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Decriminalization Of Section 138 Of The N.I Act, 1881-A Misguided And Unnecessary Proposal

The economic havoc created by the COVID-19 is alarming in ways, more than one can even imagine. India's economic condition has been in turmoil too. In order to cope up with the changing scenario, the central government has devised various policies and thereby, has introduced several notable changes and updates across the arenas of Goods and Service Tax, Income Tax, Customs and Central Excise etc.

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 has also been introduced, by The Ministry of Finance (FinMin) to increase the threshold of 'minimum default limit' and also introduced section in order to suspend initiation of corporate insolvency resolution process for default for minimum six months and maximum one year. Therefore, it is of utmost importance that the legislative policies framed by the central government in order to tackle this crisis does not end up yielding negative results thereby, eventually acting against the very intent of that policy.

Recently, one such significant measure was also adopted by FinMin via circular dated 8th June, to cope up with the crisis along with fulfilling the objective of achieving Sabka Saath, Sabka Vikas and Sabka Vishwas by proposing the decriminalization of the offence of dishonour of cheques under Section 138 of the Negotiable Instruments Act, 1881 ('the Act') along with other thirty-eight minor economic offences.[1]

Offence under section 138 of the Act is intrinsically civil in nature, with compensation as its primary objective.[2] It has been given criminal connotation as a criminal liability is casted upon the defaulters which is punishable with imprisonment extendable to 2 years, with fine extendable to twice the amount of cheque or both,[3] so as to deter future dishonour of cheques.

But under no circumstances should it be considered equal to the offences under the provisions of Indian Penal Code or other criminal laws.[4]

Ironically, not long ago FinMin's legislative policies were focusing upon strengthening the legal mechanism punishing dishonour of cheques via insertion of sections 143A & 148 to provide redressal to the complainants and increased safeguards for payee and interim relief.[5]

Now suddenly due to the pandemic, the offences under section 138 has been classified as minor offences, merely a procedural lapse and minor non-compliance thereby completely ignoring its legislative history, intentions and objectives of the past amendments and judicial pronouncements which were made to make it more exacting and firm.

Finmin's Intention Behind The Proposal

FinMin's heart was at the right place while proposing this step because criminal penalties like imprisonment for such offences are perceived as deterrents and impacts business sentiments and investment.

Another reason was that recently in March, 2020 the Supreme Court in Makwana Mangaldas Tulsidas v State of Gujarat [or in the Makwana case], noted that over 35 lakh cases of cheque bouncing were pending and utilizing judicial time and money, and registered a suo moto case to devise a mechanism to dispose of these cases rapidly.[6] Therefore, its decriminalization would not only provide with an opportunity of doing business with ease thereby inducing investment and reviving economy during COVID-19, but will also assist in effective reduction of clogged cases so that the courts would focus on other pending cases.

Ignored Intention And Object Of The Section 138 And The Act

The intention behind introducing the section in 1988 was:
to enhance the acceptability of cheques in settlement of liabilities.[7] Later, the Supreme Court in M/s. Dalmia Cement (Bharat) Ltd. v M/s. Galaxy Traders and Agencies Ltd. and others stated that the section was inserted to impose strict liability on the defaulters, to increase the debt recovery rates and to provide the rightful claimants with an adequate relief.[8]

Further, the government while approving the 2015 amendment bill to the act also shared the same intention by stating that the section is important as it provides clarity on jurisdictional issues...would increase the credibility of the cheque as a financial instrument.[9]

The proposal seems to have blatantly ignored that the act actually does not deter business sentiments instead the existing mechanism provides ample opportunities to safeguard the interest of honest and bona fide drawers which acts as a catalyst to promote business.

Cheques are not supposed to be used as tools of deceit. The issuer of cheques proofers a solemn promise to pay,[10] it must be honoured, when it is issued, and if it is not, a notice is issued at first to provide the person with an opportunity to pay the amount and if it's still not paid, then the recourse of criminal trial and consequences are taken.[11] The offence was already compoundable at any stage without permission of the court under section 147 of the Act and the magistrate was given the power to release the accused when the complainant is compensated to the court's satisfaction.

Moreover, section 143 of the Act read with section 258 Cr.P.C. entitles the courts to close the proceeding when the defaulter repays the cheque amount with interest and cost by a specified date as assessed by the Court.[12] The act and courts[13] in actual fact focuses on protecting drawer's rights by giving them choices at various stages to pay what is due on their part to avoid prosecution, therefore proving that the section does not act as a deterrent for business and investments.

Ignored Possibility Of Alternative Measures To Reduce The Burden On The Courts

The exponentially growth in the cases filed over time under Section 138 actually shows that it is needed more than ever. It shows that the section in fact is too effective but now it's suffering for its own success. Anyhow repealing, is not the answer especially post the economic havoc created by the pandemic. The government should rather focus on how to make it more efficient to protect traders from upcoming financial frauds.

The Supreme Court on several instances have addressed the issues regarding pendency and delays, and have made attempts to rectify it, like by issuing a slew of directives to be followed by Magistrates,[14] and suggesting the usage of modern technology (artificial intelligence), continuous online proceeding and stricter compliance of summary procedure to effectively deal with and reduce the backlog of cheque dishonour cases.[15] If these are rightly implemented at the trial stage along with unfettered support and relevant response by the government, may galvanize a positive outcomes.

To address the concern of increasing burden upon the courts, there are other possible methods which can be adopted. The Delhi High Court in Dayawati v Yogesh Kumar Gosain, prominently promoted the practice of mediation to resolve cheque bounce offences.[16] Even the, recently the Supreme Court in Makwana advised to decriminalize dishonour of cheques of smaller amounts to prevent excessive flooding of petty cheque bounces cases which can also be dealt with through alternative dispute methods,[17] but the FinMin took it too seriously. Apart from this, minor crimes such as bounced cheques can be dealt with establishment of One Day Courts which would act as a safeguard against cumbersome long court proceedings and legal expenses.

In UAE the defaulters for a cheques amounting equal to or less than 200,000 AED can be sentenced to pay penalties directly by the Public Prosecutor (without referring to the courts.[18] Similar amendments can be made for cheques drawn of small amount, basically in transactions by MEMEs or by small traders where the core purpose of the suit is to recover money.

Internal surveillance committees con be set-up by banks for investigation, redressal and settlement of bulk cheques dishonours, thereby achieving speedy recovery with less inconvenience. Penalties like decreasing the defaulters CIBIL score and/or divesting them of their credit card and loan facilities can discourage cheque bouncing offences.
Probable Repercussions Of The Decriminalizing Dishonour Of Cheques

Impact Upon Businesses:

Revisiting The Issues Faced During The Bahi Khata System Of Doing Business
In pre NI Act era of 1881, businesses relied on informal accounting systems. Bahi-khata or ledger account, as traditionally known, served as the only payment records. Resulting in shutting down of businesses to shut down or sustain heavy losses owing to no method of securing timely recovery of debts. Contrasting fraud against negligence is very subjective; hence ignoring the fraudulent intentions of defaulter will hamper the functioning of market. Cheques as a mode of payment in majority financial transactions will lose their sanctity and credibility, fearing to switch back to cash payments, taking a toll on government's campaign for cashless economy.

To sustain the trust in cheques, Section 138 of NI Act was introduced as a guarantee of payment. Thereafter, a drawer became more aware before drawing a cheque. Simultaneously, a payee was sensitise about withdrawal and remedy for payment default, ensuring swift payment. Chapter XVII of NI Act, in its present form along with latest amendments, takes care of liquidity concerns as it entitles the payee to claim some cash in hand for running business operations even during the pendency of Section 138 proceedings. Businesses are not forced to shut down due to financial constraints. As an equaliser, Section 138 bars any cause of action to the payee on mere information of dishonour, whereby a drawer gets buffer time of for arranging the funds in case of any shortage.

Instant availability of funds is a pre-requisite for conduct of business. The flexibility offered by Section 138, without compromising on the guarantee of payment, is very useful for small and medium level traders who may face issues in arranging funds. The proposal nowhere disputes the legal tender of cheques as legal instruments but tends to curb the remedy.

Decriminalisation would result in subjecting the parties to outdated legal processes and, in the long term, severely impacting the prospects of ease of doing business in India. In India, cheque dishonour cases arise mostly from the business contractual relationships, with the decriminalized Section 138 legal certainty of getting justice by rightful claimant in case of contractual violation will be diluted, and they will stop accepting payment in cheques, fearing non-payment and with no remedy for the same.

Expected increase in number of frauds and losses incurred due to non-payment, can affect the economy on a macro level, pushing it in financial depression, banking industry being the most affected of such changes. It was due to severity of penalties that cheques were considered a secure mode of payment, lowering the guards of Section 138, a severe problem in recovering dues and therefore acts as a deterrent rather than promoting business.

Indirect Burden upon the Judiciary

Civil procedures in India are afflicted with delays. Businessmen have always been sceptical before opting for a civil remedy, and it is no secret. With Section 138 gone, the dishonoured cheque holders will be forced to commence proceedings against defaulter under Section 406 (Criminal breach of trust) and 420 (Cheating) of the IPC.

So technically we will be back to square one. There will be multiplicity of litigation and the number of cases will remain the same, thus the very purpose of decriminalizing will be defeated. Incentivising parties to opt for a criminal recourse for an inherently civil transaction is pointless when Section 138 aptly strikes a balance and provides an effective legal recourse.

Impact upon Advocates

The Government did not consult the statutory bodies or took recommendations from experienced litigants in the field, which was even squarely objected by the Bar Council of Delhi and the Bar Council of Maharashtra and Goa.[19] The members vehemently stated the step to decriminalize the section would not only put their careers, livelihood and survival at great stake, as majority of the litigants practice law under this field, but would also result in eroding public confidence and legal security of an individual in the judicial system.

Without the fear of sanctions the sentence foisted would merely be a paper order and will only ridicule the existing well-established system. The government should refrain from resorting to such measure which would essentially defeat the objectives of a successfully established, affect the smooth operation of commercial and trading activities, and eventually end-up affecting the economy of the country.[20]

The established importance of Section 138 in upholding the reliability and integrity of cashless financial transactions along with the fact that the judiciary frequently intervenes to further improve its application manifests that the section should not be decriminalized.

We were supposed to move forward towards a cash less economy but this step is in fact fostering us to take a step back towards a cash-based economy as traders will lose trust in one another and thus, lead to increase in black money too.

This decision might or might not improve business sentiments or unclog court processes but would for sure encourage and reduce the fear in the minds of perpetrators to defraud and cheat innocent persons and affecting honest traders, businessmen, etc. Thereby defeating the very basic purpose and object of Section 138 of the Act i.e. to uphold faith and confidence of the trading community during commercial transaction.

  1. GOI, MoF, 'Statement of Reason: Decriminalisation of Minor Offences for Improving Business Sentiment and Unclogging Court Processes' (8 June 2020) < > accessed 30 June 2020.
  2. Meters and Instruments Private Ltd. and Others v Kanchan Mehta [2018] 1 SCC 560 [7] [or 'in the Meters case'].
  3. Negotiable Instruments Act 1881, s 138.
  4. Kaushalya Devi Massand v Roopkishore Khore [2011] 4 SCC 593 [9].
  5. See Negotiable Instruments Act 1881, s 143A & s 148.
  6. MANU/SCOR/24101/2020 [4].
  7. Banking Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act 1988, Statement of Object, s 138.
  8. [2001] 6 SCC 463 [3].
  9. Press Information Bureau, Government of India, Ministry of Communications, 'Approval to introduce the Negotiable Instruments (Amendment) Bill, 2015 in Parliament' (June 2015) < > accessed 30 June 2020).
  10. Rajesh Laxmichand Udeshi v Pravin Hiralal [2013] 2 ABR 1146 [16].
  11. Indian Bank Association and others v Union of India and others [2014] 5 SCC 590 [6].
  12. Negotiable Instruments Act 1881, s 147. See also Meters (n 2) 19.
  13. C.C. Alavi Haji v Palapetty Muhammed [2007] 6 SCC 555 [17] [or 'in the Alavi Haji case].
  14. Supra note 11.
  15. Meters (n 2) 3.
  16. [2018] 1 JCC 53.
  17. Makwana (n 6) 15
  18. UAE Federal Penal Code 1987, art 401.
  19. Letter from Bar Council of Maharashtra and Goa to Ministry of Finance (17 June 2020) accessed 30 June 2020.
  20. Alavi Haji (n 13).

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