Criminalize Or Decriminalize S. 138: A Dilemma

Arth Singhal analyses whether decriminalizing the offence of ‘dishonour of a cheque’ is actually a step taken in the right direction towards improving the business sentiment and unclogging the court process or not.

COVID-19 has cast its shadow across commercial economic activities with sudden disruption in the continuity of business activities of production, supply chains and trade. The pandemic hasforced the Government of India to come up with adequate strategies and plans to revive and boost the otherwise sluggish economy. Goals of improving the ease of doing business and promoting Foreign Direct Investment have become pertinent to ensure that global investors continue to choose India as a favorable destination for their investment activities.

Government, with the objective of restoring stability in the business environment is addressing the challenges posed, by issuing Notifications, circulars and Amendments to that regard. ¹ One such step directly addressed at improving business sentiment as well as unclogging court processes was taken by the Finance Ministry on June 8, 2020 i.e. to decriminalize minor offences including ‘dishonour of cheque’. ²

OBJECTIVE OF NOTIFICATION DATED 8 JUNE, 2020

The decision to decriminalize the offence of ‘Dishonour of Cheque’ under Section 138, Negotiable Instruments Act, 1881 ³ [hereinafter, S. 138,NI Act 1881] amongst other offences was taken, keeping in mind several principles as listed in the notification. These principles are also the objective behind the step to decriminalize thirty-nine Sections under nineteen statutes. These are as follows:

• (i) Decrease the burden on businesses and inspire confidence amongst investors;
• (ii) Focus on economic growth, public interest and national security should remain paramount;

• (iii) Mens rea (malafide/ criminal intent) plays an important role in 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
• (iv) The habitual nature of non-compliance. ⁴

OBJECTIVE OF SECTION 138, NEGOTIABLE INSTRUMENTS ACT, 1881

The offence under S. 138 was introduced in the Act when Chapter XVII was inserted by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 ⁵ and was subsequently supplemented and amended by the Negotiable Instruments (Amendment & Miscellaneous Provisions) Act, 2002 [hereinafter, Amendment Act, 2002]. ⁶ The objectives behind bringing section 138 on the statute were two: first, to enhance the acceptability of cheques in settlement of liabilities, ⁷ and second, to enhance the credibility of the instrument. ⁸ In a large number of commercial transactions across India, it was noted that a cheque was issued merely as a device to not only stall but also defraud the creditors, thus eroding the sanctity and credibility of its issuance in commercial transactions. ⁹

EFFECT OF CRIMINALIZATION

After more than thirty years of criminalizing dishonor of cheque,it has emerged as not only an acceptable, but also a preferable mode of transaction for conducting commercial activities. To this extent of the objective, S. 138 served its purpose. With a manifold increase in the intra-state and inter-state commercial activities, the cheque came to be accepted as a viable and effective mode of conducting transactions. To an extent, the faith in the criminal courts for recovery in cases of dishonor played an important role, but the wider acceptance of cheque can majorly be attributed to the trust reposed by commercial entities on one another in the post- globalization era.

The credibility of a cheque, however, continues to be in peril, as S. 138 cases have continued to constitute at least one-fifth of all criminal cases pending in district courts across India. ¹⁰ In this background, where the credibility of cheque has rather diminished in the past decade, and criminalization of the offence has not reaped satisfactory results, decriminalizing poses as both- an effective, as well as an ineffective solution owing to the unproved myth of criminalizing having a more coercive effect.

After the offence was criminalized in 1988, it was supplemented by numerous other provisions to cause a deterrent effect in the public by imposing tough consequences in case of conviction under the provision. However, the ineffectiveness in the functioning of these provisions and low conviction rate coupled with rigours and loopholes of court trials, has caused the coercive power of criminalizing cheque bounce to diminish.

The primary challenges affecting the disposal of these cases and consequently the credibility of the instrument, as noted in Makwani Mangaldas 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]. ¹² A complaint filed for the offence under S. 138 despite having criminal consequences, is private in nature. ¹³ Henceforth as observed, the police pays less heed to private complaints, and the courts being confused of this fact, have failed to take actions against the negligent police officers. ¹⁴

Yet another challenge is that S. 143 of the Act provides for an offence u/s 138 to be tried summarily within a period of six months. ¹⁵ However, 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 the disputes get prolonged to even more than fifteen years. The bench in Makwani, ¹⁶ also observed that courts have seldom 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.

EFFECT OF DECRIMINALIZATION

S. 138, though introduced as an offence with strict liability, ¹⁸ has numerous safeguards in place, in form of statutory provisions to protect the interests of bonafide cases.

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.

Other than the ‘mens rea’ point, all the other principles seem to be better upheld with the decriminalization of the offence.The criminalization of the offence is rendered redundant as the deterrent effect has diminished with decade-long trials.Decriminalization prima facie, seems to even improve the confidence of investors with no consequences in case of delayed or dishonour of cheque numerous times.

However, in a scenario where the offence is decriminalized, ceteris paribus, the 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 such as 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.

Moreover, assuming that a decree has been passed in favour of the complainant, the execution of the decree continues to pose yet another hurdle. The arrest and detention of the drawer for execution of the decree can be resorted to. However, the provisions themselves have certain limitations. Where the drawer is a woman, she can neither be arrested or detained, nor can her property be attached for the purposes of recovery. ²²Further, the detention can only be for a maximum of three months, on the cost of the complainant. ²³ Thus, the recovery mechanism in case of dishonour of cheque, does not make it easy for investors to continue to do business in India.

Lastly, it is pertinent to point that S. 138 is already a compoundable offence at any stage, by virtue of S. 147. ²⁴

With the provision being in force for almost two decades, speedy disposal of cases continues to remain a challenge. ²⁵ With this background, the Finance Ministry notification to reclassify the offence as compoundable, is nothing more than inefficacious. ²⁶

CONCLUSION AND SUGGESTIONS

Therefore, on careful consideration of either situation, it is clear that the objectives of unclogging Indian Courts and improving investor confidence can be achieved only when a different efficacious mechanism is put in place. Such a commercially viable solution can only be sought by using advanced technology in this field ²⁷ 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 not misplaced.

Assuming that the government does decriminalize S. 138, the creditors shall have to resort to civil courts for the recovery of dues. In such a scenario, 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. Introducing measures to attach the property of the debtors in case of cheque bouncing, and 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 are some measures which can be introduced to provide for a better recovery mechanism.

The importance of banks in the dishonour of cheque cases, as well as the potential role that banks can play in ensuring the smooth functioning of the trial and court procedures, has been duly noted by the Supreme Court numerous times. ²⁸ 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.

Lastly, as observed by the apex court in Makwani²⁹ as well, 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.