Supreme Court: In a bid to curb the worrying trend of parallel proceedings for complaints under Section 138 of the NI Act, the bench of Dr. DY Chandrachud*, Vikram Natha and BV Nagarathna, JJ has held that a complainant cannot pursue two parallel prosecutions for the same underlying transaction.
“Once a settlement agreement has been entered into by the parties, the proceedings in the original complaint cannot be sustained and a fresh cause of action accrues to the complainant under the terms of the settlement deed.”
What led to the decision?
In the case at hand, a set of cheques were dishonoured, leading to filing of the first complaint under Section 138 of the NI Act. The parties thereafter entered into a deed of compromise to settle the matter. While the first complaint was pending, the cheques issued pursuant to the compromise deed were dishonoured leading to the second complaint under Section 138 of the NI Act. Both proceedings were pending simultaneously and hence, the issue before the Supreme Court was to decide whether the complainant can be allowed to pursue both the cases or whether one of them must be quashed and the consequences resulting from such quashing.
Ingredients of the offence under Section 138
(1) drawing of the cheque,
(2) presentation of the cheque to the bank,
(3) returning the cheque unpaid by the drawee bank,
(4) giving notice in writing to the drawer of the cheque demanding payment of the cheque amount,
(5) failure of the drawer to make payment within 15 days of the receipt of the notice.
Remedies under Section 138 of the NI Act
The effect of an offence under Section 138 of the NI Act is limited to two private parties involved in a commercial transaction. However, the intent of the legislature in providing a criminal sanction for dishonour of cheques is to ensure the credibility of transactions involving negotiable instruments.
Given that the primary purpose of Section 138 of the NI Act is to ensure compensation to the complainant, the NI Act also allows for parties to enter into a compromise, both during the pendency of the complaint and even after the conviction of the accused.
Worrying trend of parallel proceedings for complaints under Section 138 of the NI Act
“The pendency of court proceedings under Section 138 of the NI Act and the multiplicity of complaints in which a cause of action arising from one transaction is litigated has dampened the ease of doing business in India, impacted business sentiments and hindered investments from investors.”
The Court noticed that the introduction of a criminal remedy has given rise to a worrying trend where cases under Section 138 of the NI Act are disproportionately burdening the criminal justice system
Hence, under the shadow of Section 138 of the NI Act, parties are encouraged to settle the dispute resulting in ultimate closure of the case rather than continuing with a protracted litigation before the court. This is beneficial for the complainant as it results in early recovery of money; alteration of the terms of the contract for higher compensation and avoidance of litigation. Equally, the accused is benefitted as it leads to avoidance of a conviction and sentence or payment of a fine. It also leads to unburdening of the judicial system, which has a huge pendency of complaints filed under Section 138 of the NI Act.
Whether once the settlement has been entered into, the complainant can be allowed to pursue the original complaint under Section 138 of the NI Act?
Holding that a complainant cannot pursue two parallel prosecutions for the same underlying transaction, the Court said that allowing the complainant to pursue parallel proceedings, one resulting from the original complaint and the second emanating from the terms of the settlement would make the settlement and issuance of fresh cheques or any other partial payment made towards the original liability meaningless.
The Court explained that a contrary interpretation, which allows for the complainant to pursue both the original complaint and the consequences arising out of the settlement agreement, would lead to contradictory results.
First, it would allow for the accused to be prosecuted and undergo trial for two different complaints, which in its essence arise out of one underlying legal liability.
Second, the accused would then face criminal liability for not just the violation of the original agreement of the transaction which had resulted in issuance of the first set of cheques, but also the cheques issued pursuant to the compromise deed.
Third, instead of reducing litigation and ensuring faster recovery of money, it would increase the burden of the criminal justice system where judicial time is being spent on adjudicating an offence which is essentially in the nature of a civil wrong affecting private parties.
A complainant enters into a settlement with open eyes and undertakes the risk of the accused failing to honour the cheques issued pursuant to the settlement, based on certain benefits that the settlement agreement postulates. The benefits may include – higher compensation, faster recovery of money, uncertainty of trial and strength of the complaint, among others.
“Once parties have voluntarily entered into such an agreement and agree to abide by the consequences of non-compliance of the settlement agreement, they cannot be allowed to reverse the effects of the agreement by pursuing both the original complaint and the subsequent complaint arising from such non-compliance. The settlement agreement subsumes the original complaint.”
The Court, hence, held that non-compliance of the terms of the settlement agreement or dishonour of cheques issued subsequent to it, would then give rise to a fresh cause of action attracting liability under Section 138 of the NI Act and other remedies under civil law and criminal law.
[Gimpex Private Limited v. Manoj Goel, 2021 SCC OnLine SC 925, decided on 08.10.2021]
For appellant: Senior Advocate V Giri and Advocate Liz Mathew
For respondent: Senior Advocate Jayant Bhushan
*Judgment by: Justice Dr. DY Chandrachud