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The Covid-19 era has put the entire nation on hold, clogging the mobility of almost every sector even the Judiciary and the Economy. To improve “Ease of doing business” in India and help unclog the court system and prisons at such unprecedented times, to curb as well as minimize the effect of the ongoing crisis, therefore the Central Government and the Ministry of Finance issued a notification on the decriminalization of around 39 sections which contain minor offences under 19 different Acts the major reason for this is Section 138 of the Negotiable Instruments Act, 1881 , as it has a direct impact on a huge number of people.
There have been some amendments in the implementation and applicability of various other laws covering the aspects like Income tax, GST, Customs and Central Excise, and Insolvency and Bankruptcy Code 2016(hereinafter referred to as ‘IBC’). the article will however focus only upon decriminalization of Sec 138 of Negotiable Instruments Act.
How Decriminalisation Is Done
The following principles should be kept in mind when deciding on the reclassification of criminal offences to compoundable offences:
- Decrease the burden on businesses and inspire confidence amongst investors;
- Focus on economic growth, public interest and national security should remain paramount;
- Mens-rea (mala fide/ criminal intent) plays an important role in the imposition of criminal liability, therefore, it is critical to evaluate nature of non-compliance, i.e., fraud as compared to negligence or inadvertent omission; and
- The habitual nature of non-compliance.
The reasons for the decriminalization of minor offences which are not fraudulent or with mala fide intent, aiming to ensure ease doing business and attracting investment both foreign and domestic. The said notification stated out the above necessary certain principles for the proposed intention, especially in 138 NI Act.
Section 138 of the Negotiable Instrument Act
Dishonour of cheque for insufficiency, etc., of funds in the accounts: Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both:
PROVIDED that nothing contained in this section shall apply unless-
- the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.
- the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within fifteen days of the receipt of information by him from the bank regarding the return of the cheque as unpaid, and
- the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice
Ingredients of Section 138
The essential ingredients of the offence as contemplated under Sec.138 of the Act were pointed out by Supreme Court in the matter of Kusum Ingots and Alloys Ltd vs Pennar Peterson Securities Ltdwhich reads as follows:
- a person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person from out of that account for the discharge of any debt or other liability;
- That cheque has been presented to the bank within six months from the date on which it is drawn or within the period of its validity whichever is earlier;
- That cheque is returned by the bank unpaid, either because of the amount of money standing to the credit of the account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank;
- The payee or the holder in due course of the cheque makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;
- The drawer of such cheque fails to make payment of the said amount of money to the payee or the holder in due course of the cheque within 15 days of the receipt of the said notice.
As per RBI guidelines, with effect from April 1, 2012, the validity period of Cheques, Demand Drafts, Pay Orders and Banker’s Cheques have been reduced from six months to three months, from the date of mentioned in the instrument.
Overview of Section 138 NI Act
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. This Chapter 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 of bouncing of a cheque due to insufficiency of funds in the accounts or for the reasons that it exceeds the arrangements made by the drawer with adequate safeguards to prevent harassment of honest drawers.
- To encourage the culture of use of cheques and enhancing the credibility of the instrument.
- Despite civil remedy, Section 138 intended to prevent dishonour on the part of the drawer of a negotiable instrument to draw a cheque without sufficient funds in his account maintained by him, in a bank and induce payee or holder in due course to act upon it.
- 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.
- The object and ingredients under the provisions, in particular, Sections 138 and 139 of the NI Act cannot be ignored. The proper and smooth functioning of all business transactions, particularly, of cheques as instruments, primarily depends upon the integrity and honesty of the 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 credibility of the issuance of cheques in commercial transactions were eroded to a large extent. Undoubtedly, dishonour of a cheque by the bank causes incalculable loss, injury and inconvenience to the payee and the entire credibility of the business transactions within and outside the country suffered a serious setback. The Parliament, to restore the credibility of cheques as a trustworthy substitute for cash payment, enacted the aforesaid provisions.
- The object of Section 138 is to induce faith inefficacy of banking operation and credibility in transacting business.
- For proper and smooth functioning of business transaction in, particular, use of cheques as negotiable instruments would primarily depend upon the integrity and honesty of the parties. It was noticed that cheques used to be issued as a device inter alia for defrauding the creditors and stalling the payments.
- The objective of the proceedings of Section 138 of the Act is that the cheques should not be used by persons as a tool of dishonesty and when a cheque is issued by a person, it must be honoured and if it is not honoured, the person is allowed to pay the cheque amount by the issuance of a notice and if he still does not pay, he must face the criminal trial and consequence.
Though the Negotiable Instruments Act was passed in the year 1881, Chapter XVII of the Act comprising Section(s) 138 to 142 was inserted by the Banking, Public Financial Institutions and Negotiable Instruments Law (Amendment) Act, 1988.
Section 138 provides that in case of dishonour of cheque for insufficiency of funds or any of the prescribed reasons, the defaulter can be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque or both.
The 213th Report of the Law Commission of India pointed out that over 38 lakh cheque bouncing cases were pending in various courts in the country as of then, and over 7.6 lakh cases were pending in the criminal courts in Delhi at the Magisterial level alone.
The number of cases that are pending in several courts in India under Section 138 has seriously cast a shadow on the credibility of our trade, commerce, and business. Due to the huge backlog of cheque bouncing cases, the trial of other important and rather more serious cases is side-lined, resulting in the litigants and the public losing faith in the judicial system.
The offence under Section 138, from the criminality point of view, has been a petty offence due to its nature. Any such criminal complaint, if the aggrieved person requires, can be filed under Section 420 (Cheating) of the Indian Penal Code, 1860, and there is no reason to have another penal provision for trying the same offence.
Further, its criminality has also been substantially decreased by inserting Section 147 in the Negotiable Instruments Act in 2002, making the offence punishable under Section 138 of the Act compoundable, which means that the parties on settling can mutually agree and drop the charges against the accused.
With the enactment of statutes in recent times, it has been observed that there have been instances of interweaving and blurring of legal forms, especially under provisions like Section 138 of the Negotiable Instruments Act, where the civil remedies sit alongside some criminal offences. This mutation of legal forms tends to often erase the functional distinction between a criminal law proceeding and a civil law proceeding.
Why decriminalisation is not desirable
In such backdrop, decriminalisation of Section 138 of the Negotiable Instrument Act is not desirable for the following reasons:
- The purpose and objectives of Section 138 of The Negotiable Instrument Act, as already mentioned above, are meant to enhance the credibility of the instrument. This furthers the objective of the Government for improving Business Sentiment and promoting Ease of Doing Business.
- 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.
- The drawer has a fear of criminal prosecution and that is why he makes sure that the cheques are duly honoured. Decriminalisation will remove such fear. This will lower the credibility of transactions made through cheques.
- Decriminalisation will discourage honest parties to adopt cheques as a credible mode of payment. This would be discouraging the Government’s initiative of promoting Ease of Doing Business.
- 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 The 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.
- Many payees are poor litigants, employees or belonging to the economically weaker background. They may not be able to afford costly and time-consuming civil litigations for recovering their dues.
- Section 142 of Negotiable Instruments Act itself contains safeguard which was to be undertaken by the Judicial Magistrate/Metropolitan Magistrate before taking cognizance of any offence punishable under Section 138 of the Negotiable Instruments Act. They can exercise judicial discretion at the time of taking cognizance.
- It has been seen from the experience of Courts handling the criminal complaints filed under Section 138 of the NI Act that a large number of such matters 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. On the other hand, availing of civil remedy may not produce desirable results inasmuch the plaintiff may not only face difficulties in obtaining the decree but in also successfully executing such decrees to his satisfaction.
Section 138 of the NI Act should remain on the statute book and should not be decriminalised. The impact of decriminalising this offence may adversely impact the initiative of the Government for improving Business Sentiments and promoting Ease of Doing Business. Section 138 of the Negotiable instruments Act reflects the anxiety of the Legislature to usher in a new healthy commercial morality through the instrumentality of the penal law. Here is a classic example where, as part of an attempt to evolve a healthy norm of commercial behaviour, the principle of social engineering through the instrumentality of penal law is put into operation.
The Parliament in its wisdom had chosen to bring Section 138 on the statute book to introduce financial discipline in business dealings. Before insertion of Section 138 of The Negotiable Instrument Act, a dishonoured cheque left the person aggrieved with the only remedy of filing a claim. The object and purpose of bringing new provisions in the Ac are to make the person dealings in commercial transactions work with a sense of responsibility and for that reason, under the amended provisions of law, lapse on their part to honour their commitment renders the persons liable for criminal prosecutions.
Criminal law across all liberal democracies including in India provides for certain protections to accused like the ones mentioned and interpreted by courts under Articles 20, 21 and 22 of the Constitution of India and also several protections mentioned under the European Convention of Human Rights, International Convention on Civil and Political Rights etc. But when a proceeding against a person is labelled as a civil proceeding and has a tendency to provide punishments like imprisonment or something equivalent, then the entire purpose of these protections afforded to the accused gets defeated.
Thus, cloaking a civil claim as a criminal claim has the impact of diluting provisions that guarantee a fair trial. This is often is the case under Section 138 of the Negotiable Instruments Act.
 Decriminalisation of Section 138 of Negotiable Instrument Act, 1881 available at. https://blog.ipleaders.in/decriminalization-of-section-138-of-negotiable-instrument
 India – Section 138 Of Negotiable Instruments Act: Overview Legal News & Analysis – Asia Pacific – India – Banking & Finance – Regulatory & Compliance available at http://www.conventuslaw.com/report/section-138-of-negotiable-instruments-act-overview/#_ftn1 on 8 June 2019
 (2000) 2 SCC 745
 An Overview of Section 138 of Negotiable Instruments Act available at https://www.mondaq.com/india/financial-services/957852/an-overview-of-section-138-of-the-negotiable-instruments-act by Vrinda Tanna, 24 June 2020.
 Vide Gazette of India, Extra., No. 49, dated 5th September 1988
 Aim and objects, also cited in Goa Plast (P) Ltd. v. Chicko Ursula D’Souza, 2004 SCC (Cri) 499
 Aim and objects, also cited in in Goa Plast (P) Ltd. v. Chicko Ursula D’Souza, 2004 SCC (Cri) 499
 As cited in in Vinay DevannaNayak v. RyotSevaSahakari Bank Ltd. (2008) 2 SCC 305