India: Decriminalization Of Criminal Offence Under Section 138 Of Negotiable Instruments Act, 1881

Introduction

The Ministry of Finance vide its Statement of Reason dated 08.06.2020¹ has announced various steps to provide relief from the economic stress caused due to the Covid-19 pandemic. One such proposal was the amendment of 19 acts to decriminalize multiple minor economic offences, including the offence under section 138 of the Negotiable Instruments Act, 1881(hereinafter referred to as 'NI Act').While inviting these comments, the Finance Ministry has made it clear that these actions to be taken for decriminalization of minor offences are expected to go a long way in improving the ease of doing business and helping unclog the court system and prisons² .

About the Provision

Section 138 finds its mention in the Chapter XVII of the NI Act which deals with "Penalties in Case of Dishonour of Certain Cheques for Insufficiency of Funds in the Accounts". The purpose of any proceeding, initiated u/s Section 138 of the NI Act, 1881, is that the cheques should not be used by people as a tool of dishonesty. When a 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.

Punishment for the offence

A person is deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both. The intent of the legislature to insert the punitive provisions were referred to by the Hon'ble Supreme Court of India in the matter of Modi Cements Ltd. Vs. K.K. Nandi³ wherein the court observed that the prime reason for insertion of such provision is to prevent unscrupulous use ofcheques and to ensure credibility of the businesses.

Why Should It Not Be Decriminalized?

Objective of the Act

The purpose of Section 138 of NI Act is to enhance the credibility of the instrument and contribute towards the trade and commerce across India with a positive sentiment. It resonates with the Government of India's efforts towards Ease of Doing Business.

Cheque serves as a line of cr

As a trade practice, cheques have been widely used as a means of credit rather than as a means of payment. The issuer in lieu of goods usually issues a post-dated cheque for payment. Therefore, decriminalization of the entire Section138 of Act would pave the way for unscrupulous drawers to avoid penal accountability altogether after issuing the cheque and its consequent dishonour.

Decriminalization will remove fear of doing wrong

Currently, the drawer of the negotiable instrument like cheque still has a fear of facing criminal punishment apart from the penalty of repayment of twice the amount. The proposed change in law will remove such fear. The instrument of cheque will lose its good faith and trust in the market, thereby lowering the number of transactions through cheques.

The provision under Section 138 itself has a safeguard for an honest drawer of cheque

It is only after receiving the notice of demand from the payee or holder in due course of time (as provided in the NI Act) and upon expiration of 15 days from such receipt, the offence is deemed to have been committed. In this regard, the drawer of such cheque(s) has an opportunity to make payment of cheque amount within 15 days and not face any criminal action. However, Section 147 of NI Act makes the offences under the said Act compoundable. Therefore, both the parties can settle at any stage and the drawer can escape further prosecution.

Costly affair

Proceedings under Section 138 attract lesser court fee as compared to civil proceedings. Upon decriminalizing the dishonour of cheque, the holders of such cheques would now be required to turn to civil courts to get respite. All matters pertaining to the dishonour of cheques will add to the workload of civil courts. It would also take away the right of the holders to recover upto 20% interim compensation of the total cheque amount. This amount can be recovered right at the beginning of the trial u/s. 143A of the NI Act.

Therefore, the poor litigants/ employees belonging to economically weaker background who are seeking recovery may find it difficult to afford costly and time-consuming civil remedies for recovering their outstanding dues from the drawer of such defaulted negotiable instrument.

Time duration

Generally, a large number of the criminal complaints filed under Section 138 of the NI Act are compounded/ settled either on or before the very first date of appearance of the accused or at the initial stage of these proceedings. The objective of filing of such criminal complaints is, therefore, achieved in a large number of cases.

However, the decriminalization will lead to litigants resorting to civil remedies such as suit for recovery which are time consuming. Even after the judgement, the obtaining of court decree as well as successful execution of such decrees will be cumbersome and long drawn process. The alternative remedy of seeking recovery from civil courts is time consuming and is costly as court fee payable at the time of filing of civil suits is much more than the court fee payable at the time of filing of a criminal complaint.

Analysis

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.

Footnotes

1. https://www.thehindubusinessline.com/economy/policy/financeministry-proposes-reclassification-of-selected-offences-tocompoundable-offences/article31785831.ece, last accessed on 03.07.2020.

2. https://economictimes.indiatimes.com/news/economy/policy/finminproposes-to-decriminalize-host-of-minor-offences-under-19legislations/articleshow/76302412.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst, last accessed on 03.07.2020.

3. 1998 (3) SCC 249

Originally published on JUNE 2020. Vol. XIII, Issue VI

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