary settlements where the complainant acknowledges complete satisfaction, . This pro-settlement approach aims to reduce litigation and support ease of doing business in commercial matters.

The Consent Veto and Article 142 Exception

Judicial encouragement of settlement, however, runs into a firm limitation. In Raj Reddy Kallem v. State of Haryana & Anr. (Criminal Appeal No. 2210 of 2024, decided 8 April 2024), the Supreme Court held that ordinary compounding under Section 147 cannot be compelled the complainant's consent remains mandatory, and mere full repayment by the accused does not automatically extinguish criminal liability. This builds on an important clarification by a five-judge Constitution Bench in In Re: Expeditious Trial of Cases Under Section 138 of the N.I. Act, 1881 (2021). The Bench did not broadly overrule earlier case law on settlement. Instead, it held that Section 258 CrPC does not apply to complaints under Section 138 and that the contrary observations in Meters and Instruments (P) Ltd. v. Kanchan Mehta (2018) did not lay down the correct law.

At the same time, the Court exercised its extraordinary power under Article 142 of the Constitution to quash the proceedings in the interests of justice, despite the absence of formal compounding. This nuance is important: while a landlord (or any complainant) holds a strong veto over routine compounding, the Supreme Court retains discretionary authority to intervene and end prosecution in appropriate cases. In lease disputes, this means that criminal leverage may remain available even after civil settlement, although it is not absolute.

It is worth being precise about what actually closes a Section 138 case. Payment made after a cheque is dishonoured does not retrospectively erase the offence; the statutory ingredients are complete once dishonour and non-payment within the notice period occur. What brings the proceedings to an end is something distinct from the payment itself, formal compounding under Section 147, a subsequent compromise that the court recognises as discharging the proceedings, or the Supreme Court's exercise of its Article 142 power. The money changing hands is necessary for settlement, but it is not, by itself, sufficient to end the case.

The Renewal Trap: Lessons from Gimpex

The Supreme Court attempted to limit excessive litigation in Gimpex Pvt. Ltd. v. Manoj Goel (2021). The Court held that once a settlement is reached and fresh cheques are accepted under the compromise, pursuing the original complaint for the same transaction generally becomes untenable. However, if the settlement cheques themselves bounce, they give rise to a fresh cause of action under Section 138.

In lease disputes, where settlements frequently involve staggered post-dated cheques for arrears, this creates a renewal mechanism. Criminal leverage is not only preserved by withholding consent to compounding, it may effectively be renewed through the payment structure of the settlement itself. Drafters must therefore approach such agreements with care.

Leverage Runs Both Ways: Security Cheques

The tool is not one-sided. Security cheques, common in lease transactions, are equally subject to Section 138 proceedings. In I.C.D.S. Ltd. v. Beena Shabeer & Anr. (Criminal Appeal No. 797 of 2002, decided on 12 August 2002), the Supreme Court rejected the argument that a cheque given purely as security falls outside the scope of Section 138. The key question is whether a legally enforceable debt existed at the time the cheque was presented. The “security” label alone does not provide immunity. (Note: This case arose in the context of a hire-purchase transaction with a guarantor.)

By parity of reasoning, the same doctrine applies to commercial leases: a landlord's cheque refunding a tenant's security deposit can trigger a valid Section 138 complaint by the tenant if dishonoured , subject to the landlord's ability to show that deductions for unpaid rent, damage, or other breaches reduced the enforceable amount. Criminal courts may be required to examine underlying lease issues (occupancy, breach, set-offs, and accounting) that a purely criminal forum was not primarily designed to adjudicate.

The Practitioner's Trap: Formal Precision Matters

Even when substantive leverage favours one party, procedural requirements can shift the balance. In Kaveri Plastics v. Mahdoom Bawa Bahrudeen Noorul (2025), the Supreme Court reiterated the strict construction applicable to this penal provision, emphasising strict compliance with the statutory requirements for demand notices. A demand notice that does not accurately demand the amount covered by the dishonoured cheque may render the complaint vulnerable to challenge. In Kaveri Plastics, the notice demanded an amount double the actual cheque value, and the Supreme Court rejected the complainant's explanation that this was a mere typographical error, treating the defect as fatal to the complaint. The judgment underscores that strict compliance with the statutory notice requirement is non-negotiable — even an asserted typographical error in the demanded amount may invalidate the complaint.

Implications for Commercial Practice

Section 138 remains a legitimate and useful deterrent against cheque dishonour in commercial relationships. In the specific arena of leasing, however, its use produces a subtler effect: it draws criminal courts into resolving what are fundamentally civil questions of contract performance under a higher standard of proof.

For landlords, this means Section 138 should be treated as a deliberate part of enforcement strategy, with close attention to statutory notices and settlement payment structures. For tenants and their counsel, it means rigorous scrutiny of demand notices and proactive use of lease documentation to challenge the existence of a legally enforceable debt. For both sides, “settlement” in these disputes is often not a clean break but a renegotiation of continuing leverage.

The consent requirement for compounding protects complainant autonomy, yet the availability of Article 142 intervention in exceptional cases shows that the leverage, while powerful, is not unlimited. Greater clarity on when ordinary compounding should follow full satisfaction could further reduce uncertainty. Until then, parties negotiating commercial lease defaults must operate with full awareness of a remedy that, even when the money is paid, does not necessarily go away.

Author is an Assistant Legal Manager, Advance India Projects Limited (AIPL), Gurugram. Views are personal.