The Punjab and Haryana High Court has affirmed that the primary purpose of proceedings under Section 138 of the Negotiable Instruments Act is compensatory, not punitive, and that compounding remains permissible even after conviction if a full and final settlement is reached. This ruling reinforces judicial recognition of the statute’s civil character and expands the scope for amicable resolution in cheque dishonour cases.
Background & Facts
The Dispute
The petitioner, Seema Rani, was convicted in 2018 by a Judicial Magistrate First Class, Patiala, for an offence under Section 138 of the Negotiable Instruments Act, read with Section 420 IPC, arising from the dishonour of a cheque issued to respondent no. 2. The conviction was upheld by the Additional Sessions Judge in 2021, resulting in a sentence of six months’ rigorous imprisonment, compensation equivalent to the cheque amount with 12% interest, and three months’ simple imprisonment in default.
Procedural History
- 7 November 2015: Criminal Complaint No. 2904 filed under Section 138 NI Act and Section 420 IPC
- 6 March 2018: Conviction and sentencing by Judicial Magistrate First Class
- 12 March 2018: Formal order of sentence passed
- 19 March 2018: Criminal Appeal filed before Additional Sessions Judge
- 26 November 2021: Appeal dismissed; conviction and sentence upheld
- 2022: Full and final settlement agreement executed on 18 February 2022 (Annexure P-5)
- 19 December 2023: High Court noted settlement but respondent’s counsel was absent
- 14 January 2026: Legal aid counsel appointed for respondent no. 2
- 3 February 2026: Judgment pronounced allowing revision petition
Relief Sought
The petitioner sought compounding of the offence under Section 359(6) of the Bharatiya Nagarik Suraksha Sanhita (BNSS) read with Section 147 of the NI Act, requesting acquittal and setting aside the conviction and sentence on grounds of complete settlement and payment of all dues.
The Legal Issue
The central question was whether a criminal complaint under Section 138 of the Negotiable Instruments Act can be compounded after conviction and sentencing, where the parties have fully settled their dispute and the complainant has received complete compensation.
Arguments Presented
For the Petitioner
Learned counsel argued that the settlement agreement dated 18 February 2022 was valid, binding, and fully executed, with all dues paid. Reliance was placed on Meters and Instruments Private Limited v. Kanchan Mehta to assert that Section 138 is primarily a civil wrong with a compensatory objective, and compounding at any stage - post-conviction included - is permissible in the interests of justice. The petitioner submitted that the complainant had no objection to acquittal, as confirmed by the appointed legal aid counsel.
For the Respondent
The legal aid counsel appointed for respondent no. 2 admitted the factum of settlement and confirmed that the complainant had no objection to the petitioner’s acquittal. No substantive counter-argument was advanced, as the complainant’s position was fully aligned with the petitioner’s request.
The Court's Analysis
The Court examined the legislative intent behind Section 138 of the Negotiable Instruments Act, emphasizing that its enactment was not to criminalize mere civil defaults but to ensure prompt recovery of debts through a summary procedure. The Court relied heavily on the Supreme Court’s judgment in Meters and Instruments Private Limited v. Kanchan Mehta, particularly paragraphs 18.2 and 18.3, which clarify that while compounding requires mutual consent, the court retains discretion to discharge the accused if satisfied that the complainant has been duly compensated.
"Though compounding requires consent of both parties, even in absence of such consent, the court, in the interests of justice, on being satisfied that the complainant has been duly compensated, can in its discretion close the proceedings and discharge the accused."
The Court observed that the settlement was not merely procedural but substantive: the cheque amount, along with interest, had been fully paid, and the complainant had no grievance remaining. The Court rejected the notion that conviction creates an irreversible bar to compounding, noting that the statute’s purpose is remedial, not retributive. The fact that the complainant’s counsel, even after being appointed, did not oppose acquittal further reinforced the bona fides of the settlement.
The Court also noted that the delay in filing the compounding application was not fatal, as the delay was attributable to the absence of the complainant’s counsel, not any mala fide intent by the petitioner.
The Verdict
The petitioner won. The Court held that compounding under Section 138 NI Act is permissible even after conviction, provided the dispute is fully resolved and compensation is paid in full. The conviction and sentence were set aside, and the petitioner was acquitted. All pending applications were disposed of, and bail bonds stood discharged.
What This Means For Similar Cases
Compounding Is Not Time-Barred After Conviction
- Practitioners may now file compounding applications even after conviction, provided the settlement is complete and documented
- Courts must assess the substance of settlement - not the procedural stage - when considering compounding
- Delay in filing is not fatal if attributable to procedural hurdles, not malice
Settlement Documentation Is Critical
- A written, signed settlement agreement with payment proof (bank receipts, acknowledgments) is indispensable
- Oral assurances or partial payments will not suffice; full and final discharge must be demonstrable
- Annexures to compounding applications must clearly show discharge of all liabilities
Judicial Discretion Trumps Rigid Procedure
- Courts are empowered to discharge accused even without formal consent if compensation is verified
- The burden shifts to the prosecution to show that justice would be subverted by compounding
- This ruling aligns with the Supreme Court’s view that Section 138 is a civil remedy dressed in criminal procedure
