India: Section 138 Of The NI Act: Balancing The Civil & Criminal Intents

Last Updated: 21 November 2017
Article by Sachin Gupta and Karan Kanwal

The object of introducing Section 138 in the Negotiable Instruments Act, 1881 (hereinafter referred to as "NI Act") is to enhance the acceptability of cheques in the settlement of liabilities. The drawer of cheque is made liable to prosecution on dishonor of cheque with safeguards to prevent harassment to honest cheque bearers. The object of the provision is to facilitate smooth functioning of any transaction between the drawer and the bearer. The provision proves out to be very helpful and indeed necessary as there were several cases of frauds and it was high time that people were made to realize the seriousness of issuing a cheque as a financial instrument. Dishonor of cheque not only causes incalculable loss, injury and inconvenience to the payee but also brings a huge setback to the credibility of business transactions involved therein.

A Division Bench of the Hon'ble Delhi High Court (hereinafter referred to as the "HC") in its recent judgment delivered on October 17, 2017, in a matter titled as "Dayawati vs. Yogesh Kumar Gosain", passed in a Criminal Reference No. 1 of 2016, has laid down the law relating to the legal permissibility of referring a complaint case under Section 138 of NI Act for amicable settlement through mediation, procedure to be followed upon settlement and the legal implications of breach of the mediation settlement. The HC has held that it is legal to refer a criminal compoundable case as one under Section 138 of the NI Act to mediation.

Reference to HC:

A Metropolitan Magistrate of the Ld. Tis Hazari Court (hereinafter referred to as the "MM") while hearing a Complaint Case Nos. 519662/64 of 2016 under Section 138 of the NI Act referred the following questions for the consideration of the HC:

  1. What is the legality of referral of a criminal compoundable case (such as one under Section 138 of NI Act) to mediation?
  1. Can the Mediation and Conciliation Rules, 2004 formulated in exercise of powers under the CPC, be imported and applied in criminal cases?  If not, how to fill the legal vacuum?  Is there a need for separate rules framed in this regard [possibly u/s 477 of the Code of Criminal Procedure (hereinafter referred as "CrPC")]?
  1. In cases where the dispute has already been referred to mediation – what is the procedure to be followed thereafter? Is the matter to be disposed of taking the very mediated settlement agreement to be evidence of compounding of the case and dispose of the case, or the same is to be kept pending, awaiting compliance thereof (for example, when the payments are spread over a long period of time, as is usually the case in such settlement agreements)?
  1. If the settlement in Mediation is not complied with – is the court required to proceed with the case for a trial on merits, or hold such a settlement agreement to be executable as a decree?
  1. If the Mediated Settlement Agreement, by itself, is taken to be tantamount to a decree, then, how the same is to be executed? Is the complainant to be relegated to file an application for execution in a civil court? If yes, what should be the appropriate orders with respect to the criminal complaint case at hand? What would be the effect of such a mediated settlement vis-ŕ-vis the complaint case?

Factual Matrix

Smt. Dayawati (hereinafter referred to as the "Complainant") filed a complaint under Section 138 of the NI Act, complaining that Shri Yogesh Kumar Gosain (hereinafter referred as the "Respondent") had a liability of INR 55,99,600/- towards her as on 7th April, 2013 as recorded in a regular ledger account for supply of fire-fighting goods and equipment to the Respondent on different dates and different quantities. In part discharge of this liability, the Respondent was stated to have issued two account payee cheques in favour of the Complainant of INR 11,00,000/-  and INR 16,00,000/-.  Unfortunately, these two cheques were dishonored by the Respondent's bank on presentation on account of "insufficiency of funds".

As a result, the Complainant was compelled to serve a legal notice of demand on the Respondent which, when went unheeded, led to the filing of two complaint cases under Section 138 of the NI Act. In these proceedings, both parties had expressed the intention to amicably settle their disputes. Consequently, the matter was referred for mediation to the Delhi High Court Mediation and Conciliation Centre (hereinafter referred to as "DHCMCC"). After negotiations at the DHCMCC, the parties settled their disputes under a Common Settlement Agreement under which the accused agreed to pay a total sum of INR 55,54,600/- to the Complainant as full and final settlement amount in installments with regard to which a mutually agreed payment schedule was drawn up.

Unfortunately, the Respondent failed to comply with the terms of the settlement and argued that the Settlement Agreement was not binding contending primarily, for the first time, that the settlement amount was exorbitant and onerous pointing out that the complaints were filed with regard to two cheques which were for a cumulative amount of INR 27,00,000/- while the settlement amount was of INR 55,54,600/- and this by itself was evidence that the agreement was unfair, arbitrary and not binding on the accused. Hence, the MM raised a reference under Section 395 of the Code of Criminal Procedure (hereinafter referred to as the "CrPC") to HC.

Compounding of Offence under the CrPC as well as under NI Act:

The CrPC as well as the NI Act have provisions only for compounding of offences. However, no procedure regarding the manner in which a settlement agreement is required to be placed or considered by the court has been provided. The Court observed that so far as the offence/proceedings under Section 138 of the NI Act are concerned, the Legislature has provided Section 147 which specifically stipulates that "every offence punishable under this Act shall be compoundable".

It is important to note that Section 147 of the NI Act contains a non-obstante provision and is applicable notwithstanding anything contained in the CrPC. Therefore, irrespective of and apart from the offences stipulated under Section 320 of the CrPC, a reference can usefully be made to certain pronouncements under the Code of Civil Procedure (hereinafter referred to as "CPC"), wherein the Legislature has provided Rule 3 of Order XXIII, which specifically provides for "Compromise of suits". The Legislature has prescribed that if it is "proved to the satisfaction of the court" that a suit has been adjusted wholly or in part by any "lawful agreement or compromise in writing and signed by the parties", the court shall order such agreement or compromise to be recorded and shall pass a decree in accordance thereof, so far as it relates to the parties in the suit. The HC observed that while the CPC would have no application to the proceedings which are guided by the CrPC, however, given the legislative vacuum, there appears to be no reason as to why the principles which apply to consideration of a settlement under Order XXIII Rule 3 of the CPC cannot be applied for consideration of a settlement which is the subject matter of consideration by a court under Section 320 of the CrPC (Compounding of an offence) or Section 147 of the NI Act (Offences to be compoundable).

 

The reference made by the MM was answered by the HC as under;

  1. It is legal to refer a criminal compoundable case as one under Section 138 of the NI Act to mediation.
  1. The Delhi Mediation and Conciliation Rules, 2004 issued in exercise of the rule making power under Part 10 and Clause (d) of sub-section (ii) of Section 89 as well as all other powers enabling the High Court of Delhi to make such rules, applies to mediation arising out of civil as well as criminal cases.
  1. In the context of reference of the parties, in a case arising under Section 138 of the NI Act, to mediation is concerned, the following procedure is required to be followed:
  1. When the respondent first enters appearance in a complaint under Section 138 of the NI Act, before proceeding further with the case, the Magistrate may proceed to record admission and denial of documents in accordance with Section 294 of the CrPC, and if satisfied, at any stage before the complaint is taken up for hearing, there exist elements of settlement, the magistrate shall inquire from the parties if they are open to exploring possibility of an amicable resolution of the disputes.
  2. If the parties are so inclined, they should be informed by the court of the various mechanisms available to them by which they can arrive at such settlement including out of court settlement; referral to Lok Adalat under the Legal Services Authorities Act, 1987; referral to the court annexed mediation center; as well as conciliation under the Arbitration and Conciliation Act, 1996.
  3. Once the parties have chosen the appropriate mechanism which they would be willing to use to resolve their disputes, the court should refer the parties to such forum while stipulating the prescribed time period, within which the matter should be negotiated (ideally a period of six weeks) and the next date of hearing when the case should be again placed before the concerned court to enable it to monitor the progress and outcome of such negotiations.
  4. In the event that the parties seek reference to mediation, the court should list the matter before the concerned mediation center/mediator on a fixed date directing the presence of the parties/authorized representatives before the mediator on the said date.
  5. If referred to mediation, the courts, as well as the mediators, should encourage parties to resolve their overall disputes, not confined to the case in which the reference is made or the subject matter of the criminal complaint which relates only to dishonoring of a particular cheque.
  6. The parties should endeavor to interact/discuss their individual resolutions/proposals with each other as well and facilitate as many interactions necessary for efficient resolution within the period granted by the court. The parties shall be directed to appear before the mediator in a time bound manner keeping in view the time period fixed by the magistrate.
  7. In the event that all parties seek extension of time beyond the initial six week period, the magistrate may, after considering the progress of the mediation proceedings, in the interest of justice, grant extension of time to the parties for facilitating the settlement.
  8. If a settlement is reached during the mediation, the settlement agreement which is drawn-up must incorporate;
  1. a clear stipulation as to the amount which is agreed to be paid by the party;
  2. a clear and simple mechanism/method of payment and the manner and mode of payment;
  3. undertakings of all parties to abide and be bound by the terms of the settlement must be contained in the agreement to ensure that the parties comply with the terms agreed upon;
  4. a clear stipulation, if agreed upon, of the penalty which would ensure to the party if a default of the agreed terms is committed in addition to the consequences of the breach of the terms of the settlement;
  5. an unequivocal declaration that both parties have executed the agreement after understanding the terms of the settlement agreement as well as of the consequences of its breach;
  6. a stipulation regarding the voluntariness of the settlement and declaration that the executors of the settlement agreement were executing and signing the same without any kind of force, pressure and undue influence.
  1. The mediator should forward a carefully executed settlement agreement duly signed by both parties along with his report to the court on the date fixed, when the parties or their authorized representatives would appear before the court.
  2. The magistrate would adopt a procedure akin to that followed by the civil court under Order XXIII of the CPC.
  3. The magistrate should record a statement on oath of the parties affirming the terms of the settlement; that it was entered into voluntarily, of the free will of the parties, after fully understanding the contents and implications thereof, affirming the contents of the agreement placed before the court; confirming their signatures thereon. A clear undertaking to abide by the terms of the settlement should also be recorded as a matter of abundant caution.
  4. A statement to the above effect may be obtained on affidavit. However, the magistrate must record a statement of the parties proving the affidavit and the settlement agreement on court record.
  5. The magistrate should independently apply his judicial mind and satisfy himself that the settlement agreement is genuine, equitable, lawful, not opposed to public policy, voluntary and that there is no legal impediment in accepting the same.
  6. Pursuant to recording of the statement of the parties, the magistrate should specifically accept the statement of the parties as well as their undertakings and hold them bound by the terms of the settlement terms entered into by and between them. This order should clearly stipulate that in the event of default by either party, the amount agreed to be paid in the settlement agreement will be recoverable in terms of Section 421 read with Section 421 of the Cr.P.C.
  7. Upon receiving a request from the complainant, that on account of the compromise vide the settlement agreement, it is withdrawing himself from prosecution, the matter has to be compounded. Such prayer of the complainant has to be accepted in keeping with the scheme of Section 147 of the NI Act. At this point, the trial court should discharge/acquit the accused person, depending on the stage of the case. This procedure should be followed even where the settlement terms require implementation of the terms and payment over a period of time.
  8. In the event that after various rounds of mediation, the parties conclude that the matter cannot be amicably resolved or settled, information to this effect should be placed before the magistrate who should proceed in that complaint on merits, as per the procedure prescribed by law.
  9. The magistrate should ensure strict compliance with the guidelines and principles laid down by the Supreme Court in the pronouncement reported at (2010) 5 SCC 663, Damodar S. Prabhu v. Sayed Babalal H and so far as the settlement at the later stage is concerned in (2014) 10 SCC 690 Madhya Pradesh State Legal Services Authority v. Prateek Jain.
  1. In case the mediation settlement is accepted by the court, the following procedure is required to be followed:
  1. In the event of default or non-compliance or breach of the settlement agreement by the accused person, the magistrate would pass an order under Section 431 read with Section 421 of the Cr.P.C. to recover the amount agreed to be paid by the accused in the same manner as a fine would be recovered.
  2. Additionally, for breach of the undertaking given to the magistrate/court, the court would take appropriate action permissible in law to enforce compliance with the undertaking as well as the orders of the court based thereon, including proceeding under Section 2(b) of the Contempt of Courts Act, 1971 for violation thereof.
  1. The settlement reached in mediation arising out of a criminal case does not tantamount to a decree by a civil court and cannot be executed in a civil court.

In a Nut Shell

The HC stated that proceedings under Section 138 of the NI Act have a special character. They arise from a civil dispute relating to dishonoring to a cheque but may result in a criminal consequence. Even though the statute is punitive in nature, however, its spirit, intent and object is to provide compensation and ensure restitution as well which aspects must receive priority over punishment.

The HC while referring to a catena of judgments came to the conclusion that there is no legal prohibition upon a court, seized of a complaint under NI Act, to encourage dispute resolution by recourse to the alternate dispute resolution methods including mediation. The HC further stated that Mediation and Conciliation Rules, 2004 would guide the process to be followed even in references to mediation arising under Section 138 of the N.I. Act.

However, the HC judgment is per incuriam to the judgment passed by the Hon'ble Supreme Court (hereinafter referred to as "SC") on October 5, 2017 in a case titled as "M/s Meters and Instruments Private Limited vs. Kanchan Mehta", passed in Criminal Appeal No. 1731 of 2017, wherein the SC held that where the cheque amount with interest and cost as assessed by the Court is paid by a specified date, the Court is entitled to close the proceedings in exercise of its powers under Section 143 of the NI Act read with Section 258 of CrPC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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