The High Court of Himachal Pradesh has clarified that a conviction under Section 138 of the Negotiable Instruments Act may be set aside when the underlying debt is fully discharged and the complainant consents to compounding, even after trial and appellate affirmation. This decision reinforces the remedial, not punitive, intent of the statute and aligns with the principle that justice must serve reconciliation where the harm is remedied.
Background & Facts
The Dispute
The petitioner, Anil Kumar, issued a cheque for Rs. 1,95,000 to the H.P. Gramin Bank as part of a loan repayment obligation. The cheque was dishonoured due to insufficient funds, prompting the bank to file a criminal complaint under Section 138 of the Negotiable Instruments Act. The trial court convicted the petitioner and sentenced him to six months’ simple imprisonment and a fine of Rs. 2,30,000. The Sessions Court affirmed this conviction on appeal.
Procedural History
- November 2022: Cheque dated 15.11.2022 dishonoured
- 2023: Complaint No. 15/3 of 2023 filed by the bank
- 27.08.2025: Trial Court convicts petitioner under Section 138 NI Act
- 21.01.2026: Sessions Court affirms conviction
- 21.01.2026: Petitioner deposits Rs. 1,62,000 with the bank as full settlement
- 30.01.2026: Bank issues No Due Certificate (NOC) confirming full discharge
- 02.02.2026: Revision petition filed before High Court seeking quashing of conviction
Relief Sought
The petitioner sought quashing of the conviction and sentence under Section 147 of the Negotiable Instruments Act, arguing that the dispute had been fully resolved through settlement and that the bank had no further claim. The bank did not oppose the request.
The Legal Issue
The central question was whether a conviction under Section 138 of the Negotiable Instruments Act can be quashed on revision after full payment and issuance of a No Due Certificate, even when the conviction has been upheld by the appellate court, and whether such compounding is permissible under Section 147.
Arguments Presented
For the Petitioner
Counsel relied on State of Rajasthan v. Bhagwan Das and K. Srinivas v. State of Andhra Pradesh to argue that Section 147 permits compounding at any stage, including after conviction, if the parties settle. The deposit of Rs. 1,62,000 and issuance of the No Due Certificate demonstrated complete satisfaction of the debt, rendering the criminal proceeding redundant. The petitioner emphasized that Section 138 is a civil wrong with criminal consequences, and justice demands closure where the harm is undone.
For the Respondent
The bank’s counsel waived formal arguments and confirmed in writing that the debt had been fully settled, the No Due Certificate had been issued, and there was no objection to quashing the conviction. The respondent did not contest the legal basis for compounding but affirmed the factual resolution.
The Court's Analysis
The Court examined the nature of Section 138 as a quasi-civil offence, noting that its primary purpose is to enforce contractual obligations and ensure commercial credibility, not to impose punishment. The Court observed that Section 147 explicitly allows compounding of offences under the Act at any stage, including after conviction, provided the complainant consents.
"The object of the Act is to ensure that cheques are honoured and commercial confidence is maintained. Once the cheque amount is fully paid and the complainant issues a No Due Certificate, the very foundation of the complaint ceases to exist."
The Court distinguished this from cases where compounding is sought to evade liability, noting that here, the payment was made voluntarily and in good faith, and the bank had no residual claim. The Court held that continuing the conviction after full settlement would serve no public interest and would be disproportionate. The condition of depositing 10% of the cheque amount with the State Legal Services Authority was imposed to ensure accountability and to contribute to legal aid, without undermining the settlement.
The Verdict
The petitioner succeeded. The High Court quashed the conviction and sentence under Section 138 of the Negotiable Instruments Act, holding that compounding is permissible even post-conviction where the debt is fully discharged and the complainant consents. The order was made conditional upon the petitioner depositing 10% of the cheque amount with the State Legal Services Authority within four weeks.
What This Means For Similar Cases
Compounding Is Permissible After Conviction
- Practitioners may now file compounding applications under Section 147 even after conviction, provided the complainant consents and payment is complete
- A No Due Certificate or written acknowledgment of full settlement is strong evidence of compounding intent
- Courts must evaluate the substance of settlement, not merely the procedural posture
Settlement Overrides Technical Conviction
- A conviction under Section 138 is not sacrosanct if the underlying civil obligation is extinguished
- Courts should not mechanically uphold convictions when the complainant’s interest is fully satisfied
- The focus must shift from punishment to resolution, consistent with the Act’s remedial purpose
Conditional Quashing Is a Valid Judicial Tool
- Courts may impose conditions (e.g., deposit to legal aid fund) to balance justice and deterrence
- Such conditions do not invalidate compounding but reinforce its public interest dimension
- Practitioners should proactively propose such conditions to increase likelihood of quashing
