Cheque Bounce Conviction Can Be Set Aside If Dispute Is Settled Even at Revisional Stage: Madras High Court

Purpose of Section 138 NI Act Is Compensation, Not Punishment – Madras High Court has held that a conviction under Section 138 of the Negotiable Instruments Act, 1881, can be set aside even at the revisional stage if the parties amicably settle the dispute. Allowing a Criminal Revision Case filed by an exporter convicted for cheque dishonour, Justice Shamim Ahmed ruled that courts should encourage settlements in cheque bounce cases as the primary objective of the NI Act is to ensure financial restitution, not incarceration.

"The object of the Negotiable Instruments Act is primarily compensatory and not punitive. Once the complainant has been adequately compensated, continuing with the prosecution serves no purpose. Courts must facilitate settlements rather than create hurdles in their enforcement," observed the High Court.

Cheque Bounce Case Leads to Conviction and Appeal
The case arose from a cheque for ₹43,73,398 issued by the petitioner, Agamadou Ibraguime Shuaid, an exporter, in favor of Bravo Logistics (P) Ltd., towards unpaid dues. The cheque was dishonoured with an endorsement of ‘Account Closed’, prompting the respondent to issue a legal notice demanding payment. The petitioner failed to comply, leading to a complaint under Section 138 NI Act before the Metropolitan Magistrate, Fast Track No.I, Allikulam, Chennai.

The trial court convicted the petitioner, sentencing him to six months simple imprisonment and directing him to pay ₹53,73,398, which included the cheque amount along with an additional ₹10 lakh as penalty. The XXI Additional Sessions Judge, Chennai, dismissed the petitioner’s appeal, confirming the conviction on March 18, 2022. The petitioner then filed a criminal revision petition before the Madras High Court.

Compromise in Mediation Leads to Settlement
During the pendency of the Criminal Revision Case (Crl.R.C. No. 545 of 2022), the parties reached a mutual settlement through mediation and filed a Joint Compromise Memo before the High Court. The agreement provided that the petitioner would pay ₹32.50 lakh as full and final settlement, of which ₹8,74,680 had already been deposited in the trial court. The respondent was permitted to withdraw this amount along with accrued interest.

Additionally, the petitioner had already paid ₹6,26,000 through a demand draft, followed by another ₹5 lakh in January 2024. On the day of the hearing, the petitioner handed over two more demand drafts totaling ₹6 lakh to the respondent before the Court. Recognizing the financial distress of the petitioner, the respondent agreed to waive ₹6,09,320 and withdraw the complaint unconditionally.

High Court Holds That Compounding Can Be Allowed Even After Appellate Conviction
The respondent initially objected to compounding, arguing that once conviction had been upheld by the appellate court, it could not be undone at the revisional stage. The High Court rejected this contention, holding that Section 147 of the NI Act permits compounding of offences at any stage, overriding the restrictions of Section 320 CrPC.

Quoting the Supreme Court’s ruling in Damodar S. Prabhu v. Sayed Babalal H., (2010) 2 SCC (Cri) 1328, the Court observed, "Section 147 begins with a non obstante clause and allows compounding of offences notwithstanding anything contained in the CrPC. Even after an appellate court confirms a conviction, the High Court can intervene to permit compounding at the revisional stage."

The Court also relied on M/s. Meters and Instruments Pvt. Ltd. v. Kanchan Mehta, (2017) 7 SCC 558, which had observed that "Offence under Section 138 NI Act is primarily a civil wrong. The aim is not to punish but to ensure that the complainant is compensated. When the complainant is satisfied, the conviction must be annulled."

Judicial Recognition of Mediation Settlements in Criminal Cases
Endorsing the role of alternative dispute resolution mechanisms in criminal proceedings, the High Court emphasized the importance of mediation in resolving cheque bounce cases. The judgment underscored that criminal litigation should not be used as a tool for harassment when an amicable resolution is reached.

"The Court must be mindful that social justice is the cornerstone of our Constitution. In cases of cheque dishonour, courts should actively encourage settlements, as these disputes are essentially financial and compensatory in nature. The complainant’s grievance is remedied by the receipt of money, not by the incarceration of the accused," the Court held.

The judgment further reiterated that even if a matter reaches the appellate or revisional stage, the inherent powers of the High Court can be invoked to prevent miscarriage of justice.

Conviction Set Aside and Petitioner Acquitted
In light of the amicable settlement, the High Court set aside the conviction and sentence of the petitioner. The criminal revision case was disposed of, and the petitioner was acquitted on account of the compounding. The Court also directed that the respondent be permitted to withdraw the ₹8,74,680 deposited before the trial court.

"The revision petitioner, Agamadou Ibraguime Shuaid, shall be treated as acquitted on account of the compounding of the offence with the complainant. The purpose of Section 138 NI Act has been served, and no further proceedings shall continue against him," the Court ruled.

The trial court was directed to immediately process the withdrawal of the deposited amount, and the order was ordered to be communicated for urgent compliance.

Strengthening the Compensatory Nature of Cheque Bounce Cases
This judgment reinforces the Supreme Court’s jurisprudence that cheque dishonour cases are primarily civil in nature and should prioritize financial restitution over imprisonment. By allowing compounding even at the revisional stage, the Madras High Court has ensured that settlements are legally binding and that convictions do not obstruct financial compensation.

The ruling is a landmark precedent for Section 138 NI Act cases, emphasizing that courts must adopt a progressive, settlement-oriented approach to resolve financial disputes efficiently and equitably.

Date of decision: 30 January 2025