Dishonour of cheques remains one of the most litigated areas in Indian criminal law. Section 138 of the Negotiable Instruments Act, 1881 (NI Act) criminalises the dishonour of cheques due to insufficiency of funds, thereby providing statutory protection to the payee. However, the offence is unique—it straddles both civil and criminal dimensions. The legislature, through Section 147 of the NI Act, specifically made it compoundable, recognising that disputes under Section 138 are essentially commercial in nature.
A recurring question has been whether, once a conviction is recorded, courts are bound to uphold it irrespective of a subsequent settlement, or whether compounding can override the conviction even at that stage. The Supreme Court in Gian Chand Garg v. Harpal Singh & Anr. (2025) has provided clarity, reinforcing the principle that voluntary compromise between parties can nullify the conviction itself.
This article examines the issue in detail, contextualising the ruling against the backdrop of earlier precedents and legislative intent.
Statutory Background
Section 138 of the NI Act
Section 138 creates criminal liability for dishonour of cheques. Essential ingredients include:
- Drawing of a cheque by the accused.
- Presentation within the period of validity.
- Dishonour due to insufficient funds.
- Service of statutory notice within 30 days.
- Failure to make payment within 15 days of receipt of notice.
Punishment includes imprisonment up to two years and/or a fine up to twice the cheque amount.
Section 147 of the NI Act
Inserted by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002, Section 147 provides:
“Notwithstanding anything contained in the Code of Criminal Procedure, every offence punishable under this Act shall be compoundable.”
This provision grants overriding effect, allowing compounding at any stage of proceedings.
Facts of the Case: Gian Chand Garg v. Harpal Singh & Anr.
- Complaint: Respondent No. 1 filed a complaint alleging that Gian Chand Garg had borrowed ₹5,00,000 and issued a cheque which was dishonoured for “funds insufficient.”
- Conviction: The Judicial Magistrate convicted the accused, sentencing him to six months’ simple imprisonment and a fine of ₹1,000.
- Appeals: Both the Additional Sessions Judge and the Punjab and Haryana High Court upheld the conviction.
- Settlement: After the revision was dismissed, parties executed a compromise on 6 April 2025. The complainant accepted two demand drafts of ₹2.5 lakhs each and three post-dated cheques of ₹1 lakh each in full settlement. He filed an affidavit expressing no objection to acquittal.
- High Court’s Refusal: The High Court dismissed the accused’s application seeking modification of its earlier order on the ground of non-maintainability.
- Supreme Court Appeal: The matter reached the Supreme Court, which examined whether the compromise could nullify the conviction.
Issue
Can compounding of the offence under Section 138 NI Act override a conviction already recorded and upheld by appellate courts?
Supreme Court’s Reasoning
1. Nature of Offence under Section 138:
The Court reaffirmed its earlier stance in Meters and Instruments Pvt. Ltd. v. Kanchan Mehta (2018) 1 SCC 560, holding that Section 138 primarily addresses a civil wrong but employs criminal sanction to ensure credibility of business transactions.
2. Private Nature of the Dispute:
Relying on P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258, the Court reiterated that Section 138 proceedings are of a private nature—described as a “civil sheep in criminal wolf’s clothing”—meant to secure the sanctity of negotiable instruments.
3. Effect of Settlement:
Citing Gimpex Pvt. Ltd. v. Manoj Goel (2021), the Court emphasised that once parties voluntarily settle, the settlement subsumes the original complaint. Allowing continuation of criminal proceedings would undermine the very purpose of compromise.
4. Legislative Mandate under Section 147:
The Court highlighted that Section 147 gives offences under the NI Act compoundable status notwithstanding the CrPC. Thus, compounding is permissible at any stage of proceedings—even after conviction—provided it is voluntary.
5. Previous Precedents on Compounding:
The Court relied on B.V. Seshaiah v. State of Telangana (2023), which held that once parties compound the offence, courts must respect their decision and not impose judicial barriers.
6. Application to the Present Case
- The complainant had received full settlement through demand drafts and cheques.
- He filed an affidavit acknowledging voluntary compromise without coercion.
- Continuing the conviction would amount to judicial interference in a private settlement.
- Accordingly, the Supreme Court quashed the conviction and set aside all prior orders.
Key Highlights of the Decision
Justice Aravind Kumar and Justice Sandeep Mehta observed:
In the present case, the compromise deed dated 06.04.2025 and the Affidavit on behalf of the Respondent No.1 dated 16.04.2025 is annexed to the present petition as Annexure P3 and P6, respectively. Upon careful perusal of the recitals contained in the said documents, it clearly emerges that the Respondent No.1 in consideration of Two Demand Drafts bearing no(s). 004348 dated 04.04.2025 and 004303 dated 11.02.2025 for Rs. 2.5 lakhs each along with three cheques bearing no(s). 354412 dated 10.05.2025, 354413 dated 10.06.2025 and 354414 dated 10.07.2025 of Rs. 1 lakh each has arrived at a compromise with appellant without any coercion and at his own will and voluntarily.
Once the complainant has signed the compromise deed accepting the amount in full and final settlement of the default sum the proceedings under Section 138 of the NI Act cannot hold water, therefore, the concurrent conviction rendered by the Courts below has to be set-aside.
Analysis of the Judgment
- Recognition of Commercial Reality: The Court’s decision reflects the commercial reality that cheque dishonour cases are essentially recovery disputes. Criminal prosecution acts as a deterrent, but once dues are settled, continuing conviction serves no practical purpose.
- Autonomy of Parties: The judgment upholds party autonomy. If the complainant, the direct victim of dishonour, consents to compounding, courts should not impose punishment merely to satisfy the notion of deterrence.
- Balancing Public Interest and Private Justice: Critics may argue that quashing conviction undermines deterrence. However, the Court distinguished Section 138 from offences involving societal harm (e.g., theft, assault). Since cheque dishonour affects primarily the payee, legislative intent favours private settlement.
- Finality v. Flexibility: Normally, once appellate courts confirm a conviction, the principle of finality operates. Yet, Section 147 creates an exception, giving flexibility to respect settlements even post-conviction. The judgment thus harmonises finality of litigation with legislative flexibility.
Implications of the Judgment
For Accused
- Provides relief from the stigma of a criminal conviction once a settlement is reached.
- Encourages the accused to settle quickly, knowing a conviction can be nullified.
For Complainants
- Ensures faster recovery without prolonged litigation.
- Enhances bargaining power, as settlement becomes a reliable route to closure.
For Courts
- Reduces burden of cheque dishonour cases, which clog dockets.
- Reinforces the judiciary’s role as facilitator of settlement in commercial disputes.
For Legal Framework
- Strengthens Section 147 NI Act as an overriding provision.
- Clarifies that compounding is permissible even post-conviction, ensuring uniform judicial approach.
Conclusion
The Supreme Court’s ruling in Gian Chand Garg v. Harpal Singh & Anr. cements the principle that compounding under Section 147 of the NI Act overrides conviction under Section 138, even at a post-conviction stage
.By quashing the conviction upon settlement, the Court reaffirmed that Section 138 disputes are essentially private, commercial matters where party autonomy and legislative intent favour compromise over punishment. The decision reduces unnecessary criminalisation, promotes speedy settlement, and alleviates judicial burden.
In the broader legal landscape, the ruling marks a shift towards recognising that not every statutory offence warrants rigid penal enforcement, especially where the legislature itself has provided for compounding. It reaffirms the judiciary’s role in balancing deterrence with pragmatic justice in commercial transactions.
Important Link
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