Report No. 213

(II) Compounding of Offence

2.11 By inserting section 147 in the Act in 2002, offence punishable under section 138 of the Act has been made compoundable and it does not provide for any other or further qualification or embargo like sub-section (2) of section 320 of the Criminal Procedure Code. The parties can compound the offence as if the offence is otherwise compoundable. Thus, the offence is made straightway compoundable like the case described under sub-section (1) of section 320. No formal permission to compound the offence is required to be sought for.1

2.12 Even prior to section 147, the opinions expressed by different High Courts and also the Apex Court appear to be in favour of approving such Compounding and settlement between the parties, taking into consideration the aim and object of the provisions of the Act. If the matter in relation to which the cheque had been issued has been settled between the parties, such settlement be given effect to keeping in mind the object of introducing the relevant provisions of the Act; the court can note the same and record the settlement between the parties.2

1. Rameshabhia Somabhai Patel v. Dineshbhai Achalanand Rathi, 2005 Cr LJ 431 (Guj).

2. Employees' State Insurance Corporation v. A.P. Heavy Machinery and Engg. Ltd., 2005 Cr LJ 1080 (AP).

(c) Object Of Section 138

2.13 The object of bringing section 138 on the statute is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. It is to enhance the acceptability of cheque in settlement of liabilities by making the drawer liable for penalties in case of bouncing of cheques due to insufficient arrangements made by the drawer, with adequate safeguards to prevent harassment of honest drawers.

If the cheque is dishonoured for insufficiency of funds in the drawer's account or if it exceeds the amount arranged to be paid from that account, the drawer is to be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both.

2.14 In KSL & Industries Ltd. V. Mannalal Khandelwal, 2005 Cr LJ 1201 (Bom). the Bombay High Court observed:

"Section 138, in fact, has been introduced to prevent dishonesty on the part of the drawer of negotiable instrument to draw a cheque without sufficient funds in the account maintained by him in bank and induce the payee or holder-in-due-course to act upon it. In other words, these provisions have been introduced to give greater credibility to our trade, business, commerce and industry, which is absolutely imperative in view of the growing international trade and business. The constitutional validity of these provisions has been upheld by the Supreme Court."

2.15 The Statement of Objects and Reasons appended to the Bill which became the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002, inter alia, states:

"These provisions were incorporated with a view to encourage the culture of use of cheques and enhancing the credibility of the instrument. The existing provisions in the Negotiable Instruments Act, 1881, namely, sections 138 to 142 in Chapter XVII have been found deficient in dealing with dishonour of cheques. Not only the punishment provided in the Act has proved to be inadequate, the procedure prescribed for the Courts to deal with such matters has been found to be cumbersome. The Courts are unable to dispose of such cases expeditiously in a time bound manner in view of the procedure contained in the Act.

A large number of cases are reported to be pending under sections 138 to 142 of the Negotiable Instruments Act in various courts in the country. The proposed amendments in the Act are aimed at early disposal of cases relating to dishonour of cheques, enhancing punishment for offenders, introducing electronic image of a truncated cheque and a cheque in the electronic form as well as exempting an official nominee director from prosecution under the Negotiable Instruments Act, 1881."

2.16 The Bombay High Court in KSL & Indutries Ltd., 2005 Cr LJ 1201 (Bom). deemed it appropriate, in order to accomplish the underlying object of the Act, to pass the following directions:

(a) Experience reveals that enormous time is spent at the stage of summoning/serving the accused. The court must adopt pragmatic methods and must serve them by all possible means of service, including e-mail. The Court must ensure that the accused are not permitted to abuse the system.

(b) The Court concerned must ensure that examination-in-chief, cross-examination and re-examination of the complainant must be concluded within three months of assigning the case....

(c) Complaints must be disposed of as expeditiously as possible, and in any event, within six months from the date when the presence of the accused has been secured...1

2.17 In Goa Plast (P) Ltd. v. Chico Ursula D'Souza, JT 2003 (9) SC 451, the Supreme Court, while considering the object and the ingredients of sections 138 and 139 of the Act, observed as under:

"The object and the ingredients under the provisions, in particular, sections 138 and 139 of the Act cannot be ignored. Proper and smooth functioning of all business transactions, particularly, of cheques as instruments, primarily depends upon the integrity and honesty of the parties. In our country, in a large number of commercial transactions, it was noted that the cheques were issued even merely as a device not only to stall but even to defraud the creditors. The sanctity and credibility of issuance of cheques in commercial transactions was eroded to a large extent.

Undoubtedly, dishonour of a cheque by the bank causes incalculable loss, injury and inconvenience to the payee and the entire credibility of the business transactions within and outside the country suffers a serious setback. The Parliament, in order to restore the credibility of cheques as a trustworthy substitute for cash payment enacted the aforesaid provisions. The remedy available in a civil court is a long drawn matter and an unscrupulous drawer normally takes various pleas to defeat the genuine claim of the payee."2

1. 2005 Cr LJ 1201 (Bom) at 1208.

2. JT 2003 (9) SC 463.

(d) Problem Of Delay In Disposal Of Cases

2.18 Over 38 lac cheque bouncing cases are pending in various courts in the country. There are 5,14,433 cases under section 138 of the Negotiable Instruments Act, 1881 (cheque bouncing disputes) pending in criminal courts in Delhi at the Magisterial level as on 1st June, 2008. Similarly, in Gujarat 84,000 and in Mumbai 1,51,759 cases are pending.

As reported in a newspaper, 73,000 cases were filed under section 138 of the Negotiable Instruments Act before a court in Bangalore. Such large number of cases would take long time for their disposal under the present set-up of the courts. These disputes are not merely criminal trials but they involve the interests of commercial circles/economy of the globe.

2.19 In the age of international trade and globalization, it is even more important that people must have implicit faith in the credibility and honesty of the system. Unfortunately, sanctity and credibility of cheques in commercial transactions have been eroded to a large extent.1

1. 2005 Cr LJ 1201 (Bom).

2.20 Several central statutes including the Negotiable Instruments Act have contributed more than 50% to 60% of the litigation in the trial courts. These enactments are referable to List I or List III of the Seventh Schedule of the Constitution of India. Article 247 of the Constitution enables the Union Government to establish additional courts for better administration of laws made by Parliament or existing laws with respect to a matter enumerated in the Union List.

2.21 Mr. Justice R. C. Lahoti, ex-CJI, (on the 'Law Day' November 26, 2004) on the matter of pendency of cases quoted the following from the speech of late Dr. L. M. Singhvi, Senior Advocate and the then President, Supreme Court Bar Association:

"Increasing institution of cases, mounting arrears, accumulating congestion in courts and inevitable law's delays have given rise not to a body of scientific and rational blueprints in terms of institutional organization and procedural methods or in terms of assessments of judicial manpower requirements, but to a spate of alarm signals and dire shibboleths. If there are more and more cases in courts, that is because we have a population explosion, we have a more complex and friction-prone society, our dispute resolution and conciliation system are bereft of efficacy, we have increasingly greater awareness of rights, and perhaps because we have more injustice and more arbitrariness in our midst.

The Governments are under an obligation to provide an adequate machinery for justice, to appoint more judges and to give them better emoluments and facilities, to build more courthouses, to enact better laws, to devise better dispute resolution procedures, and to administer more effectively and equitably, rather than to blame lawyers and judges for the increase and proliferation of litigation.

Courts in India cannot apply a mechanical-statistical razorblade or wave a magic wand to wipe out the enormous pendency of arrears. Nor can the courts afford to turn a blind eye or a deaf ear to the rank injustices and incongruities of administration merely because they have already too much on their hands. If the courts begin to do that systematically, they might endanger the confidence and credibility they have come to enjoy."1

1. 2004 (10) SCALE J-22 -J-27.