(Pragya Dixit, a 4th year BA LLB student at ILS Law College, Pune)
The supreme court of India, recently in the case of Gimpex Private Limited vs Manoj Goel (hereinafter ‘Gimpex case’) observed that section 138 of the Negotiable Instruments Act (hereinafter ‘the act’), prohibits a complainant from pursuing two parallel prosecutions in a subject matter arising out of the same transaction. The Supreme court while giving its verdict in this case, clarified that when a compromise is made between the parties by way of a settlement deed, dishonoring of any cheque issued in pursuance of such compromise, would result in a fresh cause of action and will attract a distinct set of liabilities under section 138 of the Negotiable Instrument Act and other civil and criminal laws. The court added that allowing parallel proceedings by any party would discard the effect of the settlement agreement and would add more to the already overburdened pile of pending litigations under the N.I. Act. Resultantly, the court ordered to quash the original complaint and asked the parties to proceed with the remedies available in law under the settlement agreement.
A mere cursory reading of this judgment is sufficient to indicate that the entire rationale of this ruling is based against the backdrop of huge pendency of complaints filed under section 138 of the Act. This article aims to understand the ruling of the SC in the Gimpex Case in the light of the problem of “Perpetuity of pendency of litigation under section 138 of the N.I. act.”
The underlying case involves a dispute arising out of High Seas Sale Agreements entered between the appellant, Gimpex Private Limited, and the respondent, Aanchal Cement Limited (ACL). The Appellant and the respondent had entered into these agreements in the year 2012. Pursuant to which, the Respondent requested the plaintiff to pay for customs duty and wharfage charges on its behalf and the appellant agreed to the same. The appellant paid an amount of Rs. 6.96 crore and Rs. 8.04 crore on the Respondent’s behalf in lieu of customs duty and wharfage charges respectively. Later, for the purposes of the complete discharge of the aforementioned liabilities, the respondent issued 18 cheques each amounting to Rs. 50 lakhs in favor of the appellant. However, when the appellant presented the cheques to the bank, all of them returned dishonored with an endorsement: “payments stopped by the drawer”/“insufficient funds.” Pursuant to which the appellant filed criminal complaints against the respondent and its directors. During the pendency of these complaints, a settlement agreement was executed by both parties. The parties therein agreed that when the payment of the entire settlement amount is completed, the appellant will withdraw all the criminal complaints and suits filed against the respondent. However, the cheques issued in furtherance of the settlement agreement were again dishonored, therefore, the appellant had to institute a fresh complaint under section 138 of the Act. The High Court in this matter disposed of the second complaint instituted by the plaintiff, stating:
- that the proceedings related to the first complaint is still pending and,
- that the second set of cheques issued in furtherance of the settlement agreement cannot be termed as being served towards the discharge of a debt/liability.
The appellant challenged this order of the High Court in the SC. The appellant argued that the only necessity for an offense to be proven under section 138 of the act is the fulfillment of all of its ingredients. Once these ingredients are fulfilled it is to be presumed that the cheques were issued in discharge of a legally enforceable debt until proven otherwise. They further argued that the act does not put any embargo on the parallel proceedings especially when both are instituted before the same court. Thus, even if the old proceedings are pending, the appellant is well within its rights to institute a second complaint.
THE SC’S RULING
While dealing with the issues underlying in this case the SC observed that the main purpose for the enactment of section 138 of the Negotiable Instrument Act is to provide protection, security, and infuse confidence in the banking system of the country rather than imposing criminal liabilities on the accused. This object of the act has been reiterated by the court in various cases time and again. For instance, in the case of Damodar S Prabhu v. Sayed Babalal, it was held that the offense under section 138 of the act is limited to two private parties involved in a commercial transaction, and the objective behind imposing a criminal sanction in such matters is only to ensure the credibility of transactions related to negotiable instruments.
Thus, it is clear that the primary objective of this section is to ensure compensation to the complainant, hence the prospect of compromise between the parties during the pendency of the complaint and sometimes even after the accused is convicted, is highly appreciated and encouraged by the courts.
The court further went on to discuss that once the parties execute a settlement agreement unanimously in pursuance of a complaint filed under section 138 of the Act, the complaint which was initially filed, stands to be subsumed by the settlement agreement. Court held that pursuing under the original/previous complaint would be considered as non -compliance of contractual provisions agreed by the parties.
It was further observed that in a scenario where such parallel proceedings are allowed, there would be a situation of chaos. In such circumstances, the accused will undergo trial under two different complaints arising out of one liability and would face criminal liability for the violation of the dishonoring of both the first and second set of cheques issued. Furthermore, it will also render the settlement agreement worthless and would discourage parties to enter into such compromises. It would also lead towards an increment in unnecessary litigation and will ultimately have an adverse impact on the already overburdened judicial system.
The court while allowing the second complaint under the act held that once the settlement agreement is executed and any cheque issued in pursuance of this agreement is dishonored, a fresh cause of action will arise. The court held that execution of the settlement agreement creates new sets of rights and obligations for the parties with respect to the debt, and the aggrieved party has all rights to initiate new proceedings.
This judgment, thus, clarifies position of parallel proceedings, under the Negotiable Instruments Act. Furthermore, it also deals with the efficacy of a settlement agreement under the act and states that the compromise made by way of a settlement agreement under section 138 directly lies in line with the object of this provision. Thereby affirming the supremacy of contractual principles, to ease the underlying procedure.
COURTS’ COGNIZANCE OF PROBLEM OF PENDENCY
Amongst all the other observations, this judgment again is a stark reminder of the exorbitant amount of pending litigation in the Indian Judiciary. As mentioned in 213th Law Commission Report, as of October 2008 there were over 38 lakh pending cheque bounce cases in various courts in India and on 31.12.2019, the number of pending criminal litigations in various Indian courts stood 2.31 crores, out of which 35.16 lakh cases were solely pertaining to section 138 of the Negotiable Instruments Act.
The ruling in the current case comes in the aftermath of the judgement of Supreme Court of India in the case of Re. Expeditious trial of cases under section 138 of the N.I. Act 1881, wherein it was observed that “it is the pendency of court proceedings under section 138 of the N.I. Act and the multiplicity of complaints in which a cause of action arising from one transaction is litigated that has dampened the ease of doing business in India, impacted business sentiments and hindered investments from investors.” In this case, the constitution bench implored the magistrate courts to favor summary trials, direct the parties involved in pending cases to settle disputes through mechanisms like mediation etc., to better deal with the issue of pendency of cheque bounce cases. The bench also recommended the government to make suitable changes in the Act to inculcate the provisions of “one trial against a person for multiple offenses under Section 138 of the Act committed within a period of 12 months.” It was also proposed that the parliament can create separate courts for the expeditious disposal of such matters, as Article 247 of the constitution of India gives parliament enough power to establish additional courts for the efficient administration of laws made by it or of any existing laws with respect to a matter enumerated in the Union List.
The proposal for the decriminalization of section 138 has already been put in place which will definitely provide a breather to this problem, however, there still would remain an enormous scope for the development of various remedies. Such remedies might include:
1) Making it mandatory for parties to resolve such disputes using various ADR mechanisms.
2) Giving banks power to ban repeated offenders from issuing further cheques. Currently, RBI only allows for a ban in cases where a cheque valuing more than 1 crore or more is drawn on an account and is dishonored on four occasions in one financial year. However, if RBI reduces this amount, a significant decline can be seen in pending litigation under this section.
3) Encompassing banks with sufficient power to freeze the accounts of repeat offenders until there is sufficient money in their account to fulfill the debt of the holder of the instrument.
In the Re. Expeditious Trial case, the Supreme Court observed that with each passing year, there is a rampant increase in the number of complaints filed under section 138. This coupled with the multiplicity of proceedings, delay in the disposal, and lack of trust in alternative remedies is creating an adverse impact on the overall Indian Judiciary. The pendency of cases has an overarching effect on the justice delivery system. Resultantly the trust of people in the recovery mechanism provided under section 138 of the act is fading and the only way out of this obstacle is recognizing, expediting, and revamping the process of cheque bounce cases in India.