Dishonor Of Cheques Pursuant To Settlement Agreement Gives Rise To Fresh Cause Of Action Attracting Both Civil & Criminal Laws: Karnataka HC

The Karnataka High Court has reiterated that a settlement agreement subsumes the original complaint and the dishonor of cheques pursuant to a settlement agreement would then give rise to a fresh cause of action attracting both civil and criminal laws. 

In that context, the Bench of Justice M Nagaprasanna noted that, "When a complainant party enters into a compromise agreement with the accused, it may be for a multitude of reasons — higher compensation, faster recovery of money, uncertainty of trial and strength of the complaint, among others. A complainant enters into a settlement with open eyes and undertakes the risk of the accused failing to honour the cheques issued pursuant to the settlement, based on certain benefits that the settlement agreement postulates. Once parties have voluntarily entered into such an agreement and agree to abide by the consequences of non-compliance of the settlement agreement, they cannot be allowed to reverse the effects of the agreement by pursuing both the original complaint and the subsequent complaint arising from such non-compliance. The settlement agreement subsumes the original complaint. Non-compliance of the terms of the settlement agreement or dishonour of cheques issued subsequent to it, would then give rise to a fresh cause of action attracting liability under Section 138 of the NI Act and other remedies under civil law and criminal law."

On June 21, 2011, M/s Valdel Retail Private Limited entered into a sale agreement for a piece of land. Another agreement was signed on July 5, 2011, for the same purpose. On September 29, 2021, the petitioner (accused No.1) communicated the resolution of a dispute and issued cheques to the respondent (complainant). On October 13, 2021, a cheque for ₹50,00,000 was dishonored due to insufficient funds, followed by another cheque for ₹2 crores on October 20, 2021, which also bounced. This led the complainant to initiate proceedings under Section 138 of the Negotiable Instruments Act by issuing a legal notice on November 13, 2021.

During the trial, both parties agreed to settle and filed a joint memo in court. The court acquitted the petitioner and directed him to pay certain sums, reserving the right to recover the amount under Section 421 of the Cr.P.C. The petitioner agreed to pay ₹2,99,83,904 by demand draft but failed to do so. Consequently, the respondent invoked Section 421 of the Cr.P.C., leading the Magistrate to issue a fine levy warrant on January 17, 2023. On February 21, 2023, the police attempted to attach the company's assets, but the company was no longer at the listed address. The company representative then submitted a demand draft for ₹10,00,000. The respondent sought attachment of the petitioner's personal properties, leading to the current criminal petition.

The petitioner's counsel argued that the proceedings were illegal because the company was not made a party. He contended that the settlement and subsequent proceedings without the company being a party were null and void, and sought to quash the proceedings under Section 421 of the Cr.P.C.

In response, the respondent's counsel acknowledged that the company was not a party but emphasized that the case was settled, not decided on merits. He argued that the petitioner had only paid ₹10 lakhs out of the agreed ₹3 crores and that not reserving liberty under Section 421 would be unjust to the complainant. Thus, he defended the court's action of attaching the petitioner's property.

The High Court further said that, "It is rather surprising that the accused who does not get away on the merit of the matter, gets away on account of a settlement, roams free without adhering to the conditions of the settlement and when the cup of woe comes to the brim by orders of attachment, knocks at the doors of this Court projecting hyper-technical grounds of interference. It is in such cases, the criminal proceedings should be restored if the accused do not adhere to the settlement and the intention is only to dodge the issue after settlement. Since it is a petition preferred by the accused, this Court is holding its hands in making any further observations."

Accordingly, the petition was dismissed.

Cause Title: Mathikere Jayaram Shantharam vs Pramod C

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