The Department of Financial Services under the Ministry of Finance, Government of India issued a notification on 8 June 2020, proposing the decriminalization of 39 ‘minor’ economic offences to promote the economic growth of the country. These proposals have been made primarily in the light of the pendency of cases before the Courts that lead to uncertainty in legal processes and in turn, makes conduct of business tougher. According to the notification, the imposition of criminal penalties hinders both domestic and foreign investments. Keeping in mind the ongoing pandemic, the government has adopted decriminalization of these offences as a response strategy to revive the economy and for efficient justice delivery. Amongst the several offences proposed to be decriminalized, one which has resulted in many deliberations is S.138 of the Negotiable Instruments Act, 1881 (NI Act) providing for punishments in case of dishonour of cheques.
Criminal liability in case of dishonour of cheques
Paper-based payment instruments like cheques amount for almost 60% of the total non-cash transactions in India. Even with the introduction of online payment mechanisms, the use of cheques for payments for various services is substantial. Intending to protect the drawee and to ensure that the cheque’s drawer fulfils his commitment, the government introduced penal liability in case of dishonour of cheques under S.138, NI Act in 1988.
According to this section, where a cheque issued by a person for the discharge of any debt or liability is returned unpaid by the bank on account of insufficient funds or because the amount sought to be paid exceeds the amount allowed by the bank, such person shall be punishable with imprisonment for a term which may extend to two years and/or with fine extending to twice the amount sought to be paid. The object of criminalizing S.138 was to regulate ever-growing commerce activities and safeguard creditor’s faith in the issuer of cheque.
Effect of decriminalisation of S.138 NI Act:
Decriminalisation of S.138 will create more problems than it seeks to solve. It will render the recovery of money from drawers impractical who may deliberately issue cheques that will be dishonoured. Recovery would then be sought under the provisions of the Indian Penal Code dealing with fraud, cheating and criminal breach of trust. The intent behind criminalising cheque-bouncing situations was to reinstate the faith of creditors in payment by cheque. The use of cheques is avid in our country. Many businesses run on credit and decriminalisation of this provision would severely shake people’s confidence who would then refrain from accepting cheques. The proposed amendment seems to be cumbersome and problematic.
Furthermore, it is also argued that the notification erroneously addresses the bouncing of cheques as a less serious offence. Dishonour of a cheque essentially means failure to discharge one’s obligations. Issuing of cheque is an implied promise that the cheque will be honoured and payment will be made. Dishonour depicts a malafide intent to not comply with one’s commitments. The redressal of these grievances would then be possible before the civil courts which would again take years, thus disregarding the very purpose for which this amendment has been brought forward. There will be a mere shift of cases from criminal to civil courts but it would not dispense with the problem of backlog and pendency of cases.
Bar Councils of various states have also opposed this decriminalisation stating that it will not only adversely impact the traders but also the livelihood of lawyers. Several trade and bankers’ associations have also opposed this proposal. For instance, the Finance Industry Development Council stated that this move would further deteriorate the enforcement of contracts. According to the Confederation of All Indian Traders, it would lead to a rise in unfair trade practices and would completely distort the conduct of business in India.
The move for decriminalisation of S.138 is also motivated by the Supreme Court’s decision in Makwana Mangaldas Tulsidas v. State of Gujarat &anr. whereby the court directed the RBI to consider developing a new mechanism for resolving disputes arising from the dishonour of cheques at the pre-litigation stage. However, it is also equally important to note that the fear of imprisonment in the event of cheque bouncing is one of the primary reasons ensuring the adequate functioning of the cheque-payments system. In the event of decriminalisation, the entire system could be rendered unfruitful and ineffective.
Thus, what is required is to create a balance between the need for economic growth and the protection of rights of drawees of cheques. Instead of decriminalisation, such measures should be brought that would cause a deterrent effect in society and ensure the smooth functioning of businesses and investments. The Indian payments system heavily relies on cheques and in the absence of any effective remedy, the working of the economy would become more difficult and the governmental aim of ‘SabkaSaath, Sabka Vikas and Sabka Vishwas' will become unattainable.