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Decriminalizing Sec 138 Of Negotiable Instrument Act, 1881: Boom Or Bane A Socio-Legal Study

On 8th June 2020, the Ministry of Finance through the Department of Financial Services issued a notification under the Statement of Reason titled Decriminalization of minor offences for improving Business Sentiment and Unclogging Court Processes and asking suggestions from various stakeholders qua the possibility of decriminalizing the offence of cheque bounce law that is enshrined under section 138 of the Negotiable Instruments Act, 1881 (hereinafter the NI Act) among various other legislations.

The fundamental reason behind the idea to decriminalize the cheque bounce law is to bring more investment in the economy, ease the mechanism of doing business, unclogging the process of courts, and lighten the burden of the courts too all in the light of the brutal impact of Covid19 on the economy.[1]

As stated earlier that the Government, via the aforesaid notification, proposed to decriminalize various provisions of law which are strikingly different among each other. Thus, for the sake of brevity, this piece of writing revolves around the idea, rationale, viability and the plausible impact of decriminalization of cheque bounce cases only.

Brief History of the Negotiable Instruments Act; its conceptualization and theory
The Law relating to the Negotiable Instruments is not the law of one country or of one nation but it is the law of the commercial world at large, as it contains principles of equity and usages of trade of general convenience and a regulation for dealing of merchants and mariners in all the commercial countries of the globalized world. Economic globalization has brought India a significant boost and when commerce and exchange rapidly increased, the use of cheques also expanded leading to the introduction of concepts such as post-dated cheques amongst others.

The Negotiable Instruments Bill having being passed by the Council received its assent on December 9th, 1881 and the law to govern transactions through instruments was born. This act came into force on March 1st, 1882 (Act 26 of 1881) but this baby got its teeth only after 106 years when it was amended in the year 1988 and a whole chapter relating to penal provisions was inserted.

The object of inserting penal provisions in the present statue was to inculcate faith in the efficacy of banking operations and credibility in the transaction business through negotiable instruments. It was also felt necessary by the legislature that to enhance the acceptability of cheques in settlement of liabilities it was imperative to make the drawer liable for penalties in case of bouncing of cheque due to insufficient arrangements in the account of the drawer. In order to ensure promptitude and remedy against the defaulters of a Negotiable Instruments criminal remedy was introduced.

By the Banking, Public, Financial Institutions and Negotiable Instruments Law (Amendment) Act, 1988 (Act 66 of 1988), a new chapter i.e. Chapter XVII relating to the penal provisions for dishonor of a cheque was inserted. The intent of the Legislature to introduce such penal previsions in the Act was to deter dishonest drawers with the consequences of criminal trial if they were to issue cheques with the intention to defraud, along with adequate safeguards to prevent harassment of honest drawers. The scope of Section 138 NI Act has also been widened by the Hon'ble Supreme Court on various occasions by providing necessary interpretation to the section whenever required.

The objective of Parliament was to strengthen the use of cheques, distinct from other negotiable instruments, as mercantile tender and therefore it became essential for the Section 138 NI Act offence to be freed from the requirement of proving mens rea. This has been achieved by deeming the commission of an offence de hors mens rea, not only Under Section 138 but also by virtue of the succeeding two Sections. Section 139 carves out the presumption that the holder of a cheque has received it for the discharge of any liability. Section 140 clarifies that it will not be available as a defense to the drawer that he had no reason to believe, when he issued the cheque, that it would be dishonored.

The need for stringent punishment was again felt by the legislature and the punishment as prescribed under Section 138 of the Act was enhanced from one year to two years by way of the Negotiable Instruments (Amendment and Miscellaneous Act), 2002 (Act 55 of 2002).

The Supreme Court in Goa Plast (P) Ltd. Vs Chico Ursula D'Souza, Crl. Appeal 1968 of 1996 while considering the object and ingredients of section138 and 139 of the Act observed that proper and smooth functioning of all the business transactions, particularly, of cheques as instruments, primarily depends upon the integrity and honesty of parties. In our country, in a large number of commercial transactions, it was noted that the cheques were issued even merely as a device not only to stall but even to defraud the creditors. The sanctity and reliability of issuance of cheques in commercial transactions was eroded to a large extent.[2]

Logic behind the impugned notification
Covid19 has tricked not only just the Indian economy, but the entire world. In these unprecedented times, various measures were taken from time to time in order to curb its impact. The Covid19 brought the gruesome lockdowns which ultimately thrashed the economy and followed by massive lay-offs, unwarranted salary cuts, disruption of small business, worries for real estate and the high chances of delayed payments and cheque bounce cases in the near future.

On these lines, the Government of India had already increased the threshold limit of default from Rs 1 lac to Rs 1 crore stipulated under section 4 of the Insolvency Bankruptcy Code, 2016[3] followed by the decision of suspending sections 7, 9 and 10 of the Code for 6 (six) months [4].

Thereafter the aforesaid notification dated 8th June 2020 showing the intention of the Government to decriminalize the cheque bounce law as the possibility of defaults and cheque bounce cases can't be ignored.

But the mere perusal of the notification apprises us that the intention is to not to come up with an idea to combat the possible defaults but to bring more confidence in the market by easing of doing business. The impact of decriminalizing the offence of cheque bounce on the economy is itself a matter of scientific and rational debate, but the Government believes that the decriminalization will bring the following positive changes among others:
  • The chances of imprisonment in the offences that aren't always fraudulent bring hurdles in attracting investments. Therefore, the act of decriminalising the cheque bounce law will make the investors feel confident.
  • The jail term hurts business sentiment; therefore the removal of the same will create positive business culture.
  • In the light of Covid 19, the aforesaid step is a necessary measure to deal with a sluggish
  • The proposed step will reduce the burden from the shoulders of the judiciary and also bring some relief to the prisons.
  • It will also boost India's objective of achieving 'Sabka Saath, Sabka Vikas and Sabka Vishwas'.
  • Every non compliance in business doesn't attract mens rea, therefore the cheque bounce law could be decriminalized.
The reasons seem interesting and quite relevant in the light of Covid19 period. But whether the decimalizing section 138 of the NI Act can actually bring more investment, boost the confidence among business and reduce the burden of courts? Therefore in order to assess the viability of the impugned decision, it is imperative to consider the statutory mandate, rationale behind criminalizing the offence at first place, and the stand of the judiciary and other related factors.

Fundamental provision of law
The cheque bounce law is enshrined under the NI Act. It says that if the cheque gets bounced qua the legal liability then the accused person can face the imprisonment of jail upto 2 (two) years or can be compelled to pay twice of the cheque amount or both[5].

It is the imprisonment term which has triggered the entire debate. One the one hand it's often said that the cheque bounce is a civil wrong clothed with the criminal threads[6]. It means that the issue of cheque bounce falls in the realm of the civil law, however, in order to create deterrence and to make the instrument of cheque a reliable negotiable instrument, the criminal penalty is being attached to it.

Beginning of the Criminalization of section 138
Interestingly, the cheque bounce law was not always a criminal offence. It was a civil wrong. However, it is only after the 1988 amendment, the cheque bounce case got criminalized with the insertion of chapter XVII in the Negotiable Instruments Act, 1881. The logic was to create deterrence to curb ever increasing no of cheque bounce cases and make the cheque more acceptable in the commercial and business arenas.

Now after 3 (three) decades, the Government is planning to undo it for the similar results among others for which the criminalization was brought into picture. Irony is that the real issue of dilatory procedure and the long litigation battles to recover the dues are hardly been touched upon.

High Pendency
The horrendous statistics of pending cheque bounce cases is, indeed, a matter of great concern. According to the Ministry of Finance, Department of Finances,[7] there are around 1797,47,23,808 cheque bounce cases that are pending across the nation. Moreover, the Hon'ble Supreme Court in the case of Makwana Mangaldas Tulsidas vs. The State of Gujarat and Anr.[8] has highlighted the astounding figure of pending 138 cases.

The Hon'ble Apex court has observed that:
A recent study of the pending cases reflects pendency of more than 35 lakh, which constitutes more than 15 percent of the total criminal cases pending in the District Courts. Further, there is a steady increase in the docket burden.

It is submitted that the pendency of these cases is one of the biggest problems and the same needs to be addressed as earliest. Moreover, the pendency also makes the complainants to wait for many years to recover their legitimate dues.

Not to miss that the cheque bounce law is a summons case[9]; generally conducted via summary procedure[10]. It means that the normal criminal procedure that is enshrined under the Code of Criminal Procedure, 1973 doesn't apply to such cases; and the endeavor is to complete the cheque bounce cases within 6 (six) months. But the brutal statistics are mocking on the written letters of law.

Therefore, the main focus should be to expedite the said matters which will definitely bring huge relief to various stakeholders across the nation. Needless to add, the same will bring more investment, the businesses will grow and the creditors would be more confident in furnishing credit to the corporations and others.

Stand of the judiciary
As the notification, inter alia, highlights the concern of the pendency of the cases of long litigation battles. It is, therefore, imperative to study the stand of the judiciary on the issue in hand.

Time and again the Hon'ble Supreme Court of India and various high courts have emphasized on the expedition of 138 cases and the completion of the trial in the time bound manner. In the celebrated case of J.V. Baharuni and Ors. vs. State of Gujarat and Ors[11]. The Hon'ble Supreme Court had issued various guidelines and among them 2 (two) are worth to be stated down.

The courts must try to expedite the cases in a time bound manner and restore the confidence of the common man in the judiciary; and The magistrates must encourage the compounding of the offence as earliest. In 138 cases, compensatory damages must be prioritized against the punitive part of the punishment.

In Goa Plast (P) Ltd. vs. Chico Ursula D'Souza[12] the Hon'ble Supreme Court has observed that the object of the statute was to facilitate smooth functioning of the business transactions. The provision is necessary as in many transactions as the cheques were issued merely as a device to defraud the creditors. Dishonour of the cheque causes incalculable loss, injury and inconvenience to the payee and credibility of business transactions suffers a setback.

On the other occasion, the Hon'ble Supreme Court in the case of Dilip S. Dhanukar vs. Kotak Mahindra Co. Ltd. and Ors.[13] had stated that the punishment/ prosecution in 138 cases provides deterrence, but the same cannot be used as a measure of persecution. Moreover, the Hon'ble Supreme Court has taken suo moto action in the case of Makwana Mangaldas Tulsidas vs. The State of Gujarat and Anr. to explore the possibilities to make the cheque bounce cases more expeditious. The case is still pending before the Hon'ble Court and only fate can apprise us how the Hon'ble Court is going to handle such a daunting task.

Plausible harsh impacts
Every amendment brings positive and negative impacts with itself and the said notification is no exception to this axiom. The aim to decriminalise the cheque bounce law will surely put the credibility of cheque in doubt. One of the main reasons behind the large acceptance of cheque is that the payer is always under the threat of facing prosecution if the cheque fails to get cleared.

But if the deterrence gets removed by the proposed decimalization, then the credibility of cheque will surely take a new hit and the same will cause a negative impact on the economy. On the similar lines, Hon'ble Bar Council of Delhi has opposed the idea of decriminalizing section 138 of the NI Act[14].

Additionally, the possibility of imprisonment is an important factor behind the success and popularity of 138 cases. But if the accused persons have no fear of facing harsh punishment, then it will lose its grip and ultimately bring more roadblocks in the way of recovery from the accused persons. Lastly, the proposed notification doesn't touch the fundamental problem of long litigations and therefore even if such cases get decriminalized, the 138 trial cases are not guaranteed to get expeditious.

Conclusion
Surely, the government has taken this step while keeping the best interest of the market at large. But the viability and the plausible impact of the same aren't in consonance with the intention. The real problem lies in recovering the dues on a timely basis. On the one hand, criminal punishment may act as a deterrent, but on the other the criminal punishment in light of the current situation of Covid19 may seem too harsh to many stakeholders. Additionally, in the absence of mens rea the imprisonment terms seems to be not in consonance with the fundamental principles of criminal law. Therefore, the need is to maintain the balance without losing the essence of the deterrence.

But despite such commendable efforts, the decades old problem of slow and long litigation battles isn't being touched upon and therefore the same must be addressed on urgent basis because timely recovery trials will definitely fulfill the noble intentions of the government viz, the boost in the investments and ease of doing business in the country.

Keeping in mind the Government of India's sentiment of "Ease of Doing Business", the proposed move by the union government acting through the Ministry of Finance will harm the already affected trade and commerce and create a sentiment of loss of methods of recovery of money among the potential cross border investors and other foreign investments. The proposed amendment gives a feeling of anarchy in the business.

If the protective umbrella of prosecution for dishonoured cheques is taken away, future cheques may not remain any more a preferred form of payment for business and personal transactions, further breaking down analready broken economy. Thus, the move recommended by the proposed amendment may result in a classic example of good intentions gone bad. Therefore, in view of the above discussion, the element of criminal prosecution that stands formed as part of the NI Act, as ends of justice, should not be altered.

Recommendations
This proposal is infact self contradictory and unwarranted by the Government as on one hand the government has recently inserted Sections 143A & 148 to make the N I Act more effective and powerful in providing redressal to the complainants with the further objective to strengthen the use of cheques, distinguishing them from other negotiable instruments, whilst on the other hand, is attempting to take measures to decriminalize and dilute the said Act.

Some of the most infamous and burning cases in our country presently are those of financial defrauders, as they have shaken the root of the economy and destroyed the ease in extension of lines of credit and facilities to the masses at large. Penal consequences are the only effective deterrent against such crimes, which though garb themselves as white collar are part of a premeditated nefarious design.

In complete conformity, with the opposition expressed by the Bar Council of India, it is felt and feared that if such proposal is given effect, the same would inevitably encourage perpetrators to defraud and cheat innocent persons and there would be absolutely no fear in the minds of people. The fear of criminal litigation & imprisonment is one of the most vital and paramount precipitating factor for not only making timely payments of the cheques but for the judicial system as a whole. By decriminalizing such minor economic offences especially Section 138, the very purpose of enacting these Sections/Acts would be ultimately defeated.

n India though an offence under section 138 of the Act is punishable for a maximum of 2 years but seldom any defaulter is convicted or even goes to jail. This is because in almost 85 percent of such cases of dishonor of cheques, the defaulter sooner or later enters into a settlement with the complainant after buying some time to make necessary arrangement of funds and to negotiate the terms, whilst the proceedings under the NI Act are pending in Court. This is also facilitated as the Court proceedings under the NI Act in India, takes considerable time to be completed, even though the Act contemplates a strict stipulation of the proceeding to be over within a period of 6 months.

Hence many reformists firmly believe that the objective of the Legislature must be to take steps and bring about reforms for the speedy disposal of the Cheque bouncing cases, within a redrafted realistic time frame of one year time in place of the current unrealistic six month period enshrined in the present Act, instead of the current proposal to completely decriminalize the offence.

In the current situation, when restructuring of the business and the economy is paramount, decriminalizing the Negotiable Instruments Act would further lead to a situation where everybody, individual or corporate would be issuing cheques like candies, without maintaining the requisite funds or no funds at all. Rather, the need of the hour is to adopt measures such as, amending the law to provide increased penalty for subsequent defaults similar to those being imposed in the USA.

The incorporation of this feature can prove to be an effective deterrent and at least would be more effective than the present penalty. Given that the proposal at hand has stemmed from the Covid-19 pandemic, a situation though likely to last for the immediate future, but not forever, the focus of the Government and its agencies should be on interim measures for promoting the economic revival cause, such as temporary relaxations under the Act, extensions of period of statutory limitations, government aid and fiscal policies instead of proposing fundamental changes in the well established and effective judicial framework.

ABBERVIATION
  1. AIR– All India Reporter
  2. ART- Article
  3. Sc - Supreme Court
  4. SCC- Supreme Court Cases
  5. N.I Act- Negotiable Instrument Act
Table of Cases:
  1. Dilip S. Dhanukar vs. Kotak Mahindra Co. Ltd. and Ors[ MANU/ SC/ 8289/ 2007]
  2. Goa Plast (P) Ltd. vs. Chico Ursula D'Souza [AIR 2004 SC 408]
  3. J.V. Baharuni and Ors. vs. State of Gujarat and Ors[ AIR (2014) 10 SCC 494]
  4. Kaushalya Devi Massand vs. Roopkishore Khore, [ AIR 2011 SC2 566]
  5. Makwana Mangaldas Tulsidas vs. The State of Gujarat and Anr [SLP (criminal) no. 5464/ 2016.] The case is still pending before the Hon'ble Supreme Court of India
Bibliography
BOOKS:
  1. Insolvency & Bankruptcy Code (Amendment) Code Ordinance, 2020
  2. Criminal Procedure Code, 1973
WEBSITES:
  1. https://www.thehindubusinessline.com/economy/policy/financeministry-proposes-reclassification-of-selected-offences-tocompoundable-offences/article31785831.ece, last visited on 17/09/2021
  2. https://thedailyguardian.com/decriminalisation-of-cheque-bouncing-a-boon-or-bane/ last visited on 17/09/2021
  3. https://www.livelaw.in/news-updates/bar-council-of-delhi-opposes-centres-proposal-to-decriminalize-dishonour-of-cheques-under-sec-138-ni-act-other-economic-offences-158271 Last visited on 18.09.2021
End-Notes:
  1. https://www.thehindubusinessline.com/economy/policy/financeministry-proposes-reclassification-of-selected-offences-tocompoundable-offences/article31785831.ece, last accessed on 29/12/2020
  2. https://thedailyguardian.com/decriminalisation-of-cheque-bouncing-a-boon-or-bane/ last visited on 17/09/2021
  3. Notification dated 24th March 2020 issued by the Ministry of Corporate Affairs
  4. Insolvency & Bankruptcy Code (Amendment) Code Ordinance, 2020
  5. Section 138 of the Negotiable Instruments Act, 1881
  6. Kaushalya Devi Massand vs. Roopkishore Khore, [ AIR 2011 SC2 566]
  7. Early resolution of cheque bounce cases dated 1 August 2017; Rajya Sabha
  8. Makwana Mangaldas Tulsidas vs. The State of Gujarat and Anr [SLP (criminal) no. 5464/ 2016]. The case is still pending before the Hon'ble Supreme Court of India
  9. Section 2(w) of the Criminal Procedure Code, 1973 r/w section 138 of the Negotiable Instruments Act, 1881
  10. Section 143 of the Negotiable Instruments Act, 188
  11. J.V. Baharuni and Ors. vs. State of Gujarat and Ors[ AIR (2014) 10 SCC 494]
  12. Goa Plast (P) Ltd. vs. Chico Ursula D'Souza [AIR 2004 SC 408]
  13. Dilip S. Dhanukar vs. Kotak Mahindra Co. Ltd. and Ors [MANU/ SC/ 8289/ 2007]
  14. https://www.livelaw.in/news-updates/bar-council-of-delhi-opposes-centres-proposal-to-decriminalize-dishonour-of-cheques-under-sec-138-ni-act-other-economic-offences-158271 Last visited on 18.09.2021
Written By Abhishek Roy, LLM

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