Contributed By – Krishnkant Sharma ( BBA.LLB )
Introduction
Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) was introduced with the legislative intent of enhancing the credibility of negotiable instruments and ensuring confidence in commercial transactions. Over the years, cheque dishonour litigation has become one of the most frequently invoked remedies in criminal courts across India. Given the sheer volume of cases under Section 138, courts have consistently encouraged settlement and compounding as an effective mechanism to reduce pendency and promote early resolution.
In practice, a large number of Section 138 proceedings culminate in settlements, often structured through written settlement deeds providing for payment in installments. However, complications arise when an accused, after entering into a settlement, defaults in complying with the agreed terms. One recurring question that surfaces in such situations is whether the accused can seek a refund of the amount already paid pursuant to the settlement if the complainant chooses to revive or continue the prosecution.
This article examines the legal position governing settlements under Section 138, the consequences of breach of settlement terms, and the untenability of refund claims raised by defaulting accused persons. It further analyses the judicial approach adopted by courts while balancing settlement incentives with the deterrent purpose of the statute.
Nature and Scope of Liability under Section 138 NI Act
Proceedings under Section 138 are criminal in nature, although they arise out of a civil transaction. The offence is complete when the statutory ingredients are satisfied, namely:
(i) drawing of a cheque for discharge of a legally enforceable debt or liability,
(ii) dishonour of the cheque,
(iii) issuance of a statutory demand notice, and
(iv) failure of the drawer to make payment within the prescribed period.
Once these elements are established, criminal liability attaches to the drawer of the cheque. Importantly, the liability under Section 138 is not merely compensatory but punitive as well, thereby distinguishing it from a purely civil recovery mechanism. The payment of money by the accused, whether before or during trial, does not automatically efface the offence unless the matter is lawfully compounded.
Settlement and Compounding under Section 138
Section 138 offences are compoundable by virtue of Section 147 of the NI Act, which gives overriding effect to compounding notwithstanding anything contained in the Code of Criminal Procedure, 1973. Compounding effectively results in an acquittal of the accused and brings finality to the criminal proceedings.
Settlements in Section 138 matters typically take place at various stages — before issuance of summons, during trial, or even at the appellate stage. Courts actively encourage settlements, particularly in instalment-based arrangements, to facilitate amicable resolution while safeguarding the complainant’s financial interests.
However, it is crucial to note that compounding is not automatic upon partial payment. Compounding is contingent upon full compliance with the settlement terms and judicial approval. Until the court records compounding and disposes of the case accordingly, the criminal proceedings technically continue to subsist.
Instalment-Based Settlements and Their Legal Character
Installment-based settlements are contractual arrangements entered into between the complainant and the accused, usually recorded either through a joint application or a settlement deed placed before the court. These arrangements are conditional in nature — the benefit of compounding accrues to the accused only upon full and timely payment as agreed.
Payments made pursuant to such settlements are not deposits, advances, or security amounts. Rather, they are voluntary payments made towards discharge of the underlying legally enforceable debt which formed the basis of the cheque dishonour prosecution.
A settlement in a Section 138 case does not suspend the offence; it merely holds the proceedings in abeyance subject to performance of the agreed terms. Any breach of the settlement conditions revives the complainant’s right to continue with the prosecution.
Breach of Settlement: Legal Consequences
When an accused defaults in paying instalments as per the settlement, courts have consistently held that the accused forfeits the benefit of settlement and compounding. In such circumstances, the complainant is entitled to seek revival or continuation of the criminal proceedings from the stage at which they were halted.
The critical issue that arises at this juncture is whether the accused can demand refund of the amount already paid, on the ground that the settlement has failed and trial is being resumed.
The settled legal position is that no such right of refund exists.
Refund vs Adjustment: The Correct Legal Position
The claim for refund raised by defaulting accused persons is fundamentally misconceived. Amounts paid pursuant to a settlement in a Section 138 case are payments made towards satisfaction of an existing liability. They do not become refundable merely because the accused later fails to honour the remaining settlement obligations.
Courts have consistently adopted the approach that any amount paid under a breached settlement must be adjusted against the final liability, whether in terms of compensation or fine, but cannot be ordered to be refunded to the accused.
Permitting refund would defeat the object of Section 138 and encourage strategic defaults, enabling accused persons to delay proceedings, extract time concessions, and then seek to restore the status quo ante.
Judicial Position on Breach of Settlement
Damodar S. Prabhu v. Sayed Babalal H. (2010) 5 SCC 663
In this landmark judgment, the Supreme Court emphasised the importance of compounding in Section 138 cases while simultaneously cautioning against misuse of settlement mechanisms. The Court observed that the benefit of compounding is conditional and equitable in nature, and an accused who breaches settlement terms cannot seek discretionary relief from the court.
Although the case primarily dealt with graded costs for delayed compounding, the underlying principle clearly indicates that an accused cannot claim equitable relief after failing to honour settlement obligations.
Consistent High Court View
Various High Courts have reiterated that payments made under a settlement deed in a Section 138 prosecution are voluntary and towards discharge of liability. Breach of settlement does not entitle the accused to restitution or refund. Instead, courts have directed that such amounts be adjusted while determining compensation under Section 357 CrPC or while imposing fine upon conviction.
Inapplicability of Restitution under Contract Law
Accused persons often attempt to invoke Section 65 of the Indian Contract Act, 1872, which deals with restitution when an agreement is discovered to be void or becomes void. This argument has been uniformly rejected by courts.
A settlement deed in a Section 138 case does not become void merely because it is breached. Breach results in enforcement consequences, not restitutionary relief. Furthermore, criminal proceedings under Section 138 are governed by statutory provisions and public policy considerations, which override contractual restitution principles.
Payments made in the context of criminal liability cannot be equated with benefits received under a void civil contract.
Procedural Approach Adopted by Courts
Upon breach of settlement, courts generally adopt the following approach:
- Permit revival or continuation of the criminal proceedings.
- Record the default committed by the accused.
- Adjust the amount already paid against the total liability.
- Proceed with trial or pass appropriate orders depending on the stage of the case.
Courts do not entertain applications seeking refund of settlement amounts, as such claims lack legal foundation and undermine the deterrent purpose of the statute.
Policy Considerations and Practical Implications
The strict approach adopted by courts serves important policy objectives. Allowing refunds would encourage accused persons to use settlement as a dilatory tactic, making token payments to secure adjournments and later withdrawing from the settlement without consequences.
The current judicial stance strikes a balance between encouraging settlements and preventing abuse of the process. It ensures that while genuine accused persons are incentivised to settle, those acting in bad faith are not rewarded for non-compliance.
Conclusion
Settlements in Section 138 NI Act cases play a vital role in reducing litigation backlog and promoting consensual dispute resolution. However, such settlements are conditional arrangements, and the benefit of compounding accrues only upon full compliance with the agreed terms.
Where an accused breaches a settlement by defaulting on instalment payments, the complainant is legally entitled to continue the prosecution. Amounts already paid pursuant to the settlement cannot be claimed back by the accused and are liable only to be adjusted against the final liability.
The judicial approach consistently favours adjustment over restitution, thereby preserving the sanctity of settlements while upholding the deterrent and compensatory objectives of Section 138. This position reinforces the principle that settlement is a privilege contingent upon compliance, not a shield against accountability.