Impacts of Decriminalization of Section 138 of NI Act, 1881

Contents  hide 

1 Introduction

2 About the Provision

3 Punishment for the offense

4 Why Should It Not Be Decriminalized?

4.1 2. Cheques serve as a source of credit

4.2 3. Decriminalization will remove the fear of wrongdoings

4.3 4. The provision under Section 138 has a safeguard for an honest drawer of the cheque in itself.

4.4 5. Increased Cost and expenses

4.5 6. Time duration

4.6 Other alternative methods that can be applied in place of decriminalization to achieve a Win-Win situation for the Government as well as the common man are:

5 Conclusion

5.1 Strong Opposition

6 Reference

6.1 Related

Introduction

The COVID-19 pandemic has affected the Indian economy radically. To curb as well as lessen the consequence of the ongoing crisis the Central Government has introduced some changes in the implementation and applicability of various laws in the areas. One such measure which the Ministry of Finance has proposed is regarding the decriminalization of 39 minor economic offenses including “Decriminalization of Offence of Dishonour of Cheques under Section 138 of the Negotiable Instruments Act, 1881” (hereinafter referr to as ‘the Act’) the Finance Minister of India, Mrs. Nirmala Sitharaman in a notification dated June 8, 2020,[1] stated out the reasons for the Decriminalization of minor offenses which aren’t fraudulent or with mala fide intention and aiming to ensure ease doing business and attracting investment both foreign & domestic. The notification state out certain principles that should be kept in mind when deciding on the re-classification of criminal offenses to compoundable offenses: 

1) Decrease the burden on businesses and encourage confidence amongst investors; 

2) More focus on the economic growth, public interest, and national security should remain at the top; 

3) Mens Rea (mala fide/ criminal intention) plays a vital role in the imposition of criminal liability; hence, it is critical to evaluate the nature of non-compliance

4) The habitual nature of non-compliance.[2]

About the Provision

Section 138 of Chapter XVII of the NI Act deals with “Penalties in Case of Dishonour of Certain Cheques for Insufficiency etc .of Funds in the Accounts”. [3]The purpose of any proceeding, initiated u/s 138 of the NI Act, 1881, is that the cheques should not be use by people as a tool of fraudulence. When a cheque is issue by a person, it must be honor and

if it is not honor, the person is allow to pay the cheque amount by the issuance of a notice and if he still defaults, he will face the criminal trial and consequences. The government has proposed decriminalization of section 138, Negotiable instruments Act on the following grounds:

1. It provides an opportunity of doing business with ease thus bringing investment in the economy.
2. Criminal penalties including imprisonment for minor offenses acts as a limit and are one of the major reasons impacting business sentiments and further hindering investment.
3. Uncertainty in legal processes and the time taken for resolution in the courts increases cost in terms of legal expenses and time.
4. Acts as a COVID 19 response strategies to help revive the economic growth and improve the justice system.
5. It will be effective in reducing the clogging of cases in courts and will lead courts to focus on important pending cases.

Punishment for the offense

A person is deemed to have committed an offense and shall, without discrimination to any other provision of this Act, be punished with imprisonment for a term which can be extended to two years, or with a fine which can extend to twice the amount of the cheque, or with both. The intent of the legislature to insert the penalizing provisions was referred to by the Hon’ble Supreme Court of India in the matter of Modi Cements Ltd. Vs. K.K. Nandi wherein the court observed that the prime reason for insertion of such provision is to prevent

dishonest use of cheques and to ensure credibility of the businesses.

Why Should It Not Be Decriminalized?

1. The objective of the Act

The main objective of Section 138 of the NI Act is to increase the credibility of the instrument and contribute towards the trade &

commerce across India with a positive outlook. It resonates with the Government’s efforts towards Ease of Doing Business.

2. Cheques serve as a source of credit

In trade practice, cheques have been widely use as a means of credit rather than as a means of payment. The issuer in lieu of commodities usually issues a post-dated cheque for payment. Therefore, decriminalization of the entire Section138 of the Act would pave the way for dishonest drawers

to avoid penal responsibility altogether after issuing the cheque and its consequent dishonor.

3. Decriminalization will remove the fear of wrongdoings

The drawer of the negotiable instrument like cheque still has a fear of facing criminal punishment together with the penalty of repayment of twice the amount. The proposed change in law will eradicate such fear. The instrument of the cheque will lose its good faith, trust, and reliability in the market, thereby resulting in lowering

the number of transactions through cheques.

4. The provision under Section 138 has a safeguard for an honest drawer of the cheque in itself.

It is only after receiving the notice of demand from the payee or holder in due course of time and upon expiration of 15 days from such receipt, the offense is deem to have been committed. In this regard, the drawer of

such cheques has an opportunity to make payment of cheque amount within 15 days and not face any criminal action. However, Section 147 of the NI Act makes the offenses under this Act compoundable. Therefore, both parties can settle at any stage and the drawer can escape further prosecution.[4]

5. Increased Cost and expenses

Proceedings under Section 138 attract lesser court fees as compared to civil proceedings. Upon decriminalizing the dishonor of cheques, the holders of such cheques would now be required to turn to civil courts to get relief. All matters about the dishonour of cheques will add to the workload of civil courts. It would also take away the right of the holders to recover up to 20%

interim compensation of the total cheque amount. This amount can be recover at the beginning of the proceedings under Section143A of the NI Act.[5]

Therefore, the poor litigants/ employees belonging to economically weaker backgrounds who are seeking recovery may find it difficult to afford costly and time-consuming civil remedies. The propose amendment has been oppose strongly by the Bar Council of Delhi

as well as the Bar Council of Maharashtra and Goa.

6. Time duration

Generally, a large number of the criminal complaints filed under Section 138 of the NI Act

settled either on or before the very first date of appearance or

at the initial stage of these proceedings. 

However, the decriminalization will lead to litigants resorting to civil remedies such as a suit for recovery which are time-consuming. Even after the judgment, the obtaining of a court decree, as well as the successful execution of such decrees, will be a burdensome and

long-drawn process. The alternative remedy of seeking recovery from civil courts is time-consuming and

is costly as the court fee payable at the time of filing of civil suits is much more than at the time of filing a criminal complaint.[6]

Other alternative methods that can be applied in place of decriminalization to achieve a Win-Win situation for the Government as well as the common man are:

• A cheque bounce can also be discouraged and prevented by decreasing the CIBIL score of nonpayers and further depriving them of credit card and loan facilities.
  • Banks can also establish a vigilance committee to investigate the matter of bulk cheque dishonors and act for redressal and settlement so that there are a speedy recovery and less hassle.
  • Minor crimes such as bounced cheques can be dealt with with the establishment of “One Day Courts”. The decision on such crimes is issued within 24 hours. This would act as a safeguard against burdensome long court proceedings and high costs and expenses.
  • The amendment should be brought concerning the detention of certain bounced cheques or cheques drawn for small business transactions or cheques drawn by small and medium enterprises etc. The Supreme Court in its recent order dated 5.03.2020 in Makwana Mangaldas Tulsidas v State of Gujarat, opined on decriminalization of dishonor of cheques of smaller amounts. The key focus of the order was to decriminalize dishonor of cheques for only minor amounts so that the over-flooded situation of cheque bounces cases can be dealt with through alternative dispute methods. It was not expected that the Government would not consider
  • the suggestions of the Supreme Court and propose to decriminalize section 138 as a whole.[7]

Conclusion 

The Central Government has proposed this amendment with the objective of, “ Sabka Saath, Sabka Vikas, and Sabka Vishwas”; But does everyone will be benefited from this step is something

that the proposal makers need to have a look at. The amendment is going to benefit one side of the economy at the price of the other. Decriminalization will fade the fear of criminal proceedings, leading to the issuing of cheques with no legal

burden of actually making the payment. The Union needs to think about other alternatives to the decriminalization of Section 138 of the Act. Implementing this will only create more hurdles for a better economy than reducing one.

Through various Supreme Court judgments, it has been established that the offense mentioned under Section 138 is a civil wrong in nature however it was given a criminal edge to fine the offenders, considering the nature of the offense civil courts can be given jurisdiction to adjudicate the cases concerning to dishonor of cheques of small amounts, it will reduce the number of suits filed in the civil court since the party will be having an additional burden of paying court fees for filing a suit and

unless the claimant has bonafide intent he will think before approaching the court

as it involves resources which need to invest for the case.

Strong Opposition

The strong opposition by different Bar Councils has pose a big question on the effect which will be cause to various stakeholders. How is it going to affect the economy and whether the objects stated will be achieve, only time can answer these questions the propose move by the union government acting through the Ministry of Finance will harm the already affect trade and

commerce and create a sentiment of loss of methods of recovery of money among the potential cross border investors and

other foreign investments.

Thus, the move may result in a classic example of “good intentions went bad”. Therefore, in view of the above discussion, the element of

criminal prosecution that stands as part of the NI Act should not be altered.

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Reference

[1] By Shishir Sinha, Finance Ministry eyes decriminalization of select offences, THE HINDU BUSINESS LINE, (Feb06,2021,2:11PM),https://www.thehindubusinessline.com/economy/policy/finance-ministry-proposes-reclassification-of-selected-offences-to-compoundable-offences/article31785831.ece

[2] By Diva Rai, Decriminalization of Section 138 of Negotiable Instrument Act, 1881,BLOG.IPLEADERS(Feb 06,2021, 2:11PM),  https://blog.ipleaders.in/decriminalization-of-section-138-of-negotiable-instrument-act-1881/

[3] The Negotiable Instruments Act,1881§ 138

[4] The Negotiable Instruments Act,1881§ 147

[5] Negotiable Instruments Act,1881§ 143A

[6] by Palash Taing, India: Decriminalization Of Criminal Offence Under Section 138 Of Negotiable Instruments Act, 1881,MONDAQ,(Feb06,2021,2:11PM)https://www.mondaq.com/india/crime/966664/decriminalization-of-criminal-offence-under-section-138-of-negotiable-instruments-act-1881

[7] By  Sargun Babuta, Decriminalization of Section 138’ is Indian Economy heading for a DOOM?, TAX GURU, (Feb06,2021,2:11PM)https://taxguru.in/corporate-law/decriminalization-section-138-indian-economy-heading-doom.html