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Decriminalizing 'Dishonour of Cheque’ under S.138: A calculated move or a hasty decision?

INTRODUCTION

COVID-19 has left a horrifying effect across commercial economic activities with sudden disruption in the continuity of business activities of production, supply and trade.This has forced theGovernment of India in taking various measures to relieve the economic stress in the Indian economy caused due to the novel coronavirus, by making relaxation in the laws. Recently, the Ministry of Finance has proposed an amendment of 19 Acts to decriminalise several minor economic offences. On 8th June 2020, the Ministry of Finance issued a notification titled 'Decriminalisation of minor offences for improving Business Sentiment and Unclogging Court Processes' and inviting suggestions from various stakeholders inter-alia, the possibility of decriminalizing the offence of cheque bounce law that is explained under section 138 of the Negotiable Instruments Act, 1881 among various other legislations.[1] The fundamental reasoning behind the idea to decriminalise the cheque bounce law is promoting Foreign Direct Investment in the economy, ease the mechanism of doing business, unclogging the process of courts, and lighten the burden of the courts too.

The Government, via the aforesaid notification, proposed to decriminalise various provisions of law,notably different among each other. Thus, for the sake of brevity, this article revolves around the idea, reasoning, viability and the impact of decriminalization of cheque bounce cases.

PROVISION UNDER THE STUDY

Chapter XVII of the Negotiable Instrument Act, 1881 (which includes Sections 138 to 147) is relating to Penalties in Case of Dishonour of Certain Cheques for Insufficiency of Funds in the Accounts, was introduced and inserted by the Act 66 of 1988 effective from 1st April, 1989. Reasons for inserting the said Chapter were as follows:

  • To enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case cheque bounces due to insufficiency of funds in the accounts or for the reasons that it exceeds the arrangements made by the drawer with necessary safeguards to prevent harassment of honest drawers. 
  • To encourage the usage of cheques and enhancing the credibility of the instrument.
  • The remedy available in a Civil Court is a long-drawn matter and unscrupulous drawer normally takes various pleas to defeat the genuine claim of the payee. [2]Section 138 of the Negotiable instruments Act, reflects the anxiety of the Legislature to enter into a new healthy commercial morality through the instrumentality of the penal law.
  • Section 138 was introduced to bring financial discipline in business dealings. Prior to insertion of Section 138 of Negotiable Instrument Act, a dishonoured cheque left the person aggrieved with the only remedy of filing a claim. The object and purpose of the section was to make the persons dealings in commercial transactions work with a sense of responsibility and for the samereason, lapse on their part to honour their commitment renders the persons liable for criminal prosecutions.
  • The object of Section 138 is to induce faith in efficacy of banking operation and credibility in transacting business.[3]It was noticed that cheques used to be issued as a device inter alia for defrauding the creditors and stalling the payments.

Thus, summing up the objective of the Section 138 of the Act is that the cheques should not be used by persons as a tool of dishonesty and when cheque is issued by a person, it must be honoured and if it is not honoured, the person is given an opportunity to pay the cheque amount by issuance of a notice and if he still does not pay, he must face the criminal trial and consequences.[4]

CRIMINALIZING SECTION 138

When Section 138 of Negotiable instrument Act was introduced in the year 1989, the punishment for the offence committed under the section was up-to one year. The maximum punishment of one year was later enhanced to two years by the Amending Act 55 of 2002[5], introduced by the Negotiable Instruments (Amendment) Bill, 2001. 

It cannot be ignored that a 'cheque' is the more often than not 'used' as well as 'misused' negotiable instrument. It is for the same reason the legislature intended to criminalise the ‘dishonour of cheque’ under Section 138 of Act.The motivation for the amendment was the increasing problem of the cheques being dishonoured due to insufficiency of funds or stoppage of payments by the drawer of such cheques. On the other hand, provisions related to summary (speedy) trial were also integrated. Also, the offence under the Act was made compoundable; the competent courts to adjudicate upon the cases under the Act were granted more extensive powers to pass an appropriate sentence. It is clear that the aim of the legislature and rightly so has been consistent with promoting the use of cheques, preventing misuse of cheques and enhancing faith in its credibility as an instrument.[6]

REASON BEHIND THE CURRENT ORDER

The primary challenges affecting the disposal of these cases and consequently the credibility of the instrument, as noted in MakwaniMangaldas Tulsidas v. State of Gujarat, 11 is the failure to ensure the presence of the accused in court, despite issuance of bailable/ non-bailable warrants according to the process u/s 72 of the Criminal Procedure Code, 1973 [hereinafter, CrPC].[7]

Further, Section 143 of the Act provides for an offence u/s 138 to be tried summarily within a period of six months. 15 But, owing to procedural incumbencies and the rigours of court with respect to taking evidence, this provision has failed to be of much practical significance, as it has been seen that disputes have prolonged to even more than fifteen years. The bench in Makwani case, also observed that courts have often resorted to coercive action as prescribed u/s 82 and 83,CrPC, 17 to ensure the presence of the accused, thus causing the disputes to remain unsettled for years. Thus, decriminalization of cheque bounce seems to be a viable option in such scenarios.

 The Government of India believes that the decriminalization of ‘dishonour of cheque’ will bring the following positive changes among others:

  • The chances of imprisonment in the offences that are not always fraudulent bring hurdles in attracting investments. Therefore, the act of decriminalising the cheque bounce law will make the investors feel confident.
  • The punishment of jail term hurts business sentiment, removal of the same will create positive business culture.
  • This step will reduce the burden from the shoulders of the judiciary and also bring some relief to the prisons.
  • It will boost India’s objective of achieving SabkaSaath, 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 do hold relevanance in the light of Covid-19 period.

HIGH PENDENCY OF CASES ALREADY

The credibility of a cheque, however, continues to be in peril with the presence of Section 138, as such cases have continued to constitute at least one-fifth of all criminal cases pending in district courts across India,[8] which is a matter of grave concernand the same needs to be addressed as earliest.

According to the Ministry of Finance, Department of Finances, there are around 1797,47,23,808 cheque bounce cases that are pending across the nation.[9] Moreover, the Hon’ble Supreme Court in the case of ‘Makwana Mangaldas Tulsidas vs. The State of Gujarat and Anr.’has highlighted the astounding figure of pending Section 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.'

Thus, in current situation the main focus should be to expedite the said matters which will definitely bring huge relief to various stakeholders across the nation. In addition to that 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.

JUDICIAL ACTIVISM

As the above, highlights the concern of the pendency of the cases of long litigation battles. It is, therefore, important to study the stand of the judiciary.

The Hon’ble Supreme Court of India and various high courts, time to time, have emphasized on undertakingSection 138 cases and the completion of the trial in the time bound manner. In a landmark case of J.V. Baharuni and Ors. vs. State of Gujarat and Ors[10]. The Hon’ble Supreme Court had issued various guidelines and among them 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. v. Chico Ursula D’Souza[11] 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.

The Hon’ble Supreme Court in the case of Dilip S. Dhanukar vs. Kotak Mahindra Co. Ltd. and Ors.[12] had stated that the punishment/ prosecution inS.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.

REPERCUSSIONS OF THE ORDER

The proposed amendment is in complete contravention of the object and purpose of the Act. The criminal provision is the only deterrent in the minds of the people who otherwise are habituated to abuse the instrument with mala-fide intent. In India, where thejudicial system is so slow and civil courts functioning on the verge of collapse due to the pendency of suits, it will take decades for the creditor to obtain a decree for recovery of dues. 

  • This alternative mechanism in place makes it more burdensome, and rather dissuades the investors from investing in India. With the fear of being prosecuted as an ‘accused’ gone, the credibility of the cheque shall further fall because measures such as issuance of non-bailable warrants and attachment of property are absent in a civil trial for recovery of due. Further, even if a remedy is sought under other provisions of Indian Penal Code, 1860 suchas S. 406 (Criminal Breach of Trust) 20 and S. 420 (Cheating), 21 the debtor can be punished. However, the recovery of money continues to pose a problem.
  • The criminal liability of imprisonment visualized under this section is invoked only in the case of dishonour of a cheque and a consequential failure to repay even after the period of statutory notice has lapsed. It is not an imprisonment inflicted upon the person for mere failure to discharge a civil liability. 19 Thus, the principle as envisaged under the notification relating to ‘mens rea’ is met even without decriminalization of the cheque bounce.Lack of deterrent provisions in the law as well will diminish the culture of use of cheques and vitiate its credibility defeating the very purpose and object of the Act.
  • Decriminalising Section 138 of the Act, the alternative remedy of seeking recovery from Civil Courts will also further add on to the cost of litigation burdening the litigant’s pocket. Currently, to recover the money, two remedies under the law are available, i.e. to initiate a civil suit and to invoke penal proceedings under the IPC and the Negotiable Instruments Act to seek fine and compensation from the drawer of the cheque. One can claim double the amount of the cheque in the form of a fine and recover his legal dues.Butthe problem is deepening for poor litigants, employees or belonging to economically weaker background. They may not be able to afford costly and time-consuming civil litigations for recovering their dues.All matters relating to the dishonour of cheques will not only burden civil courts but would also take away the right of the holders to recover interim compensation up to 20 percent of the total cheque amount right at the very inception of the trial under Section 143 A.
  • The provision under Section 138 itself has a safeguard for honest drawers. First, only after receiving the notice from the payee or holder in due course and upon expiry of 15 days from such receipt, the offence is deemed to have been committed. Therefore, honest drawers have an opportunity to make payment of cheque amount within 15 days and will not face any prosecution. Second, the provision under Section 147 of Negotiable Instruments Act makes the offences under the said Act compoundable. Therefore, parties can settle at any stage and the drawer can escape further prosecution.

Removal of penal provisions from the Act will undoubtedly lead to a reduction of the use of cheques both in the commercial world and personal transactions to a boundless extent. It will also become more difficult in the commercial world to make commitments for future payments and to enforce contracts.

SUGGESTIONS TO THE ISSUE

On careful consideration of either situation, it is clear that the objectives of the Ministry can be achieved only when a different mechanism yet efficient is put in place. Such a commercially viable solution can only be sought by using advanced technology in this field[13] and by putting to use the availability of modes of instantaneous payment other than cash (UPI, NEFT, RTGS, IMPS). However, post-dated cheques continue to be in vogue, owing to the fact that they remain commercially viable to conduct transactions which are settled in the future. Thus, the need for an adequate solution is required at earliest.

The government should consider introducing new provisions for providing extra safeguards and measures inthe hands of the complainants, to secure the recovery of dues at the earliest. Measures can be, to attach the property of the debtors in case of cheque bouncing or availability of similar compensation provisions under the Civil Procedure Code along the lines of Section 143A and Section 148 under the Negotiable Instruments Act, 1881.

A statutory provision making it mandatory for banks to aid and assist courts in the cheque bounce cases with respect to the debtors/creditors having their bank accounts in any of the branches of the said banks, may also be considered.[14]

Lastly, as observed by the Supreme court in Makwani case, decriminalizing cheque bounceof a value not more than the prescribed threshold amount, instead of all the cases of cheque bounce, might work in an effective manner towards achieving the twin goals of the Ministry.

CONCLUSION

As such it appears that the above act of decriminalization of Section 138 under the act by the government through the Ministry of Finance will cause more significant prejudice to the commercial world, benefitting businesses and in the same situation drive away foreign investors from making any investments in the country as well as lost purpose of act could be observed in future. If the whole umbrella of prosecution for dishonoured cheques is taken away, the future cheques may thus not remain any as a preferred form of payment for both business and personal transactions as they are, breaking down an already broken economy. Thus, the move recommended by the proposed amendment if not acted with judicious mind and in a careful manner then it may result in a classic example of what we say,‘good intentions gone bad.’

  • [1]Ministry of Finance, Government of India, Decriminalisation of Minor Offences For Improving Business Sentiment And Unclogging Court Processes, available at https://dea.gov.in/sites/default/files/consultation%20paper%20decriminal isation_0.pdf
  • [2]As cited in Goa Plast (P) Ltd. v. Chicko Ursula D'Souza, 2004 SCC (Cri) 499
  • [3]As cited in in Vinay DevannaNayak v. RyotSevaSahakari Bank Ltd. (2008) 2 SCC 305
  • [4] Indian Bank Association v. Union of India, (2014) 5 SCC 590 (594)
  • [5]Negotiable Instruments (Amendment & Miscellaneous Provisions) Act, 2002
  • [6]Damodar S. Prabhu v. Sayed Babalal H. (2010) 5 SCC 663
  • [7]MakwaniMangaldasTulsidas v. State of Gujarat, 2020 SCC OnLine SC 317
  • [8]213rd Law Commission of India Report, Fast Track Magisterial Courts for Dishonoured Cheque Cases (2008), available atbr http://lawcommissionofindia.nic.in/reports/report213.pdf
  • [9]Early resolution of cheque bounce cases dated 1 August 2017; Rajya Sabha
  • [10](2014) 10 SCC 494
  • [11]AIR 2004 SC 408
  • [12]MANU/ SC/ 8289/ 2007
  • [13]Meters and Instruments Private Limited v. Kanchan Mehta, (2018) 1 SCC 560.
  • [14]Indian Bank Association v. Union of India, (2014) 5 SCC 590; Meters and Instruments Private Limited v. Kanchan Mehta, (2018) 1 SCC 560.

 

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