WHY THE FINANCE MINISTRY IS PROPOSING DECRIMINALISATION OF SECTION 138 NI ACT BY ADV. SAURABH MISHRA

This article was written by Saurabh Mishra, Advocate-On-Record at the Supreme Court of India.

INTRODUCTION

On April 16, 2021, the Supreme Court issued a series of orders to ensure that bounced cheque cases are quickly resolved across the country[1]. Additionally, the Apex court included a request made by the Centre that laws be amended to allow trials in civil cases against the same person within one year to be consolidated when they are filed against the same person and the same transaction is at issue.

As of December 31, 2019, 35.16 lakh cases of bounced cheques, out of a total of 2.31 crore pending criminal cases in the country, had yet to be decided by the Supreme Court, which had taken cognizance of the “humongous pendency” of cheque bounce cases in March 2020.[2]

A Supreme Court decision in one case, making a hint at decriminalisation, stated that decriminalisation of cheque bounce cases involving small amounts may be left to civil courts. Increasingly, judges now prefer compensation to punishment when it comes to cheque bounces.[3]

Even though the accused was willing to pay the amount on the cheque default, the High Court was unable to grant relief to him due to Supreme Court judgments requiring mutual consent to compound offences under Section 138 of the Negotiable Instruments Act, 1881.  Even displacing consent for compounding the offence if the accused was willing to pay compensation, the Supreme Court, in this important decision, dispensed with the necessity of consent.[4]

The Ministry of Finance, Government of India, issued a notification on 8th June 2020 titled: “The Decriminalisation of Minor Offences for Improved Business Sentiment and Unclogging Court Processes” (see here) which simplifies business compliance for multinational enterprises by decriminalizing small corporate charges. As a rationale for such actions, the government argued that it would attract investment.

THE ACT & THE SECTION

As part of the Negotiable Instruments Act, 1881 (“Act”), various types of negotiable instruments were addressed, such as bills of exchange, promissory notes, and cheques. Providing a feasible alternative to cash transactions, negotiating instruments form the backbone of the country’s business model.

The punishment for dishonouring a cheque is outlined in Section 138 of the Act. As a result of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act of 1988 passed by the Indian Parliament in 1989, the dishonour of a cheque became a criminal offence.

The intent behind introducing this section was to increase trust in cheques and make them more credible to promote the use of cheques. Cheques are deemed dishonoured either because there are not sufficient funds or for any of the other reasons prescribed in the act.

Hence, if an individual defaults on a cheque, such individual may be subject to imprisonment for a term of up to two years or a fine of twice the amount of cheque, or both.

An amendment in 1988 made the section a criminal offence[5]. As a result, cheque defaulters are held responsible for their actions and smooth business transactions are maintained without fear of fraud. Following this provision, the creditors have been able to invest freely and wholeheartedly and also built a trust for their dues to be recovered if they are owed any.

There is currently widespread use of cheques for everything from rent payments to school fees to loan payments and debt repayment. 1988 saw amendments to the Act and Sections 138-142 introduced to take care of disputes arising due to dishonoured cheques. Its objective was to improve the efficiency of banking operations and bring more financial discipline to business dealings.

THE PURPOSE

In a notification titled “Statement of Reason”[6], the government proposed amending Section 138 of the Act. As for the proposal, it was made in furtherance of the government’s policy to ease the doing of business ranking along with other factors such as reducing court backlogs and increasing the overall effectiveness of the system, as in fact more than 20% of the cases the courts face relate to cheques that bounce under Section 138.

It was decided to make Section 138 of the Act criminal even though it is essentially a civil wrong to prevent defaulters from defaulting, since credit is based on trust and good faith, and a single act of dishonesty would have immediate effects on the economy as a whole.

As a result of the government’s proposal, there has been considerable debate regarding whether to decriminalize this part of the criminal code or leave it the way it is. According to the court, in Kusum Ingots and Alloys Ltd v. Pennar Peterson Securities Ltd.[7], it was necessary to meet the necessary pre-conditions for violations of section 138 of the Act to occur.

When reclassifying criminal offences as compoundable ones, the Ministry has urged to keep the following principles (see here) in mind:

  • Increase confidence among investors to allow businesses to continue smoothly by lowering the financial burden;
  • Prioritize public interest, national security and economic growth;
  • It is crucial to evaluate the cause of the noncompliance, that is, fraud or negligence or inadvertently omitted act, in determining whether criminal liability applies.
  • Repeated non-compliance.

Due to the nature of pending cases in all levels of the courts and the time it takes for disputes to be settled, the ministry noted that legislative measures have been considered and are being implemented to help restore trust in doing business.

Therefore, the decriminalisation of these minor crimes is expected to help improve the ease of doing business and unclog the court system.

THE OPPOSITION TO DECRIMINALISATION
  • Bar Council: On June 13, 2020[8], Sanjay Rathi, Co-Chairman of the Bar Council of Delhi, addressed a letter to Finance Minister, Nirmala Sitharaman regarding the decriminalization. Mr Rathi’s letter stated that the Delhi Bar Council opposed the centre’s decision to decriminalize economic minor offences.

In the letter, the Bar Council expressed their feeling that this move would cause even more damage to the institution and will do no good for businesses or the Government.

  • The Indian Banks’ Association: The financial sector has expressed its opposition and hostility to the Finance Ministry’s proposal to decriminalize the offence of dishonouring cheques under Section 138 of the Act. The Indian Banks’ Association stated that the offence should not be decriminalized, but that the current provision of the law should be maintained.[9]

In addition, the Finance Industry Development Council (FIDC), which is a representative of Non-banking finance companies (NBFCs), that provide asset and loan financing, also opposed the proposal.  FIDC’s Director-General had also warned against decriminalising the offence under Sec. 138, since it would adversely affect contract enforcement, such as honouring debts and liabilities.

  • The Confederation of All India Traders (CAIT): The All India Traders’ Federation had requested that Section 138 shall not be decriminalized, citing that such a move would nullify the purpose of cheques and hurt the Indian banking sector.[10]

If decriminalization is enacted, the proposal would distort the business environment and give rise to unfair and unethical trading practices, thereby causing a huge loss of cash for businessmen who would be vulnerable to exploitation by immoral and fraudulent elements of society.

As for the issue of equal-monthly instalments (EMIs), it also stated that people, in general, would find it difficult to obtain goods on similar instalments (EMIs) because the cheques are always post-dated and, if the cheques bounce, nobody will accept them.

Coronavirus disease has taken a heavy toll on the world. As a result of the pandemic, the global economy has been halted. A fast-growing, populous country like India has been hard hit so far. Taking financial measures to ease off the burden of doing business in India, the government intends to revive the economy by calling in foreign investment, supporting domestic industries, and supporting micro, small, and medium businesses.

By decriminalising Section 138, the government hoped to achieve similar results and reduce the financial burden placed upon business, but the post-pandemic effect requires additional measures. In this particular situation, the implementation of this policy might not be very fruitful due to recession and economic pressure.

CONCLUSION & THE PRESENT SCENARIO

In response to requests to continue the current system, which could cause people to honour their financial commitments due to fear of prosecution, the government may drop its plan to decriminalize cheque bounce offences. Taking a final decision would require the Supreme Court to consult with a panel formed to address the pending cheque bounce cases.[11]

Though the arguments put forward until now are very important, they have an important part in determining whether or not to decriminalize Section 138. In the same vein, however, it cannot be denied that the act and the section require serious improvement given the staggering number of pending cases in India involving the same topic of dishonour of cheque and with no respite whatsoever. A solution for this problem that has plagued the justice delivery system for a long time requires some serious planning and coordination on the part of different levels.

According to the Supreme Court in a case[12], section 138 r/w 139 aimed to prevent fraud by abusing the banking system. As a result of decriminalizing financial transactions, we will return to several decades of the past rather than making any progress in the banking system[13]. As well as this, it needs to be understood that a dishonoured cheque by a bank causes irreparable losses[14] to the payee and the business environment in the nation as well as abroad, resulting in loss and setbacks both within and outside the nation, as the whole trustworthiness of the business deal is undermined.

REFERENCES

[1] Time for the decriminalisation of cheque bounce cases?  The Hindu (July 11, 2021). Available at: https://www.thehindubusinessline.com/business-laws/time-for-decriminalisation-of-cheque-bounce-cases/article35266720.ece

[2] SC issues norms for speedy disposal of cheque bounce cases asks the Centre to amend laws. The Week (April 16, 2021). Available at: https://www.theweek.in/wire-updates/business/2021/04/16/lgd12-sc-ld-cheque-bounce.html

[3] Makwana Mangaldas Tulsidas v. the State of Gujarat, Special Leave Petition (CRIMINAL) NO. 5464 OF 2016, decided on March 5, 2020.

[4] M/s Meters and Instruments Pvt. Ltd. v. Kanchan Mehta, Criminal Appeal No. 1731 OF 2017.

[5] Negotiable Instruments Laws (Amendment) Act, 1988, inserted Chapter XVII in the Negotiable Instruments Act, 1881 on (w.e.f. 1-4-1989).

[6] Ministry of Finance, Government of India, Decriminalization of Minor Offences for Improving Business Sentiment and Unclogging Court Processes (8th June 2020).

[7] Kusum Ingots and Alloys Ltd. v Pennar Peterson Securities Ltd., (2002) 2 SCC 745.

[8] Bar Council of Delhi writes a letter to FM Nirmala Sitharaman. Latest Laws (June 13, 2021). Available at: https://www.latestlaws.com/latest-news/bar-council-of-delhi-writes-a-letter-to-fm-nirmala-sitharaman-opposing-the-decriminalization-of-section-138-of-negotiable-instrument-act

[9] Banks oppose the Finance Ministry’s move to decriminalise cheque-bounce offences. The Hindu (July 21, 2020). Available at: https://www.thehindubusinessline.com/money-and-banking/banks-oppose-finance-ministry-move-to-decriminalise-cheque-bounce-offence/article32147355.ece

[10] CAIT urges govt not to decriminalise bouncing of cheques, writes to FM. Business Standard (July 20, 2020). Available at: https://www.business-standard.com/article/economy-policy/cait-urges-govt-not-to-decriminalise-bouncing-of-cheques-writes-to-fm-120072001494_1.html

[11] Govt is likely to drop the plan to decriminalise cheque bounce offences. Business Standard (May 12, 2021). Available at: https://www.business-standard.com/article/finance/govt-likely-to-drop-plan-to-decriminalise-cheque-bounce-offences-121051200037_1.html

[12] Rajesh Laxmichand Udeshi v. Pravin Hiralal Shah, Appeal (L) No.202 of 2012.

[13] Devansi Desai, Decriminalising Section 138 of Negotiable Instruments Act, 1881: Whether a right manoeuvre to boost the economy?, (2020)

[14] Goa Plast (P) Ltd. v. Chico Ursula D’Souza, (2004) 2 SCC 235.

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