Decriminalizing Section 138 Ni Act : Boom or Bane for Socio-legal Soceity?
Payment through cheque have become the most common way of making payment and transacting with other parties. In recent years, payment through cheque have increased tremendously. However, with such increase in the usage for cheques for repayment, cases of bouncing of cheques for want of insufficient funds and signatures mismatch also increased drastically.
Therefore, in order to keep a check on the negotiable instrument and to ensure repayment of the due amount to the debtor and providing remedies in case of non-repayment, legislature introduced the Negotiable Instruments Act.
Section 138 of the Negotiable Instruments Act provides for cases where the cheque have not been cleared due to want of insufficient funds or for signature mismatch or for other reasons. In such scenarios, the receiver of the cheque have the remedy of filing criminal case under thus Section before the Metropolitan Magistrate and recover not only the due amount but also the penalty and interest as well. Along with that, the drawer of the cheque is also faced with imprisonment.
However, legislature is now proposing to make Section 138 NI Act a civil remedy, thereby decriminalizing the Section and providing remedy for recovery amount along with penalty and interest only.
What’s legislature intended to propose?
Ministry of Finance on 8th June, 2020 issued a notification under the Department of Financial Services titled as Decriminalization of minor offences for improving business sentiment and unclogging court processes, thereby asking suggestions and opinions of various industry experts on the possibility of decriminalizing the offence of cheque bounce as enshrined under Section 138 of Negotiable Instruments Act.
And the major reason for this thought is to bring in more investment in the economy and ease the business doing mechanism along with lightening the burden of the courts. Furthermore, in the light of COVID-19, the pendency of cases have drastically increased due to which this seems the appropriate measure to be taken.
History of Negotiable Instruments Act and Section 138
Law enshrined under the Negotiable Instruments Act pertains to the entire commercial world at large and therefore, does not restricts itself to a state or even a country. This act was formulated to ease the process of doing business and transacting. Negotiable Instruments Act further contains various regulations for merchants and mariners in their day-to-day dealings. While India didn’t had much of foreign investment before the 90th century, globalization has given significant boost to the foreign investment, which leaded to use of cheques for transacting with various other businesses. Hence, the negotiable instruments Act was given a go ahead by the legislature to inculcate the faith in efficiency of banking operations and credibility in the business dealings through various negotiable instruments.
However, vide Banking, Public, Financial Institutions and Negotiable Instruments Law (Amendment) Act, 1988 (Act 66 of 1988), a new chapter i.e. Chapter XVII relating to the penal provisions for dishonor of a cheque was inserted. And the intention of the legislature to introduce such amendment was to deter the activities of dishonest payers and made them face the consequences of criminal trial. However, this Section not only provides for safeguard against dishonest drawers but also provide safeguard to honest drawers as well.
Supreme Court in the case of Goa Plast Pvt. Ltd. v. Chico Ursula D’Souza, while observing the object and ingredients of Section 138 and 139 of NI Act held that proper and smooth functioning of all the business transactions, particularly, of cheques as instruments, primarily depends upon the integrity and honesty of parties. Supreme Court further observed that 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 reliability of issuance of cheques in commercial transactions was eroded to a large extent.
Thus, it was clear for the interpretation of Supreme Court that the intent behind introducing Section 138 NI Act was to prohibit dishonest drawer from misusing negotiable instruments and protect the interest of the debtor.
However, cheque bounce was not always a criminal offence. Initially it was a civil wrong. It was only after 1988, when the amendment made it a criminal offence that bouncing of a cheque became a criminal offence. And the logic to deter the ever increasing cheque bounce cases, was seemed reasonable.
Why decriminalizing the offence now?
Pendency of cases in the Indian judiciary was already at its height. However, COVID-19 has worsened the situation even more. Due to these unprecedented times, courts were closed and those which were open were having restricted functioning. Not only this, COVID-19 brought unwanted jobs and salary cuts which lead to more and more defaults in the repayment mechanism.
Due to these unprecedented times, Government had already increased the threshold of liquidation under the Insolvency and Bankruptcy Code, whereby the default limit for initiation of liquidation proceedings were increased from Rs. 1 lakh to Rs. 1 crores. Thus, decriminalizing of Section 138 seems reasonable in such circumstances.
However, the major seems not to be protection of drawer of the cheques but the intention to bring in more confidence in the market through ease of doing business.
What changes decriminalizing of Section 138 will bring?
According to the Government of India, decriminalizing of Section 138 will bring in the following changes:
- Act of decriminalization will make investors feel more confident and in turn will attract more investments as chances of imprisonment in cases where the intention is not fraudulent will be gone.
- Ordering the accused to undergo jail term hurts the sentiment of businesses. Thus, decriminalization will remove such atmosphere and will create positive business culture.
- Decriminalization will not only reduce the burden from the courts but will also reduce the burden from prisons as well.
- And the last reason given is that non compliance in the business does not attract mens rea and therefore, there is no point in criminalizing an offence which is done via performance of business activities.
Furthermore, Supreme Court in the case of Makwana Mangaldas Tulsidas v. State of Gujarat & Ors. cited the astounding figure of pendency of Section 138 cases and observing such a worrying situation, Supreme Court observed that A recent study of the pending cases reflects pendency of more than 35 lakh, which constitutes more than 15 percent of the total criminal cases pending in the District Courts. Further, there is a steady increase in the docket burden.
Supreme Court further submitted that the pendency of these cases is one of the biggest problems and the same needs to be addressed as earliest. Moreover, the pendency also makes the complainants to wait for many years to recover their legitimate dues.
What is the stand of judiciary on this?
Supreme Court in the case of Goa Plast Pvt. Ltd. v. Chico Ursula D’Souza held that the object of the statute was to facilitate smooth functioning of the business transactions. The provision is necessary as in many transactions as the cheques were issued merely as a device to defraud the creditors. Dishonour of the cheque causes incalculable loss, injury and inconvenience to the payee and credibility of business transactions suffers a setback.
In another case titled as Dilip S. Dhanukar v. Kotak Mahindra Co. Ltd. & Ors., Supreme Court stated that the prosecution or punishment in Section 138 cases provide deterrence, however, the same cannot be used as a measure of persecution.
The Government has made its stance very clear: that decriminalizing Section 138 will bring positive and only positive change. However, it still had invited suggestions from various investors and shareholders and thus, it remains to be seen whether Government will actually decriminalize it or not?
However, one thing remains certain, it will have both positive and negative affects coming judiciary’s way with it.