Return of the Debtor’s Paradise? A case against Decriminalisation of Section 138 of the NI Act

A slightly abridged version of this first published at Bar and Bench – https://www.barandbench.com/columns/return-of-the-debtors-paradise-a-case-against-decriminalisation-of-section-138-of-the-ni-act

Creditor, n. From the Latin for “believer”; someone who lent money to a borrower and believes the loan will be repaid in full. That belief turns out to be true – most of the time 

(Devil’s Financial Dictionary – Jason Zweig)

Let’s face it: Our civil processes of enforcement of contracts and decrees are largely broken. They are Kafkaesque, prohibitively expensive and unduly protracted. At the very outset, we agree that a Cheque is essentially a contract, and, therefore, strictly speaking, a dishonor of cheque ought to amount to a breach of contract simpliciter; however, the legislature, in its wisdom, and for good reason (as we argue) criminalized it in 1989 and provided a legal framework to ensure that Cheques are honoured and there is a huge disincentive to issuing a bad cheque. 

The legislative policy of giving more teeth to Negotiable Instruments Act, 1881 (hereinafter “the Act” or “NI”) – over the last few years – has also been very clear.  For instance, the 2018 amendment to N.I. Act saw the addition of two sections namely- Sections 143A and 148 to the NI Act. The legislative intent behind the amendment was to strengthen the legal regime penalizing dishonor of cheques. The two provisions, collectively read, provide for enhanced safeguards in favour of the payee (complainant) by providing : i) payment of interim compensation to the complainant (since cases take long to be disposed-of and, in most cases, the accused doesn’t have much of a defense, liability being documented and often unimpeachable); and ii) payment of part amount as precondition of appeal from conviction. 

Section 138 served a salutary purpose and amendments further strengthened it. But then comes a rather striking somersault; an epidemic changes it all. 

The recent circular dated 8th June, 2020 (“Proposal”) released by the Department of Financial Services, Ministry of Finance proposes to decriminalise certain “minor offences”, including Section 138, purportedly to “improve business sentiment” and “unclog court processes”. This is striking. From the legislative policy of making the legal regime of cheque bounce cases more efficacious to the extreme measure of entirely decriminalising the dishonour of a widely trusted banking instrument, the intention of the legislature seems to have undergone a sea change. The authors believe that this move may not be apposite and will try to show why.  

To start at the start, there is no denying that the criminalisation or decriminalisation of any act (including omission) is an aspect of policy and depends upon the socio-temporal perceptions of the society. However, the propriety of any such decision ought to be seriously questioned when there appears to be a huge gap/disconnect between the societal and governmental perceptions. 

Let’s take a quick look at what these social and governmental perceptions were – at the time when cheque dishonor was first made an offence. 

Chapter XVII of the Act, of which Section 138 forms part, was inserted via amendment in 1988 (came into force in 1989), with the following objects and reasons: 

“To enhance the acceptability of cheques in settlement of liabilities for making the drawer liable for penalties in case of bouncing of cheque due to insufficiency etc. of funds in the accounts or for the reason that it exceeds the arrangements made by the drawer with adequate safeguards to prevent harassment of honest drawers.”

Objects and Reasons

The importance of enhancing acceptability of cheques and their honour by transacting parties was reflected again in the 2015 amendment, where the official Cabinet statement noted: 

“The clarity on jurisdictional issues for trying cases of cheque bouncing would increase the credibility of the cheque as a financial instrument. This would help trade and commerce in general and allow the lending institution, including banks, to continue to extend financing to the economy, without the apprehension of loan default on account of bouncing of a cheque.”

From its very inception, therefore, it becomes clear that the thrust of the legislature has been on strengthening prosecutions for cheque bounce cases and making wriggling-out of a cheque dishonor – relatively difficult.  

Judiciary has done its bit too. Matching steps with legislative developments, the judiciary has shown considerable zeal in providing judicial lubrication to the enforcement machinery. This is clear from a number of decisions expediting the process of trials, service of process, securing appearances, etc. 

After having concretised the regime of cheque bounce cases, the legislature now seeks to decriminalise the offence altogether. Broadly, on account of two reasons (both of which appear to have been triggered by the COVID-19 crisis and its adverse impact on economic activity). These reasons are: 

  1. Section 138 is blocking businesses and investments;
  2. Section 138’s contribution to huge pendency in courts which has negatively impacted court processes.  

Let’s examine each:  

Does Section 138 pose a threat to businesses and investments? 

In order to understand this limb, a few basics about Section 138 of the Act. Section 138 recognises the usage of cheques (including post-dated cheques) in business transactions and renders the act of dishonour of cheque – culpable, so as to deter future dishonours. It seeks to deter by providing for a two-year sentence in case of conviction. It provides for restorative justice by providing for a speedier remedy to the complainant by providing for a fine upto twice the cheque amount – as compensation. An amount that a complainant would take years to recover in the court, if she at all does. But how does S.138 benefit businesses?

Liquidity is the life blood of a business. Before the enactment of NI in 1881, businesses relied on informal accounting and payment systems. “Bahi-khata” or ledger account, as we know it, used to be the only record of payment. The informal nature of accounting systems led to more defaults, more disputes and eventually, businesses were forced to shut down or sustain heavy losses as there was no method to secure timely discharge of debts. With economic expansion, it was becoming challenging for businesses to ensure a sustained flow of money. With the enactment of NI, cheques, promissory notes and bills of exchange provided a way-out from the informal world. Out of these three species of negotiable instruments, businesses came to rely more on cheques as they were drawn upon a bank and the involvement of a trusted formal middle entity and, therefore, commanded great credibility. But even cheques lacked certainty and security of payment. For instance, a supplier supplied the raw material and received a cheque in her favour, only to discover after 2 months (when she deposited the cheque in her bank) that the promise of payment has been dishonoured. Undischarged debts surmounted. Businesses needed a guarantee, or at any rate, a huge disincentive to dishonour of cheques.  

To sustain the trust of businesses in cheques, the legislature introduced S.138 as a guarantee of payment. Post S.138, a drawer learnt to put her signature on a cheque more responsibly, and only after satisfying herself that she is maintaining sufficient balance in her account. Simultaneously, a payee learnt to present her cheque to the bank within a specified period of time, and take further steps (notice of payment) to recover her money if cheque could not be honoured from the bank. Now, a trader is not compelled to wait for years to get back her rightful money. This bodes well since time is of the essence in such transactions. For instance, a businessman desirous of expanding to multiple cities might just drop her plan if her previous debts have not been recovered within time. Future planning would suffer. This was the real mischief that S.138 sought to remedy. It sought to make cashflow more balanced, predictable and time-bound. Chapter XVII of the NI, in its present form and 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 S.138 proceedings. Businesses are not forced to shut down. Incalculable and unpredictable losses are not forced upon them. 

To balance things out, S.138 does not give any cause of action to the payee on mere information of dishonour. What this means is that a drawer gets a buffer time of a few more days for arranging the funds in case she could not arrange them in her bank account for any reason. Be it cash or an online transaction, instant availability of funds is a pre-requisite for carrying on any business. With a cheque, however, a small trader can place an instant order with her dealer for urgent supplies merely by issuing a cheque under her signature. She can arrange funds in a day or two. S.138 provides statutory recognition to the ground realities of businesses. This flexibility offered by S.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 sense of security coupled with necessary flexibility, as offered by S.138, provided a boom to the usage of cheques. MSMEs are known to rely heavily on cheques as they associate security and trust with this instrument and find it easy to document in their books of account. A cheque offers credible information about the drawer (account number, name, signature etc.) to the payee so as to enable her to maintain faith in the transaction she is entering into. Moreover, cheques are numbered and missing leafs can be traced. It enables parties to undertake charge-less transactions and keeps them away from cyber frauds. And as illustrated above, the legal strength of cheques vests in S.138, for, without a guarantee of honour, they are stale pieces of paper for businessmen. In practical terms, S.138 takes care of an indispensable segment of any business activity – payments and flow of money. This remedy, therefore, can only be said to add credibility to businesses and not to pose a threat to them. 

The Proposal nowhere disputes the legal tender of cheques as legal instruments and therefore, the usage of cheques is not sought to be curbed. Strikingly, what is being curbed is the remedy. Without Section 138, the affected parties shall be left either with a purely civil remedy in the form of a suit for recovery of money or with a criminal remedy under the Indian Penal Code, 1860.  (“IPC”) 

It’s no secret that  civil processes in India are plagued with delays and any businessman of even elementary prudence won’t touch a civil case with a 100 feet pole. Civil remedies, therefore, are insufficient and doing away with Section 138 would push people to use serious provisions under the IPC as a remedy. Now, this would be problematic.

Without a fairly balanced, proportionate and speedy remedy such as Section 138, there is a strong reason to believe that people would be compelled to invoke the IPC and try to give purely civil transactions – a criminal hue. 

Section 138 strikes a balance and provides an effective legal recourse. Decriminalisation would amount to dragging the parties to old legal processes and, in the long term, severely impact the prospects of ease of doing business in India. 

Pendency and delays in court processes 

Indisputably, the volume of cases filed under Section 138 has grown exponentially over the course of time and attempts have been made to expedite the procedure. But that’s hardly the reason for repeal. This, in fact, shows that Section 138 of the Act really works. Section 138, in that sense, is a victim of its own success as it has emerged as an effective remedy. Too effective a remedy possibly which has led to too many cases. But repeal is not an answer. It would not be prudent for the government to nullify the remedy itself due to a crunch of resources or inability to fix the issue of pendency. In fact, the increasing number of frauds/financial shenanigans requires the government to further strengthen the remedy and not to decriminalise the fraud itself. In all likelihood, the post pandemic society will see more frauds and we cannot afford to reduce an effective remedy into a nullity; especially, when it is most needed. 

In order to cater to the problem of pendency and delays, attempts are being made on the judicial side, which, if rightly adopted at the trial stage, may lead to positive outcomes. Such attempts must be met with appropriate government response. For instance, the Supreme Court, in Indian Bank Association and Others v. Union of India[2], recognised the issue of delays in cheque bounce cases and issued a slew of directives to be followed by Magistrates. The Delhi High Court, in Dayawati v. Yogesh Kumar Gosain[3], streamlined the process of mediation in cheque bounce cases and observed that, if elements of settlement exist, the possibility of an amicable resolution could be explored. It also provided for a remedy in case a mediation settlement in a S.138 case is not honoured. 

In Meters and Instruments Private Ltd. and Others v. Kanchan Mehta[4], the Supreme Court categorically laid emphasis on stricter compliance of summary procedure and compounding of cases. In one of the most recent developments, the Supreme Court delved into the question of pendency again vide its order dated 5th March, 2020 in Makwana Mangaldas Tulsidas v. State of Gujarat and Anr. The Apex Court succinctly observed that one of the most dominating factors behind pendency in cheque bounce cases is the failure to secure attendance of accused. In Para 6, it observed: 

“6. One of the major factor(s), for high pendency is delay in ensuring the presence of the accused before the Court for trial. As per recent study, more than half of the pending cases, i.e. more than 18 lakh cases, are pending due to absence of accused.“  

Makwana Mangaldas Tulsidas v. State of Gujarat and Anr

The Court also suggested to rope in banks to ensure effective disposal of these cases in the following words: 

“11. ….. An information sharing mechanism may be developed where the banks share all the requisite details available of the accused, who is the account holder, with the complainant and the police for the purpose of execution of process …..”

The Court further suggested introducing pre-litigation settlement in cheque bounce cases so as to reduce the volume of cases that reach the courts. Para 14 of the Order is instructive and reads thus: 

“14. With ever growing institution of N.I. cases, there is a need of developing a mechanism for pre-litigation settlement in these cases. The Legal Services Authorities Act, 1987 provides for a statutory mechanism for disposal of case by Lok Adalat at pre-litigation stage under Sections 19 and 20 of the Act. Further, Section 21 of the Act, recognises an award passed by Lok Adalats as a decree of a civil court and gives it a finality. This Court in K.N. Govindan Kutty Menon vs C.D. Shaji, (2012) 2 SCC 51 has held that:

“Even if a matter is referred by a criminal court under Section 138 of the Negotiable Instruments Act, 1881 and by virtue of the deeming provisions, the award passed by the Lok Adalat based on a compromise has to be treated as a decree capable of execution by a civil court.””

Interestingly, in Meters and Instruments, the Court had advanced a step ahead and envisaged the possibility of online proceedings in cheque bounce cases as a step forward in tackling the concern of pendency. It observed thus: 

“Use of modern technology needs to be considered not only for paperless courts but also to reduce overcrowding of courts. There appears to be need to consider categories of cases which can be partly or entirely concluded “online” without physical presence of the parties by simplifying procedures where seriously disputed questions are not required to be adjudicated. Traffic challans may perhaps be one such category. At least some number of Section 138 cases can be decided online. If complaint with affidavits and documents can be filed online, process issued online and accused pays the specified amount online, it may obviate the need for personal appearance of the complainant or the accused.

Meters and Instruments (Supreme Court)

The cases above reveal that various issues concerning Section 138 have been addressed time and again by the judiciary. Inarguably, this frequent judicial intervention is born out of the fact that the remedy in Section 138 has been instrumental in securing credibility of financial transactions involving cheques and, as such, needs to be preserved and further strengthened. More loopholes, of course, remain to be plugged.   

We reiterate that, merely because a subject matter has posed issues of pendency, it does not ipso facto make a good case for decriminalising the subject matter. It, however, does make a good case for radical legislative reforms in line with judicial directives, something that we are yet to see. Once the utility of a provision is unquestioned, as is the case with Section 138, the road must go forward and not backward. Section 138, therefore, must stay.

Indeed there are grave financial constraints that have emerged in the light of the pandemic. Liquidity has taken a great beating. Consequently, there could be cases of dishonour wherein the drawer issued the cheque with a bona fide intention to honour it; however, the emergence of this black swan event rendered her incapable in honouring it. Law must be alive to such situations and afford protection to such drawers by retrospectively suspending the application of S.138, albeit narrowly tailoring it only for a specified time-frame. This, we believe, is precisely the area where legislative intervention is required presently. Through suitable modification, the legislative policy should aim to protect innocent businessmen in this hour of need and not to do away an effective tool like S.138. 


[1] Authored by Bharat Chugh and Yashdeep Chahal.

Bharat is a former Judge and a Partner at L&L Partners Law Offices. Yashdeep is a Judicial Law Clerk at the Supreme Court of India. The views expressed here are personal.

[2] (2014) 5 SCC 590

[3] 243 (2017) DLT 117

[4] (2018) 1 SCC 560

One Reply to “Return of the Debtor’s Paradise? A case against Decriminalisation of Section 138 of the NI Act”

  1. Yes needs to be done away with.In my experience it’s a tool of harassment by Big business houses against their dealer’s.I haven’t come across a Court which has less then 200 matters.Most of the cases are abuse of process of Law.Victim is generally small traders or middle class people.it takes atleast 5 years to settle.
    Were as if you have a good case of recovery the order 37 is far better.I have found order 37 get desired earlier then 138.In 138 every one is harassed.

    Like

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