Section 138 NI Act: Complaint Cannot Be Proceeded With Once The Accused And Complainant Enter Into A Settlement Agreement: Supreme Court

The Supreme Court observed that a complaint under Section 138 of Negotiable Instruments Act cannot be proceeded with once the accused and the complainant enter into a settlement agreement.

The bench headed by Justice DY Chandrachud observed 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.

A fresh cause of action accrues to the complainant under the terms of the settlement deed, the bench also comprising Justices Vikram Nath and BV Nagarathna observed.

In this case, during the pendency of complaints filed under Section 138 NI Act, the complainant and accused entered into a deed of compromise. The cheques issued in pursuance of the deed of compromise were dishonoured, and therefore a second complaint was instituted under Section 138 of the NI Act. In a petition filed by the accused, the second complaint was quashed by the High Court.

The issue raised before the Apex Court was whether parallel prosecutions arising from a single transaction under Section 138 of the NI Act can be sustained. In other words, 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?

The court made the following observations to hold that the original complaint must be quashed and parties must proceed with the remedies available in law under the settlement agreement

The settlement agreement subsumes the original complaint.

38. 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 the 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 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. 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.

 A contrary interpretation would discourage settlement of matters

39. 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 problem noted in multiple judgements of this Court cited above. Most importantly, 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. Such an interpretation would discourage settlement of matters since they do not have any effect on the status quo, and in fact increase the protracted litigation before the court

A complainant cannot pursue two parallel prosecutions for the same underlying transaction

40. Thus, in our view, 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

Liability arising from the settlement agreement

46 Once a settlement agreement has been entered into between the parties, the parties are bound by the terms of the agreement and any violation of the same may result in consequential action in civil and criminal law.

Regarding the second complaint, the court observed that the determination of whether a cheque pursuant to a settlement agreement arises out of a legal liability would be dependent on various factors, such as the underlying settlement agreement, the nature of the original transaction and whether an adjudication on the finding of liability was arrived at in the original complaint, the defence raised by the accused, etc.

"The Single Judge was in error in proceeding to quash the criminal complaint on a priori reasoning that the second set of cheques issued in pursuance of the deed of compromise were not in discharge of a liability and on that basis proceeding to quash the proceedings under Section 482 CrPC. The mere fact that a suit has been instituted before the Madras High Court challenging the deed of compromise would furnish no justification for exercising the jurisdiction under Section 482. The deed of compromise would continue to be valid until a decree of the appropriate court setting it aside is passed. The High Court, as we have explained above, has failed to notice the true meaning and import of the presumption under Section 139 which can only be displaced on the basis of evidence adduced at the trial.", the court observed.

The court also rejected the contention that in the event the second complaint is found to be non-maintainable and the compromise deed is held to be invalid, they would be left remediless and thus, the first trial should be allowed to continue.

"We do not find any merit in this submission. In the event that the compromise deed is found to be void ab initio on account of coercion, the very basis for quashing of the first complaint is removed since the settlement agreement is deemed to have never existed and hence it had no effect on the liability subsisting under the first complaint. The appellants may then approach the competent court for reinstatement of the original complaint and the trial can proceed on that basis", the bench added.

Click here to Read/Download Judgment