Unlike most criminal offences, a Section 138 case is designed to be settled. The provision is express and the courts encourage it. The routes, the costs and the realistic numbers are compared in our note on cheque bounce settlement, compounding and Lok Adalat.
The provision
Section 147 of the Negotiable Instruments Act: notwithstanding anything in the Code of Criminal Procedure, every offence punishable under the Act is compoundable. There is no need for the offence to fall within a schedule, and settlement can happen at any stage, including in appeal.
Read that against the ordinary criminal law and the point becomes clearer. Under the general Code, an offence can be compounded only if it appears in the compounding table, and many require the court's permission. Section 147 sweeps that aside for every offence under the Act. The consequence of compounding is an acquittal, not a withdrawal, so the accused walks away with a judicial order rather than an understanding, and that order is what you produce if the same cheque is ever raised again.
The cost of settling late
In Damodar S. Prabhu v. Sayed Babalal H. (2010) the Supreme Court set out graded costs to discourage accused persons from dragging a case out and then settling on the courthouse steps:
| Stage of compounding | Costs payable |
|---|---|
| At the first or second hearing | No costs |
| Later before the Magistrate | 10 percent of the cheque amount |
| Before the Sessions Court or High Court | 15 percent of the cheque amount |
| Before the Supreme Court | 20 percent of the cheque amount |
Costs are ordinarily deposited with the Legal Services Authority.
Interim compensation and the deposit on appeal change the arithmetic
Two provisions decide who has the stronger hand when settlement is discussed. During the trial, Section 143A allows the Magistrate to direct the accused to pay interim compensation of up to twenty per cent of the cheque amount, though the Supreme Court has since held that power to be discretionary rather than mandatory and has required reasons to be recorded. After conviction, Section 148 allows the appellate court to require the appellant to deposit a minimum of twenty per cent of the fine or compensation awarded, as a condition of the appeal being heard. Money already deposited under either provision should be dealt with expressly in the settlement, because the parties routinely forget it and then argue about it afterwards.
The Supreme Court has since held that the cost-for-compounding directions in Damodar S. Prabhu cannot be treated as a binding precedent, and has set aside cost orders imposed mechanically on that basis. Treat the table as an indication of judicial thinking and of the risk of delay, not as a tariff the court must apply. If costs are being levied on you purely by reference to the scale, that is arguable.
Cheque bounce matters are the single largest category taken up in National Lok Adalats. There is no court fee, the settlement is recorded as an award which is deemed a decree, it is binding and not appealable, and it is executable if the accused defaults on the instalments. If both sides are willing, this is faster and cheaper than compounding through the regular court.
How to document a settlement properly
- Record the full amount, the instalment schedule, and the mode of payment.
- Include a default clause: what happens if an instalment is missed, and whether the complainant may revive the complaint or execute the award.
- Record what happens to the original cheque and any security.
- File a joint memo before the court and obtain an order compounding the offence and acquitting the accused. Do not simply take the money and stop attending.
Two more clauses that save arguments later. Record the mode of payment as a traceable bank transfer with the account details set out, so that receipt is never a question of oral evidence; and record that the complainant will issue a written acknowledgement for each instalment. Then decide, and write down, whether the offence stands compounded on the first instalment or only on the last, because the two produce very different consequences on a default and the memo is frequently silent on it.
On a default, the route depends on where the settlement was recorded. A settlement recorded by the Magistrate, with the case kept pending, allows the complaint to be revived and the trial to resume. A Lok Adalat award is not revived; it is executed, as a decree, in the appropriate civil court. Choose deliberately, because a complainant who wants criminal pressure preserved should not take a Lok Adalat award, and one who wants a clean enforceable money order should.
Where the settlement is reached after conviction, the High Court can also be approached to quash the proceedings, applying the reasoning in Gian Singh.
A last practical point on timing, and it is the reason this answer sits where it does. Compounding is cheapest and simplest at the very first hearing, before evidence, before interim compensation and before the graded costs bite. Every step after that adds cost on both sides: the complainant spends on evidence he will not need, the accused spends on a defence he will abandon, and the court's time is consumed on a matter that was always going to settle. If the money is going to be paid, pay it at the outset. Our guide to the Section 138 procedure sets out where in the sequence each of those costs falls, so you can see what a delayed settlement is actually costing.