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Supreme Court observed that dishonouring cheques is now a regulatory offence, and courts should encourage compounding of offences. The Apex Court suggested the courts encourage compounding of offences under the Negotiable Instruments Act if parties are willing to do so.
The Supreme Court Bench comprising Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullah, recently reaffirmed its stance on the treatment of dishonoured cheques as a regulatory offence, emphasizing the need for courts to promote the compounding of such offences. Compounding refers to the process where both parties in a legal dispute agree to settle the matter outside of court, typically upon the accused compensating the complainant.
In a significant observation, the Apex Court underscored that the compensatory aspect of remedy should take precedence over punitive measures in cases arising under the Negotiable Instruments Act, 1881. This means that courts should prioritize achieving financial compensation for the aggrieved party rather than strictly imposing penalties on the accused. The Court's rationale behind this approach stems from the recognition that a considerable backlog of cheque dishonour cases is burdening the judicial system. Addressing these cases through compounding can lead to quicker resolutions and alleviate the strain on court resources.
During the hearing of a Criminal Appeal arising from a complaint under Section 138 of the Negotiable Instruments Act, 1881, the Supreme Court articulated these principles. The Court's guidance to lower courts to actively encourage compounding reflects its commitment to expediting the resolution of cheque dishonour cases and promoting efficiency in judicial proceedings.
Supreme Court observed that the offence of dishonouring cheques under the Negotiable Instruments Act is primarily regulatory and serves the public interest in ensuring the reliability of financial instruments. Given the large number of pending cases related to dishonoured cheques, which strain the judicial system, courts should prioritize the compensatory aspect of the remedy over the punitive aspect. Therefore, courts should actively encourage the compounding of offences under the NI Act when parties express willingness to resolve disputes amicably. Supreme Court allowed the appeal and acquitted the appellants, setting aside their conviction, based on the genuine settlement agreement between the parties and principles favouring the compounding of offences under the Negotiable Instruments Act.
The Supreme Court Bench observed, "It is to be remembered that dishonour of cheques is a regulatory offence which was made an offence only in view of public interest so that the reliability of these instruments can be ensured. A large number of cases involving dishonour of cheques are pending before courts which is a serious concern for our judicial system. Keeping in mind that the ‘compensatory aspect’ of remedy shall have priority over the ‘punitive aspect’, courts should encourage compounding of offences under the NI Act if parties are willing to do so."
The Supreme Court Bench relied on the judgment of Damodar S. Prabhu v. Sayed Babalal H., REEDLAW 2010 SC 05002; Gimpex Private Limited v. Manoj Goel; REEDLAW 2021 SC 10001; and Meters And Instruments Private Limited and Another v. Kanchan Mehta, REEDLAW 2017 SC 10002.
In the matter of the appeal before the Supreme Court of India, arising from a complaint under Section 138 of the Negotiable Instruments Act, the Court had initially granted leave to hear the appeal filed by the appellants, Mr. A and his partnership firm M/s New Win Export, against their conviction by the Trial Court. The case stemmed from a loan of Rs. 5,25,000 borrowed by Mr. A from the respondent, which was not repaid as agreed. In an attempt to settle the debt, Mr. A issued a cheque for the same amount in favour of his partnership firm, but it was dishonoured due to insufficient funds. Consequently, the respondent filed a complaint leading to legal proceedings.
Initially, the Trial Court had convicted the appellants on October 16, 2012, sentencing them to one year of simple imprisonment each. Subsequently, the Appellate Court reversed this decision and acquitted the appellants. Dissatisfied with the Appellate Court's decision, the respondent approached the High Court, which overturned the Appellate Court's ruling on April 1, 2019, thereby restoring the Trial Court's conviction.
Before the matter reached the Supreme Court, the appellants and the respondent entered into a settlement agreement dated January 27, 2024. Pursuant to this settlement, the appellants paid Rs. 5,25,000 to the respondent, who agreed to settle the dispute on receiving this amount. The settlement agreement also included provisions wherein the respondent consented to the appellants' appeal and agreed not to object to the setting aside of their conviction.
Upon reviewing the settlement agreement and considering the legal provisions regarding the compounding of offences under Section 147 of the Negotiable Instruments Act and Section 320(5) of the Criminal Procedure Code, the Supreme Court sought further verification of the settlement's authenticity. The respondent filed an affidavit confirming the receipt of payment and expressing no objection to the appellant's acquittal.
Emphasizing the compensatory nature of punitive measures in cases under the Negotiable Instruments Act, the Court cited precedents and principles encouraging the settlement of such disputes. Notably, the Court referred to the case of Raj Reddy Kallem v. The State of Haryana and Another, REEDLAW 2024 SC 04006, where it had similarly quashed a conviction under the NI Act despite the complainant's initial reluctance to compound the offence.
Taking into account the settlement reached between the parties and satisfied with its genuineness, the Supreme Court proceeded to allow the appeal. Accordingly, the Court set aside the orders of both the Trial Court and the High Court convicting the appellants. Additionally, Mr. A was exempted from surrendering, and his sureties were discharged.
The Supreme Court emphasized that courts should promote the settlement of cases under the Negotiable Instruments Act, 1881, emphasizing that prioritizing compensation over punishment is crucial. This observation was made in light of the significant backlog of cheque dishonour cases pending before the judiciary, which poses a serious challenge to the judicial system. The Court made these remarks during the hearing of a Criminal Appeal arising from a complaint under Section 138 of the Negotiable Instruments Act, 1881.
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