DECRIMINALIZATION OF SECTION 138 OF THE NEGOTIABLE INSTRUMENT ACT – A RIGHT STEP?
Author: Deepansha Vij, II year of B.B.A.,LL.B. from University School of Law and Legal Studies , GGSIPU
Co-author: Lavanya Gupta, II year of B.B.A.,LL.B. from University School of Law and Legal Studies, GGSIPU
The Ministry of Finance released a Notification dated 8th June 2020. It proposed the Idea of Decriminalization of Minor Offences for improving business Sentiment and Unclogging the Court processes. This was a proposal where the government asked for Views and Suggestions from Interested parties regarding the proposed Decriminalization. This notification suggested decriminalization of certain sections in total Nineteen Statutes, one of these was Section 138 of the Negotiable Instruments Act, 1881. The Section 138 states that when a cheque is drawn by a person or account maintained by him for payment or discharge of debt, is returned by the bank unpaid, due to insufficient funds in the bank, such person would be deemed to have committed an offence which will be punishable with imprisonment up to the term of two years or charged with a fine that may extend to twice the amount given in the cheque or both.
1. JURISDICTIONAL AND PROCEDURAL ISSUE PERTAINING TO THE NATURE OF THIS SECTION
The Main issue with anyone bringing Action under this Section is the Decision whether to opt for Civil Remedies or Criminal Remedies.[i] The Supreme Court has used the term “Quasi-Criminal” while referencing to this Section.
S.138 was introduced as a Criminal offence through an Amendment in 1988 in the Negotiable Instruments Act, 1881. The aim of this section was to increase the credibility of transactions being done through cash by the way of making it into a punishable criminal offence, but, the nature of this offence is the cause of confusion because it cannot be said to be entirely Civil or Criminal which makes it difficult for the parties to decide upon the correct approach pertaining to the remedies.
The Section lays down the penalty for the Dishonouring of Cheque to be up to two years Imprisonment or a fine which might extend to twice the amount given in the Cheque or both. This offence is Bailable, Compoundable and Non – Cognizable.
What makes the nature of this section confusing is that it is tangled with various elements of both Civil and Criminal law, like, the aim of this section has been interpreted to be not to punish the offender but to compensate the victim, this, is a concept that is not familiar in Criminal law. Also the expression “Cause of Action” is something that is used for civil cases in order to recover money or damages. The Chapter XIII of the CrPC which deals with the Jurisdiction of Criminal Courts in trials and inquiries has the term “Cause of Action” missing from it. Similarly under S.144 the mode of summons is given as in Civil cases which is contrary to the mode of the summons given in Sections 62 to 64 of the CrPC which is applied to Criminal offences. Also, the Evidence under S.145 is given by the complainant in the form of an Affidavit as given under Civil proceedings but at the same time under S.147 of this Act the offences are Compoundable without the Action of the Court similar to the S.320 (2) of the CrPC.
While the S.138 of the NI Act lays down a Criminal remedy which has a confusing Civil Construct, it is imperative to note that in the case of Cheque bounce another civil remedy is available in the form of Order 37 of the CPC,1908 where the Payee can initiate a recovery procedure and recover the amount using a court order from a Jurisdictional Court apart from Criminal proceedings.
This Nature of the offence causes Jurisdictional issue with respect to filing the complaint, should it be done in a Criminal Court and all the procedure for Criminal cases given under the Criminal Procedure Code be followed? But at the same time the Sections discussed above indicated towards use of Civil procedure as observed in Damodar S. Prabhu Vs Sayed Babalal H[ii] it has not been clarified under S.147 about the kind of proceedings to be followed as it is a Compoundable offence but at the same time S. 320 of the CrPC cannot be applied.
The Compounding requires the consent of both the parties and in the absence of the same, in interest of Justice, the court on its own discretion can close the proceedings and discharge the accused as observed in M/s Meters and Instruments Private Limited & Another V. Kanchan Mehta[iii].
Even after conviction the parties can reach to a compromise which would be considered valid and after payment of the amount the accused can be acquitted as observed in the case of Vinay Devanna Nayak Vs. Ryot Seva Sahakari Bank Ltd.[iv]
If after the conviction the parties decide to settle the dispute then the S.147 of the NI Act will override the S.138 of the CrPC as observed in K.M. Ibrahim v. K.P. Mohammed and Another.[v]
The Decriminalization of this Act will solve this issue as now it will be considered as a Civil offence with only a fine as decided by the Court. This will bring uniformity in the procedure being followed in all cases i.e. Civil proceedings as specified in the Civil Procedure Code.
2. REDUCED BURDEN ON THE COURTS
While post COVID Economic recovery might have been the aim stated under this Notification, another advantage is that it would reduce the amount of Burden on the Courts and save the time and resources of the same which could be directed to cases of a more serious nature. Indian Courts are overburdened and cases are often known to take a very long time to finally reach a rational conclusion. A cheque bounce case in India would[vi] take around 2 – 5 years to reach a final Judgement and as per the data on the National Judicial Data Grid as of 12th July 2021, there were 41,69,965 civil cases pending in High Courts with 88.14% of them being more than one year old, similarly, the tally for District and Taluka Courts is 1,04,36,697 civil cases pending with 78.83% of them being more than an year old. These Statistics show the state of the Indian Courts today which are heavily burdened with pending cases. Considering the huge amount of cases and the paucity of time with the judges and in order to reduce the burden on these courts decriminalization is a viable option as it would prove more effective, efficient and fast and make disposing off of cases of a less serious nature or pertaining to minor offences an easier task. The Confederation of all India Traders (CAIT) in a letter addressed to the Finance Minister Nirmala Sitharaman suggested the formation of fast track courts at district level to deal with cheque bounce cases on immediate basis and bring amendments in Section 138 of the Negotiable Instruments Act,1881.
The Decriminalization will leave only Civil courts as a mode of recourse thereby reducing the burden on Criminal Courts which have cases of a far more serious nature to deal with. Also, Civil Courts have an advantage of Criminal Courts in terms of Claiming of relief which had always been the main intention behind this Section.
3. THE PUNISHMENT IS DISPROPORTIONATE TO THE CRIME
It is important to note that the concept of Mens Rea is imperative while proving a Criminal offence but it has been observed in many cases that the Cheque could be dishonoured due to a variety of reasons like the sign on the cheque not matching etc. it can be caused by error or ignorance and imprisonment for the same is a harsh punishment. Since, this is a Compoundable offence where the consent of both the parties is required to reach a compromise, the chance of pursuing of a criminal case with a Malafide Intention is always a fear that the Business Community lives in. The chances of a cheque bouncing due to a simple error and not the lack of funds is high, in that case bringing Criminal proceedings against an offence that clearly has a civil nature seems disproportionate.
In the case of Kaushalya Devi Massand v. Roop Kishore Khore[vii] where the Appellant was of the view that imprisonment should be given to the Respondent due to his own actions causing the delay in litigation after an interval of 14 years for the default in payment of 50,000 Rupees which were a part of the compensation of 4 lakh to be given for dishonouring a cheque of 2 lakh rupees which was later raised to the amount of 6 lakh by the High Court. The Magistrate here was of the view that the gravity of a complaint under the Negotiable Instrument Act cannot be equated with an offence under the provisions of the Penal Code, 1860, this is simply a civil wrong which has been given criminal overtones. The Magistrate also thought that the fine was enough to meet the need of Justice and there was no requirement to send the Respondent to jail after an interval of 14 years hence overruling the previous decision of awarding two months of rigorous imprisonment for not paying 50,000 as a part of the penalty.
Rigorous Imprisonment for a default in payment of fine is a really harsh punishment given that this kind of treatment is meted out to hardened criminal who are accused of grave crimes. This itself proves that this section has higher chances of getting misused.
4. AID IN ECONOMIC RECOVERY AND IMPROVE EASE OF DOING BUSINESS
The step towards decriminalization of Minor offences has been hailed as a saviour by the Business Community. This move is said to be one more step towards improving India’s Ease of Doing Business rank to bring in business to save an already dwindling economy owing to the COVID pandemic and also for supporting the PM’s vision of “Sabka Saath, Sabka Vikas”. The improvement in ease of doing business is going to invite foreign investments and encourage start-ups which will translate to more jobs and foreign investment which will give a much needed boost to the economy. This move comes along with several other relief measures for the post COVID economic recovery which pertain to areas of GST, Income Tax, IBC etc. This move is also bound to unclog the Courts and Prisons which are bursting at the seams with several pending cases pertaining to small amounts of the dishonoured cheque. More recently in the case of Mangaldas Tulsidas v. State of Gujarat and Others[viii], the Supreme Court commented on decriminalization of dishonour of cheques of smaller amounts, the court further went on to suggest a mechanism for pre-litigation settlement of such cases.
Decriminalization of S.138 in particular is just the formalization of it as a civil offence as under the S.147 of the same Act in 2002 which added the provision of Compoundable offence pertaining to the offence under S.138.
While these arguments clearly point towards the Viability of Decriminalization of this Section, it is imperative for us to look at the other side of this Contention as well.
1. HAMPER CREDIBILITY
Section 138 of the negotiable instrument act earlier was a civil offence which later got criminalised by an amendment in the year 1988. The parliament introduced the banking,public financial Institutions and Negotiable Instrument Laws (Amendment) Act 1988 incorporating Sections 138 to 142 with effect from April 1, 1989 in the Negotiable Instrument Act 1881. The provisions of section 138-142 were then introduced to dispense the disputes that arose due to dishonouring of cheque.[ix] Cheques had become a popular medium as a bill of exchange, easing the transactions between the parties. With the widespread use of cheque, the offences related to the same came into picture. Offences such as default on the money due, fraud, forgery, etc made this mode of transaction inconvenient for the payee. Therefore the act came as a relief to safeguard the payee from the harassment caused due to dishonour of cheque. The Hon’ble Supreme Court has reiterated in its judgement in Damodar S. Prabhu v Sayed Babalal H[x] that the legislative intend in for the provision was to provide a “strong criminal remedy” for the cases related to dishonouring of cheques. The act made the seriousness of offence under the act more severe by attaching criminal liability. The provision of imprisonment ensured that there be fear in the minds of perpetrators and the offence be curtailed. The proposed amendment, if allowed would defeat the entire objective and scope of the act for which it was amended in the first place. It will hamper the credibility and trustworthiness of the commercial transactions.
2. CIVIL ROUTE- TIME CONSUMING
Apart from this a major point that is raised in favour of the decriminalisation of the said act, is that this will ensure speedy redressal of the offences and reduce the burden of the criminal court. It is seen that in majority of cases filed under the act, the settlement is done either before the proceedings start or on the first day of the proceeding. The objective that is to instil fear and gain compensation is thus settled. However if decriminalisation takes place the litigants will have to go for civil remedies such as suit for recoveries which is hectic and consumes a lot of time. The matter is not solved merely if one gets judgement in his/her favour, the obtaining and furthermore executing of court decree is a cumbersome process which takes a lot of time. Added to this is the court fee payable at the time of filing of civil suits. The fee is much more than the court fee payable at the time of filing of a criminal complaint. It would also take away the right of the holders to recover upto 20% interim compensation of the total cheque amount. According to section 143A of the negotiable instrument act, this amount can be recovered by the plaintiff in the beginning of the trial. In the case of Makwana Mangaldas Tulsidas v. State of Gujarat[xi] it has been mentioned that there are more than thirty five lakh cases pending which is approximately fifteen percent of the total criminal cases in the district court.
3. MENS REA- PRESENT
Another contention of the government while proposing the notification was that mens rea forms an important ingredient in the constitution of the criminal offence. If so, then it becomes critical to evaluate the nature of non compliance. If we look into the provision of S.138, it becomes evidently clear that the principle for evaluation mens rea is not to be complied here. This is because the drawer of the cheque or the defaulter gets several opportunities to clear his liability by paying the amount before levying punitive measures of imprisonment or fine or both. If after the warnings also the drawer is unable to discharge his liability, it can be inferred that she/he had an intention to deceive.[xii] The major difference between the offences committed in civil law and criminal law is that the stigma it attaches to the wrongdoer. The tag of a “criminal” has much more serious ramifications than just being an offender under civil wrong. One of the instances is that it causes a setback on the prospects of being employed in the public offices.
4. CONCERNS OF STAKEHOLDERS
Another contention raised by the government id that it will enhance the ‘Ease of Doing’ business in India as it will reduce the burden of the organisations. But it is to be noted that transactions through cheques form a major chunk of transactions. Most of the transactions are done through post dated cheques. Borrowers use it as a security while taking loan from the banks and other financial institution. As seen in the judgement of Dalmia Cement (Bharat) Ltd v M/S.Galaxy Trades& Agencies ltd. & ors.[xiii] The court was of the view that the trading community will have an adverse effect if the instruments such as cheque were not to be used which can be a result if the offence was decriminalised. It was also stated that negotiable instruments are convertible due to the legality of such instruments. The legislatures have drawn the provisions of penalties and procedures to benefit and protect the interest of merchants.
Banks have raised their disregard to the said proposal of the finance ministry. Bankers are of the view that they resort to provision of section 138 where they think that the loans have been defaulted wilfully by the borrowers. Therefore the punitive provisions are used by them to keep away the borrowers from defaulting. This helps them to keep the borrowers in discipline and prevent any defaulting of loan taken. Although the banks have remedies under ‘ The Recovery of Debts Due to Banks and Financial Institution Act,1993’ and the ‘ Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act,2002’ they still feel a need to have Section 138 as an option against the defaulters.The Finance Industry Development Council (FIDC), a representative body of asset and loan financing non-banking finance companies (NBFCs), also opposed the said proposal of decriminalising section 138. According to them the doing away with the provision will further deteriorate the situation. Small and Medium Enterprises will be the worst hit by such an act. The confederation of All India Traders is of the view that decriminalising the bouncing of cheques will hinder in recovering their dues from business transaction and private loans.
5. DILEMMA FOR FOREIGN INVESTORS
It might be fruitful for the government in its mission to boost Indian economy by attracting foreign investments, but the interest of the creditors might suffer as they will have to wait more to recover their sums. The apprehension of criminal legal action and punishment with imprisonment and fine as provided under Section 138of the Negotiable Instrument Act, 1881 are the factor for making timely payments of the cheques.
6. RISK OF INCREASE IN BLACK MONEY
The next issue with decriminalisation of section 138, is that it can push the Indian economy from cash less to cash base economy. The use of cheque ensured certain accountability and transparency in relation to incoming and outgoing of money in the accounts of not only individuals but also business organisation. With the decriminalisation of offence, there can be a reduction in use of cheque as an instrument for transactions. This will lead to the peopled depending upon the cash transactions (due to less amount of digital literacy) the flow of black money will increase.[xiv]The decriminalization of Section 138, of The Negotiable Instruments Act, 1881 as such would not reduce business burden as the financial liability against default, would still accrue on the business, in case of dishonor of the cheque, and in fact the corporate entity exposes itself to immediate statutory winding up/insolvency proceedings, which is infact more detrimental from a business perspective.[xv]
After careful scrutiny of the Contentions put forward by the supporting and opposing side in regards to the Decriminalization of Section 138 of the Negotiable Instruments Act, 1881, we conclude that decriminalization is a step in the positive and forward direction. The COVID pandemic was an unexpected situation which caused a lot of loss not only in terms of life and health but also in progress of the country. The standstill brought about by the pandemic resulted in a lot of backlog in courts and government offices and economic slowdown both of which are extremely necessary for the recovery of the economy and remains the focus of the government as a large part of our population is in danger of facing poverty and unemployment. The reforms bought about should therefore be welcomed as they aim at putting India on the charts for world trade and business and bringing to us much needed jobs and foreign investment. Section 138 had always been confusing with respect of its criminal and civil nature, decriminalization will clear out the same and also solve procedural issues. This move will help reduce the burden on Indian Judiciary which has been grappling with increasing backlog of cases many of whom are trivial in nature. This move is not going to hamper the Credibility of a Cheque but will simply keep this as a civil remedy owing to the civil nature of the offence. The decriminalization does not mean that the offender can get away scot free after the offence, instead as stated in the notification the aim is to make a framework of a civil nature which levies a fine which is going to act as a deterrent for the offence i.e. the penalty will be large enough to act as a deterrent. As stated in an argument that the Civil route is more time consuming as compared to criminal does not justify the treatment of a clear civil offence as a criminal one, also its compoundable nature and decision of treatment as a civil or criminal offence resting in the hands of the court lengthens the process, the notification clearly states the apprehension around the criminality of this section being a deterrent for business investors, this needs to change at a time where we clearly need investment and revival of business to increase jobs. Another point is that under Order 37 of the CrPC where the amount can be easily recovered from the offender through a court order why is there a need to go through a criminal procedure and waste time and resources of the court which can be applied to actual criminal cases which are much more serious in nature. Attachment of stigma of a “criminal” is in no way going to act as a deterrent for a person who already has a malafide intention, just as it has not acted as a deterrent in several criminal cases that are lined daily in front of a criminal court. One should also note the fact that the criminal law deals with offences that affect national security or the public at large, and the offences under Section 138 do not fall into either of the categories therefore not justifying the criminalization. At a time where India is still grappling with COVID losses and suffering from the economic shocks of 2020 coupled with the deteriorating situation in 2021, it is high time that we focus on the bigger picture and prioritize efficiency over all else to regain our footing. It is imperative for us to support our domestic business and project a lucrative picture to foreign investors to bring in much needed trade and business but not at the cost of security of any section of our society, the features and reasons given by the government regarding the new framework work in balancing the interest of both and benefiting the country and its economy at large.
[i] 2021 SCC Online SC152 P. Mohanraj v. Shah Brother Ispat Pvt. Ltd. Decided on 01.03.2021. [ii]2010 (5) SCC 663 [iii]2018 (1) SCC 560 [iv](2008) 2 SCC 305 [v]AIR 2010 SC 276 [vi]FAQ tab “Cheque Bounce Notice” CorpBiz<https://corpbiz.io/cheque-bounce-notice> [vii]AIR 2011 SC 2566 [viii] (2020) 4 SCC 695 [ix] Sachin Gupta, Karan Kanwal India: Section 138 Of The NI Act: Balancing The Civil & Criminal Intents<https://www.mondaq.com/india/civil-law/648080/section-138-of-the-ni-act-balancing-the-civil-criminal-intents>. [x] (2010) 5 SCC 663 [xi] (2020) 4 SCC 695 [xii]Yukta Ambastha, Shreya Srivastava; <Decriminalisation of Section138,NI Act: Dishonouring its purpose?> Criminal Law Review; Oct 7 2020 [xiii](2001) 6 SCC 463 : AIR 2001 SC 676 [xiv]Supra at point 8 [xv] Samarjit G. Pattanaik Bonita Singh and Puneet Relan ;Decriminalising Cheque Bouncing: A Boon or a Bane?; The Daily Guardian; January 2,2021; <https://thedailyguardian.com/decriminalisation-of-cheque-bouncing-a-boon-or-bane-2/>