The Proposed Decriminalization of the Offence of Dishonour of Cheque under Section 138 of the Negotiable Instruments Act : An Effect-Based Appraisal

By Pritha Ghosh, 2nd Year UG Law Student, Ajeenkya DY Patil University of Pune

The Covid-19 pandemic has caused a great upheaval across all sectors of the country. The economy of India has witnessed a turbulence as well. With the aim to improve business sentiment and unclog courts, the Ministry of Finance proposed that it intended to decriminalize minor economic offences. It has opened the floor for suggestions from stakeholders against the move since the issue at hand does not pose any threat to national security or public interest. Unnecessarily burdening the courts and procedural lapses increased the pressure on the judiciary and it has therefore decided to do away with minor economic offences to improve the economy as part of the “Atmanirbhar economic package”. 

The notification[1] said:

“Given the nature of pendency in all tiers of the courts and the time taken for disputes to be resolved, legislative measures have been considered to help restore trust in doing business. In this pursuit, it is also important that a balance be found so that malafide intent is punished while other less serious offences are compounded. Accordingly, a framework is required such that a penalty levied is sufficient to act as a deterrent. Actions taken for decriminalisation of minor offences are expected to go a long way in improving ease of doing business and helping unclog the court system and prisons.”

The notification was released regarding 39 minor offences which will be decriminalized, one of which is the Section 138 of the Negotiable Instruments Act, 1881 (hereinafter the “NI Act”) which deals with dishonor of cheques since it often leads to a deterrence to normal businesses and causes problems in recovering business dues. 

The Section 138 of the NI Act creates statutory offence in the matter of dishonour of cheques on the ground of insufficiency of funds in the account maintained by a person with the banker and exceeds the amount arranged to be paid from that account by an agreement made with that bank (as mentioned in the act). It mandates that “such person shall be deemed to have committed an offence and shall, without prejudice to the other provisions of this Act, be punished with imprisonment for a term which may extend to two years, or with a fine which may extend to twice the amount of the cheque, or with both.”

In the recent case dated 5th March, 2020 the Supreme Court in Makwana Mangaldas Tulsidas v. The State of Gujarat & Ors. SLP (Crl) No. 5464/2016, the court ruled on decriminalization of dishonour of cheques of smaller amounts. One of the important suggestions made by the Supreme Court was to develop a mechanism for pre-litigation settlement in such cases with the objective of reducing the burden on courts. The National Legal Services Authority was suggested to introduce a scheme of dispute settlement methods to solve the matter before it knocks the doors of the courts. It is important to note that if the original complainant withdraws himself from the prosecution, no formal permission is required to compound the offence, Rameshbhai Sombhai Patel v. Dineshbhai Achalanand Rathi 2005 CriLJ 431.

In addition to this, another observation is that an act which is in the nature of a civil wrong has been categorised and penalised as a criminal wrong. Therefore, if the civil courts are given jurisdiction of handling cases relating to dishonour of cheques, it will reduce the number of suits. In addition to this, an individual will have to think twice before filing a plaint since it will involve Court fees. 

As per the Law Commission Report No. 213 [2], around 20% of the litigation work (currently pending) is regarding dishonour of cheques pertaining to Section 138 of the NI Act. Often, individuals give cheques against MSMEs or take personal or private loans and issue cheques which are post-dated. Had Section 138 of the NI Act not been there, there would be constant fear for the drawees to get the cheques honoured as soon as possible from their banks. The precipitating factor for making timely payments is mostly the fear of criminal litigation and the punishment that accompanies it. 

The proposed amendment to the section will remove the provisions of imprisonment. However, it does not address how the purpose of existence of the section will be justified. The purpose of the act was:

  1. To deter the habitual nature non-compliance in the public
  2. Mens Rea or criminal intention which plays the most important role to prove criminal liability. (Whether or not the action of non-compliance to the procedure had any malafide intent behind it will not be evaluated.) Mens rea is not required for the commission of an offence under Section 138 of the NI Act as per the virtue of the act itself and the succeeding sections, Section 139 and Section 140 which states that mens rea will not be available as a defence. [3]
  3. Increasing the ease of doing business and instil confidence among investors. 

A majority of cases in India of small businesses deals with the dishonour of cheques. The step of decriminalization will indeed remove the element of deterrence in addition to rendering the ones wronged without justice every time a contract is violated. The wrongdoer will be free to take advantage of this situation with the dishonoured cheque in hand. 

The proposed decriminalization of the Section 138 of NI Act therefore, does not justify itself. The government must therefore take into consideration the sharp blow that businesses and investors will potentially take due to this move. The banking sector, small businesses and the common man will be the most affected, the ones who treat cheques as a sign of guaranteed payment. 

DISCLAIMER : All right reserved to Legally Layman and Lexstructor

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[1] Ministry of Finance, Decriminalization of Minor Offences for Improving Businesses Sentiment and Unclogging Court Processes (Notified on 8th June, 2020).

[2] Law Commission of India, Fast Track Magisterial Courts for Dishonoured Cheque Cases, Report No.213, (November 2008), available at http://lawcommissionofindia.nic.in/reports/report213.pdf (Last visited on June 26, 2020)

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