Offences Under Section 138 of the NI Act Are Compensatory in Nature and Can Be Resolved at Any Stage: Madras High Court

Madras High Court quashed the conviction of a petitioner under Section 138 of the Negotiable Instruments Act, 1881, based on a joint memorandum of compromise filed by the parties. Justice Shamim Ahmed ruled that the offence, arising from a dishonored cheque of ₹20,00,000, was compounded after the petitioner and respondent reached an amicable settlement for ₹19,00,000 during the pendency of the Criminal Revision Case No. 578 of 2022. The petitioner was acquitted, and the conviction and sentence imposed by the lower courts were annulled.

The petitioner had been convicted by the Judicial Magistrate, Fast Track Court, Kallakurichi, and sentenced to one year of simple imprisonment along with compensation of ₹20,00,000. The conviction was upheld by the III Additional Sessions Judge, Villupuram at Kallakurichi. However, during the pendency of the criminal revision case, the parties entered into a settlement, which was accepted by the High Court.
The Court invoked Section 147 of the NI Act, which permits compounding of offences, and held that it overrides the procedural restrictions under Section 320 of the CrPC. Justice Ahmed noted that the provision's primary objective is compensatory, not punitive. He stated:
"Section 147 of the NI Act, starting with a non obstante clause, permits compounding of offences at any stage, including at the revisional level, to secure the ends of justice."

The petitioner had borrowed ₹20,00,000 from the respondent and issued a post-dated cheque. The cheque was dishonored on the grounds of a mismatched signature. Despite receiving a legal notice, the petitioner failed to repay the amount, leading to a complaint under Section 138 of the NI Act. Both the trial court and the appellate court found the petitioner guilty, prompting the present revision petition.
During the pendency of the revision, the parties amicably resolved the matter through a joint compromise memo. As per the settlement, the petitioner paid ₹19,00,000 to the respondent, who confirmed the payment and waived any further claims.

1.    Compensatory Nature of the NI Act:
The Court emphasized that the primary purpose of Section 138 is to ensure repayment rather than punishment. Justice Ahmed remarked:
"The compensatory aspect of Section 138 must take precedence over its punitive element, especially when parties resolve their dispute amicably."
2.    Section 147 Overrides Section 320 CrPC:
The Court clarified that Section 147 of the NI Act, with its overriding provision, allows compounding of offences irrespective of the procedural limitations in Section 320 CrPC. It observed that this legislative intent ensures flexibility in resolving disputes arising from cheque dishonor.
3.    Guidelines in Damodar S. Prabhu:
Citing the Supreme Court's decision in Damodar S. Prabhu v. Sayed Babalal H. (2010), the Court noted that compounding can be permitted at any stage, subject to costs to deter undue delays. However, the Court waived costs in this case, considering the bona fide nature of the settlement.
4.    Inherent Jurisdiction of the High Court:
The Court reiterated its inherent powers under Section 401 CrPC to annul convictions in light of settlements. Justice Ahmed remarked:
"The High Court’s inherent jurisdiction is vital to secure the ends of justice and prevent abuse of judicial processes."
Based on the joint compromise memo and the principles of law under Section 138 and 147 of the NI Act, the Court disposed of the revision petition.
1.    The conviction and sentence passed by the trial and appellate courts were annulled.
2.    The petitioner was acquitted on account of compounding of the offence.
3.    The Court directed its order to be communicated to the trial court for necessary action.
This judgment reinforces the compensatory nature of cheque dishonor cases under the NI Act and underscores the permissibility of compounding at any stage of the proceedings. It highlights the High Court's role in facilitating amicable settlements to avoid prolonged litigation and unnecessary incarceration.

Date of Decision: January 3, 2025