Supreme Court's Stance on Compounding Offences under NI Act 1881

Dishonouring cheques is considered a regulatory offence; the Supreme Court advocates for courts to promote the compounding of offences under the Negotiable Instruments Act.

July 22, 2024

The Supreme Court reaffirmed its stance on promoting the compounding of offences under the Negotiable Instruments Act, 1881, emphasizing the priority of the compensatory aspect of remedies over the punitive aspect. The Court expressed concern over the substantial backlog of cheque dishonour cases pending before the judiciary, highlighting its impact on the judicial system. This observation was made during the hearing of a Criminal Appeal arising from a complaint under Section 138 of the Negotiable Instruments Act, 1881. Justices Sudhanshu Dhulia and Ahsanuddin Amanullah referred to precedents such as Damodar S. Prabhu v. Sayed Babalal H. (2010) 5 SCC 6631, Gimpex Private Limited v. Manoj Goel (2022) 11 SCC 7052, and Meters And Instruments Private Limited And Anr. v. Kanchan Mehta (2018) 1 SCC 560. The Court underscored that dishonour of cheques is a regulatory offence introduced to safeguard the reliability of these instruments in public interest. It stressed that courts should actively encourage the compounding of such offences under the NI Act when parties are amenable to such resolution.

Summary of the case: In 2006, Appellant No. 2 borrowed money from the respondent but failed to repay it. To settle the debt, Appellant No. 2 issued a cheque from Appellant No. 1, their partnership firm. The cheque bounced due to insufficient funds, prompting the respondent to file a complaint under Section 138 of the Negotiable Instruments Act. Initially, the trial Court convicted the appellants, sentencing each to one year of simple imprisonment. Subsequently, the Appellate Court acquitted them, but the High Court reinstated the trial Court’s conviction. The matter was then appealed to the Supreme Court. The Court underscored that the dishonour of cheques constitutes a regulatory offence introduced to uphold the reliability of these financial instruments in public interest.

The Court referred to the case of Raj Reddy Kallem v. The State of Haryana & Anr. [2024] 5 S.C.R 203, where the Supreme Court invoked its powers under Article 142 to quash a conviction under the Negotiable Instruments Act, despite the complainant’s refusal to consent to compounding. The Court noted that the accused had adequately compensated the complainant. Considering the overall circumstances and the compromise between the parties, the Court overturned the challenged judgment and allowed the appeal.

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