The economic havoc created by the COVID-19 is alarming in ways, more than one
can even imagine. India's economic condition has been in turmoil too. In order
to cope up with the changing scenario, the central government has devised
various policies and thereby, has introduced several notable changes and updates
across the arenas of Goods and Service Tax, Income Tax, Customs and Central
Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 has also been
introduced, by The Ministry of Finance (FinMin) to increase the threshold of
'minimum default limit' and also introduced section in order to suspend
initiation of corporate insolvency resolution process for default for minimum
six months and maximum one year. Therefore, it is of utmost importance that the
legislative policies framed by the central government in order to tackle this
crisis does not end up yielding negative results thereby, eventually acting
against the very intent of that policy.
Recently, one such significant measure was also adopted by FinMin via circular
dated 8th June, to cope up with the crisis along with fulfilling the objective
of achieving Sabka Saath, Sabka Vikas and Sabka Vishwas
by proposing the
decriminalization of the offence of dishonour of cheques under Section 138 of
the Negotiable Instruments Act, 1881 ('the Act') along with other thirty-eight
minor economic offences.
Offence under section 138 of the Act is intrinsically civil in nature, with
compensation as its primary objective. It has been given criminal connotation
as a criminal liability is casted upon the defaulters which is punishable with
imprisonment extendable to 2 years, with fine extendable to twice the amount of
cheque or both, so as to deter future dishonour of cheques.
But under no circumstances should it be considered equal to the offences under
the provisions of Indian Penal Code or other criminal laws.
Ironically, not long ago FinMin's legislative policies were focusing upon
strengthening the legal mechanism punishing dishonour of cheques via insertion
of sections 143A & 148 to provide redressal to the complainants and increased
safeguards for payee and interim relief.
Now suddenly due to the pandemic, the offences under section 138 has been
classified as minor offences, merely a procedural lapse and minor non-compliance
thereby completely ignoring its legislative history, intentions and objectives
of the past amendments and judicial pronouncements which were made to make it
more exacting and firm.
Finmin's Intention Behind The Proposal
FinMin's heart was at the right place while proposing this step because criminal
penalties like imprisonment for such offences are perceived as deterrents and
impacts business sentiments and investment
Another reason was that recently in March, 2020 the Supreme Court in Makwana
Mangaldas Tulsidas v State of Gujarat
[or in the Makwana case
that over 35 lakh cases of cheque bouncing were pending and utilizing judicial
time and money, and registered a suo moto case to devise a mechanism to dispose
of these cases rapidly. Therefore, its decriminalization would not only
provide with an opportunity of doing business with ease thereby inducing
investment and reviving economy during COVID-19, but will also assist in
effective reduction of clogged cases so that the courts would focus on other
Ignored Intention And Object Of The Section 138 And The Act
The intention behind introducing the section in 1988 was:
to enhance the acceptability of cheques in settlement of liabilities. Later,
the Supreme Court in M/s. Dalmia Cement (Bharat) Ltd. v M/s. Galaxy Traders
and Agencies Ltd. and others
stated that the section was inserted to impose
strict liability on the defaulters, to increase the debt recovery rates and to
provide the rightful claimants with an adequate relief.
Further, the government while approving the 2015 amendment bill to the act also
shared the same intention by stating that the section is important as it
provides clarity on jurisdictional issues...would increase the credibility of
the cheque as a financial instrument.
The proposal seems to have blatantly ignored that the act actually does not
deter business sentiments instead the existing mechanism provides ample
opportunities to safeguard the interest of honest and bona fide drawers which
acts as a catalyst to promote business.
Cheques are not supposed to be used as tools of deceit. The issuer of cheques
proofers a solemn promise to pay, it must be honoured, when it is issued,
and if it is not, a notice is issued at first to provide the person with an
opportunity to pay the amount and if it's still not paid, then the recourse of
criminal trial and consequences are taken. The offence was already
compoundable at any stage without permission of the court under section 147 of
the Act and the magistrate was given the power to release the accused when the
complainant is compensated to the court's satisfaction.
Moreover, section 143 of the Act read with section 258 Cr.P.C. entitles the
courts to close the proceeding when the defaulter repays the cheque amount with
interest and cost by a specified date as assessed by the Court. The act and
courts in actual fact focuses on protecting drawer's rights by giving them
choices at various stages to pay what is due on their part to avoid prosecution,
therefore proving that the section does not act as a deterrent for business and
Ignored Possibility Of Alternative Measures To Reduce The Burden On The
The exponentially growth in the cases filed over time under Section 138 actually
shows that it is needed more than ever. It shows that the section in fact is too
effective but now it's suffering for its own success. Anyhow repealing, is not
the answer especially post the economic havoc created by the pandemic. The
government should rather focus on how to make it more efficient to protect
traders from upcoming financial frauds.
The Supreme Court on several instances have addressed the issues regarding
pendency and delays, and have made attempts to rectify it, like by issuing a
slew of directives to be followed by Magistrates, and suggesting the usage
of modern technology (artificial intelligence), continuous online proceeding and
stricter compliance of summary procedure to effectively deal with and reduce the
backlog of cheque dishonour cases. If these are rightly implemented at the
trial stage along with unfettered support and relevant response by the
government, may galvanize a positive outcomes.
To address the concern of increasing burden upon the courts, there are other
possible methods which can be adopted. The Delhi High Court in Dayawati v Yogesh
Kumar Gosain, prominently promoted the practice of mediation to resolve cheque
bounce offences. Even the, recently the Supreme Court in Makwana advised to
decriminalize dishonour of cheques of smaller amounts to prevent excessive
flooding of petty cheque bounces cases which can also be dealt with through
alternative dispute methods, but the FinMin took it too seriously. Apart
from this, minor crimes such as bounced cheques can be dealt with establishment
of One Day Courts
which would act as a safeguard against cumbersome long
court proceedings and legal expenses.
In UAE the defaulters for a cheques amounting equal to or less than 200,000 AED
can be sentenced to pay penalties directly by the Public Prosecutor (without
referring to the courts. Similar amendments can be made for cheques drawn of
small amount, basically in transactions by MEMEs or by small traders where the
core purpose of the suit is to recover money.
Internal surveillance committees con be set-up by banks for investigation,
redressal and settlement of bulk cheques dishonours, thereby achieving speedy
recovery with less inconvenience. Penalties like decreasing the defaulters CIBIL
score and/or divesting them of their credit card and loan facilities can
discourage cheque bouncing offences.
Probable Repercussions Of The Decriminalizing Dishonour Of Cheques
Impact Upon Businesses:
Revisiting The Issues Faced During The Bahi Khata
System Of Doing
In pre NI Act era of 1881, businesses relied on informal accounting systems. Bahi-khata
or ledger account, as traditionally known, served as the only payment records.
Resulting in shutting down of businesses to shut down or sustain heavy losses
owing to no method of securing timely recovery of debts. Contrasting fraud
against negligence is very subjective; hence ignoring the fraudulent intentions
of defaulter will hamper the functioning of market. Cheques as a mode of payment
in majority financial transactions will lose their sanctity and credibility,
fearing to switch back to cash payments, taking a toll on government's campaign
for cashless economy.
To sustain the trust in cheques, Section 138 of NI Act was introduced as a
guarantee of payment. Thereafter, a drawer became more aware before drawing a
cheque. Simultaneously, a payee was sensitise about withdrawal and remedy for
payment default, ensuring swift payment. Chapter XVII of NI Act, in its present
form along with latest amendments, takes care of liquidity concerns as it
entitles the payee to claim some cash in hand for running business operations
even during the pendency of Section 138 proceedings. Businesses are not forced
to shut down due to financial constraints. As an equaliser, Section 138 bars any
cause of action to the payee on mere information of dishonour, whereby a drawer
gets buffer time of for arranging the funds in case of any shortage.
Instant availability of funds is a pre-requisite for conduct of business. The
flexibility offered by Section 138, without compromising on the guarantee of
payment, is very useful for small and medium level traders who may face issues
in arranging funds. The proposal nowhere disputes the legal tender of cheques as
legal instruments but tends to curb the remedy.
Decriminalisation would result in subjecting the parties to outdated legal
processes and, in the long term, severely impacting the prospects of ease of
doing business in India. In India, cheque dishonour cases arise mostly from the
business contractual relationships, with the decriminalized Section 138 legal
certainty of getting justice by rightful claimant in case of contractual
violation will be diluted, and they will stop accepting payment in cheques,
fearing non-payment and with no remedy for the same.
Expected increase in number of frauds and losses incurred due to non-payment,
can affect the economy on a macro level, pushing it in financial depression,
banking industry being the most affected of such changes. It was due to severity
of penalties that cheques were considered a secure mode of payment, lowering the
guards of Section 138, a severe problem in recovering dues and therefore acts as
a deterrent rather than promoting business.
Indirect Burden upon the Judiciary
Civil procedures in India are afflicted with delays. Businessmen have always
been sceptical before opting for a civil remedy, and it is no secret. With
Section 138 gone, the dishonoured cheque holders will be forced to commence
proceedings against defaulter under Section 406 (Criminal breach of trust) and
420 (Cheating) of the IPC.
So technically we will be back to square one. There will be multiplicity of
litigation and the number of cases will remain the same, thus the very purpose
of decriminalizing will be defeated. Incentivising parties to opt for a criminal
recourse for an inherently civil transaction is pointless when Section 138 aptly
strikes a balance and provides an effective legal recourse.
Impact upon Advocates
The Government did not consult the statutory bodies or took recommendations from
experienced litigants in the field, which was even squarely objected by the Bar
Council of Delhi and the Bar Council of Maharashtra and Goa. The members
vehemently stated the step to decriminalize the section would not only put their
careers, livelihood and survival at great stake, as majority of the litigants
practice law under this field, but would also result in eroding public
confidence and legal security of an individual in the judicial system.
Without the fear of sanctions the sentence foisted would merely be a paper order
and will only ridicule the existing well-established system. The government
should refrain from resorting to such measure which would essentially defeat the
objectives of a successfully established, affect the smooth operation of
commercial and trading activities, and eventually end-up affecting the economy
of the country.
The established importance of Section 138 in upholding the reliability and
integrity of cashless financial transactions along with the fact that the
judiciary frequently intervenes to further improve its application manifests
that the section should not be decriminalized.
We were supposed to move forward towards a cash less economy but this step is in
fact fostering us to take a step back towards a cash-based economy as traders
will lose trust in one another and thus, lead to increase in black money too.
This decision might or might not improve business sentiments
but would for sure encourage and reduce the fear in the
minds of perpetrators to defraud and cheat innocent persons and affecting honest
traders, businessmen, etc. Thereby defeating the very basic purpose and object
of Section 138 of the Act i.e. to uphold faith and confidence of the trading
community during commercial transaction.
- GOI, MoF, 'Statement of Reason: Decriminalisation of Minor Offences for
Improving Business Sentiment and Unclogging Court Processes' (8 June 2020)
< https://www.livelaw.in/pdf_upload/pdf_upload-376169.pdf > accessed 30 June
- Meters and Instruments Private Ltd. and Others v Kanchan Mehta  1
SCC 560  [or 'in the Meters case'].
- Negotiable Instruments Act 1881, s 138.
- Kaushalya Devi Massand v Roopkishore Khore  4 SCC 593 .
- See Negotiable Instruments Act 1881, s 143A & s 148.
- MANU/SCOR/24101/2020 .
- Banking Public Financial Institutions and Negotiable Instruments Laws
(Amendment) Act 1988, Statement of Object, s 138.
-  6 SCC 463 .
- Press Information Bureau, Government of India, Ministry of
Communications, 'Approval to introduce the Negotiable Instruments
(Amendment) Bill, 2015 in Parliament' (June 2015) < https://pib.gov.in/newsite/PrintRelease.aspx?relid=134187 >
accessed 30 June 2020).
- Rajesh Laxmichand Udeshi v Pravin Hiralal  2 ABR 1146 .
- Indian Bank Association and others v Union of India and others  5
SCC 590 .
- Negotiable Instruments Act 1881, s 147. See also Meters (n 2) 19.
- C.C. Alavi Haji v Palapetty Muhammed  6 SCC 555  [or 'in the Alavi
- Supra note 11.
- Meters (n 2) 3.
-  1 JCC 53.
- Makwana (n 6) 15
- UAE Federal Penal Code 1987, art 401.
- Letter from Bar Council of Maharashtra and Goa to Ministry of Finance
(17 June 2020)
accessed 30 June 2020.
- Alavi Haji (n 13).