High Court Has Power to Compound Offences Even at Revisional Stage: Madras HC in Section 138 NI Act Case

Madras High Court set aside the conviction and sentence imposed on the petitioner for dishonour of a cheque under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). The case, initially decided by the XX Metropolitan Magistrate, Chennai, had resulted in a nine-month simple imprisonment and a compensation order of ₹8,85,000/-. The V Additional Sessions Judge, Chennai, upheld the conviction and sentence on November 10, 2021.
However, during the pendency of the Criminal Revision Case No. 894 of 2021, the parties entered into a Memorandum of Compromise and sought to compound the offence. Justice Shamim Ahmed, exercising the High Court’s inherent powers, ruled: "Since offences under the NI Act are compoundable under Section 147, this Court, in the interest of justice, permits compounding at the revisional stage and sets aside the conviction and sentence."
The Court directed that the petitioner be acquitted, and the respondent be permitted to withdraw the deposited amount of ₹4,42,500/- with accrued interest from the trial court.
The petitioner, V.B. Thiyaga Moorthy, had borrowed ₹9,00,000/- from the respondent, S. Lokesh, for clearing old debts and starting a provisional store. To discharge this liability, he issued a cheque of ₹8,85,000/- dated September 2, 2016, drawn on DENA Bank, Purasawalkam Branch.
However, when the respondent presented the cheque at the State Bank of Mysore, Anna Nagar Branch, it was returned on September 5, 2016, with the endorsement “insufficient funds.” The respondent issued a legal notice on September 9, 2016, demanding payment within 15 days, which the petitioner acknowledged on September 12, 2016. Despite receiving the notice, the petitioner failed to pay the cheque amount, leading to the filing of a complaint under Section 138 of the NI Act.
After the trial, the XX Metropolitan Magistrate, Chennai, convicted the petitioner on November 5, 2020, sentencing him to nine months simple imprisonment and compensation of ₹8,85,000/- under Section 357 of Cr.P.C., with an additional three-month imprisonment in case of default. The V Additional Sessions Judge, Chennai, dismissed the appeal on November 10, 2021, confirming the conviction and sentence.
The petitioner filed a criminal revision before the High Court, challenging both lower court judgments. During the pendency of the revision, the parties amicably settled the dispute and entered into a Memorandum of Compromise on January 9, 2025, leading to the present order.
The High Court analyzed the scope of Section 147 of the NI Act, which permits compounding of offences under the Act. The Court observed: "The provisions of Section 320 Cr.P.C. regarding compounding do not restrict the High Court’s power under Section 147 of the NI Act. Since the primary objective of Section 138 NI Act is compensatory rather than punitive, compounding should be encouraged at any stage, including revision."
Relying on the Supreme Court’s judgment in Damodar S. Prabhu v. Sayed Babalal H, (2010) 2 SCC (Cri) 1328, the Court reiterated that compounding can be allowed even after conviction to meet the ends of justice.
The Court further cited M/s Meters and Instruments Pvt. Ltd. v. Kanchan Mehta, (2017) 7 SCC 558, wherein the Supreme Court held: "The offence under Section 138 NI Act is primarily compensatory in nature. The court can allow compounding even after conviction, considering the fact that the complainant’s interest is primarily in recovering money rather than punishing the accused."
The High Court also noted that in Vinay Devanna Nayak v. Ryot Seva Sahkari Bank Ltd., AIR 2008 SC 716, the Supreme Court had observed: "Where the matter has been amicably settled and the complainant has been compensated, there is no reason to refuse compounding, even after conviction."
Thus, the Madras High Court held that it has inherent powers to permit compounding at the revisional stage and nullify the conviction in cases under Section 138 NI Act.
The Court noted that the petitioner had deposited ₹4,42,500/- before the trial court, as part of the appellate process. Since the respondent had agreed to withdraw this amount under the Memorandum of Compromise, the Court directed: "The respondent is permitted to withdraw ₹4,42,500/- along with accrued interest from the trial court within four weeks upon filing an appropriate application."
The Madras High Court allowed the compounding of the offence and annulled the conviction and sentence imposed on the petitioner. The key takeaways from the ruling are:

•    "An offence under Section 138 NI Act can be compounded at any stage, including at the revisional stage."
•    "The High Court, in exercise of its inherent powers, can annul a conviction if parties amicably settle the dispute."
•    "The primary object of the NI Act is to ensure compensation to the complainant rather than punish the accused."
•    "Once the offence is compounded, the accused is entitled to acquittal."
The Criminal Revision Case No. 894 of 2021 was disposed of in terms of the Memorandum of Compromise, and the petitioner was acquitted.

Date of Decision: January 22, 2025