SC Says Courts Cannot Override Agreement to Compound Offence under Section 138 NI Act

In an order dated February 1, 2023, the Supreme Court set aside the order of conviction of the appellants issued by the trial court, holding that courts cannot “impose its will” and override the agreement entered into between the parties to compound offence under section 138 of the Negotiable Instruments Act, 1881.

The appellants allegedly obtained money on the pretext of making investments and were held guilty of committing an offence under section 138 of the Negotiable Instruments Act, 1881 by the trial court. Aggrieved, the appellants filed a criminal revision case before the Telangana High Court challenging the trial court’s order of conviction. During the pendency of the matter, the parties executed a Memorandum of Understanding (MoU), and clause 8 of this memorandum expressly provided that any dispute arising between the parties would have to be amicably resolved. It further specified that if the parties are unable to resolve the matter among themselves, then it has to be decided by a sole arbitrator as per provisions of the Arbitration and Conciliation Act, 1996.

Thereafter, the second respondent failed to file a compromise petition (as per terms of the MoU) and the Telangana High Court was not apprised of the MoU executed by the parties to settle the matter among themselves. Consequently, the court dismissed the petition and upheld the order of conviction.

The judgment of the Telangana High Court is being challenged vide present appeals filed before the Supreme Court. Relying on case law, the court observed that the offence under section 138 of the Negotiable Instruments Act, 1881 relates to a civil wrong and is a compoundable offence. Further, the court opined that the parties were free to enter into a compromise or settlement since the appellants had committed a compoundable offence and they were required to resolve the matter amicably or through arbitration as per the terms of the MoU. Allowing the appeals, the court set aside the order of conviction of the appellants issued by the trial court (which was later confirmed by the Telangana High Court).