Supreme Court Clarifies the Scope of Section 138 NI Act in Cases of Settlement: Gimpex Private Limited vs. Manoj Goel (2021) INSC 580 (08 October 2021)

Date of the Judgment: 08 October 2021
Citation: (2021) INSC 580
Judges: Dr. Dhananjaya Y. Chandrachud, J, Vikram Nath, J, and B.V. Nagarathna, J. The judgment was authored by Dr. Dhananjaya Y. Chandrachud, J.
Can a complainant pursue two separate criminal cases under Section 138 of the Negotiable Instruments Act, 1881, for the same debt, especially when a settlement agreement was reached and subsequent cheques issued under that agreement were also dishonored? The Supreme Court of India recently addressed this critical question, clarifying the legal position on parallel prosecutions in cheque dishonor cases. The core issue revolves around whether a settlement agreement and the issuance of new cheques for an existing debt extinguish the original liability, thus preventing multiple prosecutions.

Case Background

The case involves M/s Gimpex Private Limited (the appellant) and Manoj Goel (the respondent), along with Aanchal Cement Limited (ACL). Gimpex had a business arrangement with ACL involving High Seas Sale Agreements (HSSA). Gimpex paid customs duty and wharfage charges on behalf of ACL, which was supposed to repay the amount with interest. However, ACL failed to make payments. Subsequently, ACL issued 18 cheques totaling Rs. 9 crores to Gimpex as part payment of the outstanding liability. These cheques were dishonored.

Following the dishonor of the first set of cheques, Gimpex filed a complaint with the police and issued legal notices to ACL and its directors, including Manoj Goel, under Section 138 of the Negotiable Instruments Act, 1881. Subsequently, Gimpex filed criminal complaints regarding the dishonored cheques. During this time, one of ACL’s directors was arrested, leading to a settlement agreement between Gimpex and ACL.

Under the settlement, ACL agreed to pay a total of Rs. 10 crores, with an initial payment and the remaining amount in installments via post-dated cheques. However, these post-dated cheques were also dishonored. Consequently, Gimpex filed a second complaint under Section 138 of the NI Act. This led to the current legal battle, with the core question being whether the second complaint was valid given the prior settlement agreement and the first set of complaints.

Timeline

Course of Proceedings

The legal proceedings began with the dishonor of the initial 18 cheques, leading to the first set of complaints under Section 138 of the NI Act. Subsequently, a compromise was reached, and new cheques were issued. When these new cheques were also dishonored, a second complaint was filed under Section 138 of the NI Act.

The High Court of Judicature at Madras initially dismissed the petitions to quash the first set of complaints. However, it allowed the petition to quash the second complaint, stating that the cheques issued under the compromise were not for any liability since the original liability was still pending. The High Court also noted that the validity of the compromise itself was under challenge in a separate suit. These conflicting decisions led to appeals before the Supreme Court.

The Supreme Court granted liberty to ACL and Manoj Goel to approach the High Court to address the issue of the compromise deed and the simultaneous prosecution of two sets of cases. The High Court then dismissed the proceedings against the first complaint and quashed the second complaint. These orders of the High Court were then challenged before the Supreme Court.

Legal Framework

The core of this case revolves around Section 138 of the Negotiable Instruments Act, 1881, which deals with the dishonor of cheques. It states:

“Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence…”

The provision further stipulates conditions for the application of this section, including the presentation of the cheque within a specified period, the issuance of a demand notice, and the failure of the drawer to make the payment within 15 days of the notice. The explanation to Section 138 clarifies that “debt or other liability” means a legally enforceable debt or other liability.

The Supreme Court also considered Section 139 of the NI Act, which establishes a presumption that the holder of a cheque received it for the discharge of a debt or other liability. This presumption is rebuttable, meaning the accused can present evidence to prove otherwise.

Additionally, the Court referenced Section 39 of the Indian Contract Act, 1872, which deals with the effect of a party’s refusal to perform a contract. It allows the promisee to end the contract unless they have acquiesced to its continuation.

Arguments

Appellant (Gimpex Private Limited) Arguments:

• The offense under Section 138 of the NI Act is complete once its ingredients are fulfilled.
• Once a prosecution is launched, it must proceed to trial and cannot be quashed based on a settlement that has not been implemented due to the accused’s default.
• Whether a liability exists and whether the cheques were issued as security are matters for trial.
• The presumption under Section 139 of the NI Act requires the court to assume the cheques were issued to discharge a legally enforceable debt.
• The mere pendency of a suit challenging the deed of compromise is not a ground to quash the criminal complaint.
• There is no bar on parallel proceedings for distinct offenses involving the dishonor of cheques.

Respondent (Manoj Goel) Arguments:

• The essential issue is whether a criminal trial can proceed with both sets of cheques.
• Section 138 requires the cheque to be for the discharge of a debt or liability, and there cannot be two prosecutions for the same liability.
• The liability under the first set of cheques was replaced by the second set of cheques following the deed of compromise.
• The deed of compromise created a novated contract between the parties.
• Under Section 39 of the Indian Contract Act, the appellant could either repudiate the agreement or continue with its performance upon breach.
• The appellant repudiated the deed of compromise by not withdrawing the criminal complaints and arbitration proceedings.
• The appellant can only enforce the liability related to the first set of cheques, and thus, only the first criminal prosecution should proceed.
• The transaction was not a sale on high seas. However, this cannot be fairly agitated in proceedings under Section 482 CrPC and it will be appropriate if the issue is left open to be urged at the trial.

[TABLE] showing the sub-submissions categorized by main submissions of all sides pertaining to the issue.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether parallel prosecutions arising from a single transaction under Section 138 of the NI Act can be sustained.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

Statutes:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• K Bhaskaran v. Sankaran Vaidhyan Balan [(1999) 7 SCC 510]* : The Court relied on this case to summarize the ingredients of the offence under Section 138 of the NI Act.
• P Mohanraj and Others v. Shah Brothers Ispat Private Limited [(2021) 6 SCC 258]*: The Court used this case to explain the quasi-criminal nature of Section 138 proceedings, emphasizing their compensatory purpose.
• Meters and Instruments (P) Ltd. v. Kanchan Mehta [(2018) 1 SCC 560]*: The Court cited this case to highlight the objective of allowing the compounding of offences under Section 138 of the NI Act.
• Prakash Gupta v. SEBI [(2021) SCC Online SC 485]*: The Court analyzed this case in the context of compounding of an offense.
• Damodar S Prabhu v. Sayed Babalal [(2010) 5 SCC 663]*: The Court used this case to emphasize the compensatory aspect of the remedy under Section 138 of the NI Act and to encourage amicable resolution of disputes.
• Re: Expeditious Trial of Cases under Section 138 of the NI Act 1881 [Suo Motu Writ Petition (Crl.) No. 2 of 2020, 16 April 2021]*: The Court referred to this case to highlight the concern about the pendency of cases under Section 138 of the NI Act.
• R. Vijayan v. Baby [(2012) 1 SCC 260]*: The Court cited this case to emphasize that the punishment of the offender is secondary to the complainant’s primary concern of recovering the cheque amount.
• Lalit Kumar Sharma v. State of Uttar Pradesh [(2008) 5 SCC 638]*: The Court distinguished this case, stating that the second cheque was issued for settlement and not in discharge of debt or liability of the company, and there was already a conviction on the first cheque.
• Arun Kumar v. Anita Mishra [(2020) 16 SCC 118]*: The Court distinguished the case of Lalit Kumar Sharma (supra) and held that a subsequent cheque issued following a conviction in an earlier complaint gives rise to a fresh cause of action.
• HMT Watches Ltd. v. M.A. Abida [(2015) 11 SCC 776]*: The Court relied on this case to state that whether the cheques were given as security or not, or whether there was outstanding liability or not is a question of fact which could have been determined only by the trial court after recording evidence of the parties.
• Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd. [(2016) 10 SCC 458]*: The Court relied on this case to state that while dealing with a quashing petition, the court has ordinarily to proceed on the basis of averments in the complaint and the defence of the accused cannot be considered at this stage.
• Kumar Exports v. Sharma Carpets [(2009) 2 SCC 513]*: The Court relied on this case to interpret the provisions of Section 139 of the NI Act and observed that in a trial under Section 138 of the Act a presumption will have to be made that every negotiable instrument was made or drawn for consideration and that it was executed for discharge of debt or liability once the execution of negotiable instrument is either proved or admitted.
• Kishan Rao v. Shankargouda [(2018) 8 SCC 165]*: The Court relied on this case to note that the trial court as well as the appellate court having found that cheque contained the signatures of the accused and it was given to the appellant to present in the Bank, the presumption under Section 139 was rightly raised which was not rebutted by the accused.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to balance the compensatory aspect of Section 138 of the NI Act with the need to prevent the overburdening of the judicial system. The Court recognized that the primary purpose of Section 138 is to ensure that the complainant receives compensation, and the punitive aspect is secondary. The Court was also concerned about the multiplicity of complaints arising from the same transaction, which is a major cause of delay in the trial of cases under Section 138.

The Court emphasized that once a settlement agreement has been entered into, it subsumes the original complaint. Allowing parallel prosecutions would undermine the purpose of settlement agreements, discourage amicable resolution of disputes, and further burden the criminal justice system. The Court also highlighted the presumption under Section 139 of the NI Act, which places the burden on the accused to prove that the cheque was not issued for a legally enforceable debt or liability.

The Court also considered the principle that a settlement agreement effaces the original complaint, and any breach of the settlement agreement gives rise to a fresh cause of action. The Court was of the view that the High Court had erred in quashing the second complaint based on a priori reasoning that the second set of cheques were not in discharge of a liability. The Court was also of the opinion that the mere pendency of a suit challenging the deed of compromise would not justify the quashing of the proceedings under Section 482 of the CrPC.

[TABLE] ranked based on percentage to show the ranking of sentiment analysis of reasons given by the Supreme Court as to what weighed in the mind of the court to come to the conclusion with the various points emphasised in the reasoning portion.

“Fact:Law”: Create ratio table for showing the sentiment analysis of the Supreme Court to show the ratio of fact:law percentage that influenced the court to decide. Fact is defined as “percentage of the consideration of the factual aspects of the case” and Law is defined as “percentage of legal considerations”.

Logical Reasoning:

Decision

The Supreme Court allowed the appeal filed by Gimpex Private Limited and set aside the judgment of the High Court of Judicature at Madras. The Court held that once a settlement agreement has been entered into, the original complaint cannot be sustained. The dishonor of cheques issued under the settlement agreement gives rise to a fresh cause of action, and a fresh complaint can be filed under Section 138 of the NI Act. The Court clarified that the second complaint was valid and should proceed in accordance with the law.

Conclusion

The Supreme Court’s judgment in the case of Gimpex Private Limited vs. Manoj Goel clarifies the scope of Section 138 of the Negotiable Instruments Act in cases of settlement. The Court held that a settlement agreement subsumes the original complaint, and the dishonor of cheques issued under the settlement agreement gives rise to a fresh cause of action. This decision ensures that parties are not subjected to multiple prosecutions for the same underlying liability, and it encourages the amicable resolution of disputes. The judgment also emphasizes the compensatory aspect of Section 138 of the NI Act and the need to prevent the overburdening of the judicial system.

Key Takeaways:

• A settlement agreement subsumes the original complaint under Section 138 of the NI Act.
• Dishonor of cheques issued under a settlement agreement gives rise to a fresh cause of action.
• Parallel prosecutions for the same underlying liability are not permissible.
• The primary purpose of Section 138 is compensatory, not punitive.
• The judicial system should not be burdened with multiple complaints arising from the same transaction.