SECTION 138
NI Act: If COMPLAINTS BASED ON settlement CAN BE QUASHED?
The provisions relating to bouncing of cheques
have travelled quite a distance since the year 1988, when the provision of
Section 138 of Negotiable Instruments Act (In short “NI Act”) was inserted in
the said NI Act. This was done with a view to give fillip to transactions by
cheque and also to infuse confidence in such transactions. The provisions have
undergone various changes/amendments by virtue of several subsequent amendments.
The present article, however, shall revolve around a new vista i.e whether the
terms of settlement envisaging settlement and cheques issued pursuant to
subsequent settlement and complaint u/s 138 of NI Act, based shall be
maintainable, if the cheques are also dishonoured. This is to be seen,
particularly, in the backdrop of ongoing earlier complaints based on dishonor
of cheques, which is also continuing and settlement is executed during the
pendency of earlier complaints. What will be the fate of earlier complaints?
What will be the fate of settlement during the pendency of the earlier
complaints? The another dimension of it is as to whether the claim under the
subsequent settlement, provisioning for more payment by way of compensation
shall tantamount to consideration or not? Whether both sets of complaints u/s
138 of NI act could continue and shall remain maintainable or the subsequent
complaints shall only be maintainable and the earlier complaint shall no longer
be maintainable. Conversely, whether, the
earlier complaint shall be only maintainable?
The
hon’ble Supreme Court has settled the dust fully and finally. The issues
arising out of the above situation are thus clearly answered in a recent
judgment captioned as M/s Gimpex Private Limited
Vs Manoj
Goel Criminal Appeal No. 1068 of 2021 (Arising out of SLP (Criminal) No. 6564
of 2019).
Before delving in further, it may be apt to refer to
the
essential ingredients of section 138 of Negotiable Instruments as is held by the hon’ble Supreme Court in K Bhaskaran v. Sankaran Vaidhyan Balan (1999) 7 SCC 510 The Supreme Court had observed:
“14. The offence under Section 138 of the Act can
be completed only with the concatenation of a number of acts. The following are
the acts which are components of the said offence:
(i) The
drawing of a cheque by person on an account maintained by him with the banker
for the payment of any amount of money to another from that account;
(ii) The cheque being
drawn for the discharge in whole or in part of any debt or other liability;
(iii) Presentation
of the cheque to the bank;
(iv) The
return of the cheque by the drawee bank as unpaid either because the amount of
money standing to the credit of that account is insufficient to honour the
cheque or that it exceeds the amount arranged to be paid from that account;
(v) A
statutory notice by the payee or the holder in due course making a demand for
the payment of the amount to the drawer of the cheque within 30 days of the receipt
of information from the bank in regard to the return of the cheque; and
(vi) The
drawer of the cheque failing to make payment of the amount of money to the
payee or the holder in due course within 15 days of the receipt of the notice.
It may be
noted that the primary purpose of Section 138 of the NI Act is to ensure
compensation to the complainant, the NI Act also allows for parties to enter
into a compromise, both during the pendency of the complaint and even after the
conviction of the accused.
The
decision of the Supreme Court in Meters and Instruments (P) Ltd. v. Kanchan Mehta (2018)
1 SCC 560 is worth reference as that summarises the objective of allowing
compounding of an offence under Section 138 of the NI Act:
“18.2. The object of the provision being
primarily compensatory, punitive element being mainly with the object of
enforcing the compensatory element, compounding at the initial stage has to be
encouraged but is not debarred at later stage subject to appropriate
compensation as may be found acceptable to the parties or the court.”
In Damodar S. Prabhu Vs Sayed Babalal (2010) 5
SCC 663 the Supreme Court had
emphasised that the compensatory aspect of the remedy under Section 138 of the NI
Act must be preferred and has encouraged litigants to resolve disputes amicably.
The
Supreme Court observed:
“4. It may be noted
that when the offence was inserted in the statute in 1988, it carried the
provision for imprisonment up to one year, which was revised to two years
following the amendment to the Act in 2002. It is quite evident that the legislative
intent was to provide a strong criminal remedy in order to deter the worryingly
high incidence of dishonour of cheques. While the possibility of imprisonment
up to two years provides a remedy of a punitive nature, the provision for imposing
a “fine which may extend to twice the amount of the cheque” serves a
compensatory purpose. What must be remembered is that the dishonour of a cheque
can be best described as a regulatory offence that has been created to serve
the public interest in ensuring the reliability of these instruments. The
impact of this offence is usually confined to the private parties involved in
commercial transactions.”
The Supreme Court has also noted that the introduction of a
criminal remedy has given rise to a worrying trend where cases under Section
138 of the NI Act are disproportionately burdening the criminal justice system.
The Supreme Court has observed:
“5.
Invariably, the provision of a strong criminal remedy has encouraged the
institution of a large number of cases that are relatable to the offence
contemplated by Section 138 of the Act. So much so, that at present a
disproportionately large number of cases involving the dishonour of cheques is choking
our criminal justice system, especially at the level of Magistrates’ Courts. As
per the 213th Report of the
Law Commission of India, more than 38 lakh cheque bouncing cases were pending
before various courts in the country as of October 2008. This is putting an
unprecedented strain on our judicial system.”
The provision u/s 138 of the NI Act, has thus encouraged the
parties to settle the dispute resulting in ultimate closure of the case rather
than continuing with a protracted litigation before the court. This is
beneficial to the parties to the lis , as speedy recovery of money is ensured and in compromise there
are chances of mitigating the aspect of extent of compensation. The prospect of
protracted litigation is also avoided. The likelihood of probable conviction
and sentence or payment of a fine could also be avoided. The judicial system
may also be relieved from some pendency of such complaint. In Damodar S. Prabhu (Supra)
the Supreme Court has observed has observed;
“18. It
is quite obvious that with respect to the offence of dishonour of cheques, it
is the compensatory aspect of the remedy which should be given priority over
the punitive aspect. There is also some support for the apprehensions raised by
the learned Attorney General that a majority of cheque bounce cases are indeed
being compromised or settled by way of compounding, albeit during the later
stages of litigation thereby contributing to undue delay in justice delivery.
The problem herein is with the tendency of litigants to belatedly choose compounding
as a means to resolve their dispute…”.
Though, section 147 of NI act stipulates the compounding of
offence, but the same is not as comprehensive as Section 320 CrPC. For instance, Section 147
of the Negotiable Instruments Act does not provide any clear guidance as to at
what stage compounding could be done. It is also not provided if the compounding
can be done at the instance of the complainant or with the leave of the court.
The net result therefore is that in the
absence of statutory guidance parties opts to compounding only as a method of
last resort, rather than at the stage when the Magistrates take cognizance of
the complaints. No doubt, the same may also be due to the reason that the accused persons may be willing to take
the chance of progressing through the various stages of litigation and then
choose the route of settlement only when no other route remains. It may be
prudent on the part of the accused, but this is akin to affording opportunity
to cause delay. The judgment rendered in Damodar
S Prabhu (Supra) has stipulated greater amount of compensation in case of
delay in compounding, but the situation has not vastly altered, yet.
It was realized that the pendency of court proceedings under
Section 138 of the NI Act and the multiplicity of complaints in which a cause
of action arising from one transaction is litigated has dampened the ease of
doing business in India, impacted business sentiments and hindered investments
from investors. In this backdrop, it was felt that the issue deserved attention
and the Ministry of Finance in June 2020, had solicited comments as regards
decriminalisation of minor offences, including Section 138 of the NI Act, to
improve the business sentiment in the country.
The Supreme Court has thus dealt with the issue of pendency
of parallel proceedings for complaints under Section 138 of the NI Act. The
question that whether once the settlement has been entered into, the
complainant can be allowed to pursue the original complaint under Section 138 of
the NI Act?
FACTS OF THE PRESENT CASE:
The hon’ble Supreme Court has dealt with the issues of settlement
and pursuant thereto filing of criminal complaints u/s 138 of NI Act based on
dishonoured cheques issued pursuant to settlement. In M/s Gimpex
Private Limited(Supra) pursuant
to High Seal sale Agreement (HSSA), initially, 18
cheques dated 8 August 2012 of a total value of Rs. 9 crores were issued by Anchal
Cement Ltd (ACL) M/s Gimpex Private Limited. The cheques were dishonoured on
the premise that the payment had been stopped by the drawer or, as the case may
be, for insufficiency of funds that led
to the issuance of legal notices under Section 138 of the NI Act and the
institution of the first criminal complaint before the Metropolitan Magistrate.
It was at that stage that a director of ACL was arrested by the Central Crime
Branch in connection with Crime No. 21/2013 which was registered for offences
under Sections 409 and 506(1) of the Indian Penal Code. The complaints u/s 138
of NI act was also initiated.
In this backdrop, the deed of compromise was entered into. The
deed of compromise envisages that:
(i) A demand draft of Rs. 3 Crores
was handed over to the complainant on 11th March 2013;
(ii) On receipt of the amount of Rs.3
crores, the complainant would not object to the bail application filed by M G;
(iii) Apart from the amount of Rs. 3
crores, the balance of Rs. 7 crores would be paid within three months in three
equal monthly installments each of Rs.2,33,33,333/- commencing from 11 April
2013 and ending on 11 June 2013;
(iv) The amount of Rs. 2.33 crores
would be divided equally between SG,MG and ACL, who would issue cheques in
favour of the complainant in compliance of the settlement;
(v) Towards discharge of the
liability, post-dated cheques dated had
been handed over; and
(vi) Any default in complying with the conditions set out in the
compromise deed would entitle the complainant to file a fresh criminal
complaint under the NI Act against the drawer of the cheques and to proceed
against the other directors; and
(vii) Upon the payment of the entire
settlement amount of Rs. 10 crores, all criminal complaints, suits, arbitration
proceedings and Section 138 proceedings would be withdrawn.
The settlement was acted upon as well and after receipt of an
amount of Rs.3 crores, in pursuance of the compromise deed, MG was granted bail
by the competent court. Though, the balance due and payable under the deed of
compromise had admittedly not been paid and the second set of cheques were dishonoured.
ACL proceeded to institute a suit before the Madras High Court to challenge the
deed of compromise. While the suit is pending, the interim application stands dismissed.
In this backdrop, there are two sets of criminal complaints under Section 138
of the NI Act based on the dishonour of the first set of cheques and the second
set respectively i.e after execution of deed of compromise.
The
question before the Supreme Court was whether parallel prosecutions arising
from a single transaction under Section 138 of the NI Act can be sustained. In
this case, a set of cheques were dishonoured, leading to filing of the first
complaint under Section 138 of the NI Act. The parties thereafter entered into
a deed of compromise to settle the matter. While the first complaint was
pending, the cheques issued pursuant to the compromise deed were dishonoured
leading to the second complaint under Section 138 of the NI Act. Both
proceedings were pending simultaneously and it is for this Court to decide
whether the complainant can be allowed to pursue both the cases or whether one
of them must be quashed and the consequences resulting from such quashing.
In the
present case, the first set of cheques which were issued allegedly towards
discharge of the liability under the HSSA were dishonoured. A deed of compromise
was entered into thereafter, but it was partially implemented by the payment of
an amount of Rs. 3 crores by demand draft to the complainant. Upon the receipt
of an amount of Rs. 3 crores, Gimpex Private Limited was to grant its no
objection to the plea of bail of MG and MG undertook to pay the balance of Rs.
7 crores within three months in installments. The second set of cheques issued
pursuant to the deed of compromise were also dishonoured.
ANALYSIS
It was held that allowing prosecution under both sets of
complaints would be contrary to the purpose of the enactment. It is further
held that it is the compensatory aspect of the remedy that should be given
priority as opposed to the punitive aspect. The complainant in such cases is
primarily concerned with the recovery of money, the conviction of the accused
serves little purpose. In fact, the threat of jail acts as a stick to ensure
payment of money. The Supreme Court in R. Vijayan v. Baby (2012) 1 SCC 260 has emphasised that punishment of the offender is
of a secondary concern for the complainant in the following terms:
“17. The apparent intention is to ensure that not only the offender
is punished, but also ensure that the complainant invariably receives the
amount of the cheque by way of compensation Under Section 357(1)(b) of the
Code. Though a complaint Under Section 138 of the Act is in regard to criminal
liability for the offence of dishonouring the cheque and not for the recovery of
the cheque amount (which strictly speaking, has to be enforced by a civil
suit), in practice once the criminal complaint is lodged Under Section 138 of
the Act, a civil suit is seldom filed to recover the amount of the cheque. This
is because of the provision enabling the court to levy a fine linked to the
cheque amount and the usual direction in such cases is for payment as
compensation, the cheque amount, as loss incurred by the complainant on account
of dishonour of cheque. Under Section 357(1)(b) of the Code and the provision
for compounding the offences Under Section 138 of the Act most of the cases
(except those where liability is denied) get compounded at one stage or the other
by payment of the cheque amount with or without interest. Even where the
offence is not compounded, the courts tend to direct payment of compensation
equal to the cheque amount (or even something more towards interest) by levying
a fine commensurate with the cheque amount. A stage has reached when most of
the complainants, in particular the financing institutions (particularly
private financiers) view the proceedings under Section 138 of the Act, as a
proceeding for the recovery of the cheque amount, the punishment of the drawer
of the cheque for the offence of dishonour, becoming secondary.”
It is held that when a party enters
into a compromise agreement with other it may be for a multitude of reasons –
higher compensation, faster recovery of money, uncertainty of trial and
strength of the complaint, among others. A complainant enters into a settlement
with open eyes and undertakes the risk of the accused failing to honour the
cheques issued pursuant to the settlement, based on certain benefits that the
settlement agreement postulates. Once parties have voluntarily entered into
such an agreement and agree to abide by the consequences of non-compliance of
the settlement agreement, they cannot be allowed to reverse the effects of the
agreement by pursuing both the original complaint and the subsequent complaint
arising from such non-compliance. The settlement agreement subsumes the
original complaint. Non-compliance of the terms of the settlement agreement or
dishonour of cheques issued subsequent to it, would then give rise to a fresh
cause of action attracting liability under Section 138 of the NI Act and other
complaints.
The Supreme Court has held that once the
ingredients of Section 138 of NI Act are fulfilled, a distinct offence arises
in respect of the dishonour of the cheques in question. It cannot be concluded in
the course of the hearing of a petition under Section 482 of the Cr.PC that the
second set of cheques issued in pursuance of the deed of compromise cannot be
construed as being towards the discharge of a liability. The question as to
whether the liability exists or not is clearly a matter of trial. The order of
quashing the complaint based on cheques issued pursuant to subsequent
settlement was set aside. It is further held by Supreme Court that even if a
suit is pending before the High Court challenging the validity of the
compromise deed shall not furnish any cogent basis to quash the proceedings
under Section 138 of NI Act.
In HMT Watches
Ltd. v. M.A. Abida (2015) 11 SCC 776
the Supreme Court has held:
“10. […] Whether the
cheques were given as security or not, or whether there was outstanding
liability or not is a question of fact which could have been determined only by
the trial court after recording evidence of the parties. In our opinion, the
High Court should not have expressed its view on the disputed questions of fact
in a petition under Section 482 of the Code of Criminal Procedure, to come to a
conclusion that the offence is not made out. The High Court has erred in law in
going into the factual aspects of the matter which were not admitted between
the parties.”
In Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency
Ltd (2016) 10 SCC 458 the
Supreme Court has held:
“16. As is clear from
the above observations of this Court, it is well settled that while dealing
with a quashing petition, the court has ordinarily to proceed on the basis of
averments in the complaint. The defence of the accused cannot be considered at
this stage. The court considering the prayer for quashing does not adjudicate
upon a disputed question of fact.”
CONCLUSION
The
aforesaid discussion, based on the judgment rendered by hon’ble Supreme Court,
clearly postulates that the complaints u/s 138 of NI Act based on compromise
shall be maintainable. The fact that both the parties have agreed to adhere to
the terms of settlement and if the agreement is otherwise in order, the issue
of lack of consideration shall not pass
muster. The earlier complaint based on the cheques issued before and during
the pendency whereof, if the settlement is arrived at shall be of no
consequence. It is so, as the second set of cheques are issued after settlement
and relating to the same transactions, thus, the earlier cause of action shall
be subsumed in the later cause of action based on settlement. It is of significance
that the earlier complaints being part of same transaction and still further the
same having been replaced by a terms of settlement and cheques issued thereunder
and dishonoured, the first complaint therefore shall not be maintainable.
However, the second complaint even if includes compensation as well, as agreed
by both parties, the same shall be deemed to be with due consideration and the
second complaint shall be perfectly maintainable. The Three (3) judge bench of hon’ble
Supreme Court has settled the matter in M/s Gimpex
Private Limited (Supra) and the ambiguity is set at rest. The judgment in
Gimpex (Supra) is passed upon quashing of subsequent complaint based on a settlement
by Madras High Court and it is held by hon’ble Supreme Court that earlier
complaint arising out of the same transaction, after settlement, stands
subsumed in it and the cause arising out of the settlement shall only be subsisting
and the prior complaint/s shall be of no consequence.
------
Anil
K Khaware
Founder
& Senior Associate
Societylawandjustice.com
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