The Supreme Court ruled that a conviction under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), cannot stand once a complainant signs a compromise deed acknowledging full settlement of the disputed amount. Justices Aravind Kumar and Sandeep Mehta allowed an appeal by Gian Chand Garg, setting aside a Punjab and Haryana High Court order dated March 27, 2025, which had rejected his application to modify a revision petition upholding his conviction for cheque dishonor.
The case stemmed from a complaint by Harpal Singh, who alleged Garg borrowed Rs. 5,00,000 and issued a cheque that was returned for insufficient funds. On April 21, 2010, the Judicial Magistrate First Class convicted Garg, sentencing him to six months’ simple imprisonment and a Rs. 1,000 fine, with a 15-day default term. This was upheld by the Additional Sessions Judge on September 14, 2010, and the High Court in revision. After the revision was dismissed, the parties reached a settlement on April 6, 2025, with Singh accepting two demand drafts of Rs. 2.5 lakhs each (dated April 4 and February 11, 2025) and three cheques of Rs. 1 lakh each (dated May 10, June 10, and July 10, 2025) as full and final settlement, as evidenced by the compromise deed and Singh’s affidavit dated April 16, 2025. The High Court, however, dismissed Garg’s modification application on April 9, 2025, citing non-maintainability.
The Supreme Court invoked Section 147 of the NI Act, which makes cheque dishonor offenses compoundable, emphasizing its civil nature despite criminal consequences. Citing M/s. Meters and Instruments Private Limited & Anr. v. Kanchan Mehta (2018) 1 SCC 560, the court noted: “This Court has noted that the object of the statute was to facilitate smooth functioning of business transactions. The provision is necessary as in many transactions’ cheques were issued merely as a device to defraud the creditors. Dishonor of cheque causes incalculable loss, injury and inconvenience to the payee and credibility of business transactions suffers a setback. At the same time, it was also noted that nature of offence under Section 138 primarily related to a civil wrong and the 2002 amendment specifically made it compoundable.”
Referencing P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258, the bench described the offense as a “Civil Sheep” in “Criminal Wolf’s Clothing,” highlighting its private nature criminalized to enhance negotiable instruments’ credibility. In M/s. Gimpex Private Limited v. Manoj Goel (2021) SCC OnLine SC 925, the court observed: “When a complainant party enters into a compromise agreement with the accused, it may be for a multitude of reasons—Higher Compensation, faster recovery of money, uncertainty of trial and strength of complaint, among others. 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. Once parties voluntarily entered into such an agreement and agree to abide by the consequence 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.”
In B.V. Seshaiah v. State of Telangana & Anr. (2023) SCC OnLine SC 96, the court held that voluntary compounding avoids prolonged litigation and courts cannot override such agreements. Noting the uncoerced settlement, the bench stated: “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.” The appeal was allowed, quashing the conviction and sentence.
Case Title: Gian Chand Garg v. Harpal Singh & Anr. [Criminal Appeal No. _ of 2025 (Arising out of SLP (Crl.) No. 8050/2025)]
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