The COVID 19 pandemic has pushed the economy towards the brink
of collapse. With India’s GDP growth going into negative for
the first time since 1979, the finance ministry has come up with
many schemes and policies to make business transactions more
efficient and prevent the economy from collapsing.

One such proposal was passed via circular dated 8^th
June¹ to fulfill the objective of SabkaSaath,
SabkaVikas and SabkaVishwas by decriminalizing Dishonour of
Cheque along with 38 other petty economic offenses. The objective
is to ease the path of business transactions because imprisonment
for such offense can have a deterrent impact on business and
investments.

This reason for such proposal can be drawn from the Makwana
case. In March 2020, the Hon’ble Supreme Court in the case of
Makwana Mangaldas Tulsidas v State of Gujarat,
noted that over 35 lakh cases of dishonour of cheque were pending
and registered a suo motu case to devise a mechanism to dispose off
such cases.

Thus, decriminalization would result in a reduction of clogged
cases.

WHAT IS SECTION 138, NEGOTIABLE INSTRUMENTS ACT,
1881?

Chapter XVII (Sections 138 to 147) of the Negotiable Instrument
Act, 1881 states Penalties in Case of Dishonour of Certain
Cheques for Insufficiency of Funds in the Accounts. This
Chapter was inserted by the Act 66 of 1988 effective from
1^st April, 1989. The objective was to make business
transactions more efficient and add credibility to cheque
payment.

The Hon’ble Supreme Court in the case of Kusum
Ingots And Alloys Ltd vs Pennar Peterson Securities
Ltd² has laid out the ingredients of section
138 as:

(i) a person must have drawn a cheque on an account maintained
by him in a bank for payment of a certain amount of money to
another person from out of that account for the discharge of any
debt or other liability;

(ii) that cheque has been presented to the bank within a period
of six months from the date on which it is drawn or within the
period of its validity whichever is earlier;

(iii) that cheque is returned by the bank unpaid. Either because
of the amount of money standing to the credit of the account is
insufficient to honour the cheque or that it exceeds the amount
arranged to be paid from that account by an agreement made with the
bank;

(iv) the payee or the holder in due course of the cheque makes a
demand for the payment of the said amount of money by giving a
notice in writing, to the drawer of the cheque, within 15 days of
the receipt of information by him from the bank regarding the
return of the cheque as unpaid;

(v) the drawer of such cheque fails to make payment of the said
amount of money to the payee or the holder in due course of the
cheque within 15 days of the receipt of the said notice

LIABILITY OF DISHONOUR OF CHEQUE

1. Civil liability

• A Fine twice the amount of dishonoured cheque under section
  138, Negotiable Instruments Act, 1881.
• Under order 37, Civil Procedure Code, 1908, amount as directed
  by the court.

2. Criminal liability

Section 138 provides imprisonment of 2 years or fine or both and
drawer will be prosecuted under section 417 and 420 of Indian Penal
Code.

Pros of decriminalization

1. As per 213th Report of Law Commission of India, over 38 lakh
cases of dishonour of cheque were pending in courts and out of them
over 7.6 lakh cases were pending in criminal courts in Delhi at
magistrate level alone.

2. Due to the huge backlog of these cases, trial of other cases
are also sidelined giving poor name to our criminal justice
system.

3. Dishonour of cheque can be penalized under sec 420 IPC,
therefore there is no need for another provision for the same
purpose.

4. Its criminality has also been substantially decreased by
making it a compoundable offense, which shows the intention of
legislature towards reducing the backlog of such case.

Cons of decriminalization
1. The purpose of section 138 is to enhance the credibility of
cheques thus making business transactions more safe and efficient.
Decriminalising it might create hindrance towards accepting
cheques. This can lead to distrust in trade practices.

2. The alternate remedy of civil court is time-consuming and
costly. Many payees belong to economically weaker section and
cannot afford the expense of civil litigation.

3. The fear of criminal prosecution ensures that the cheques are
honoured by the drawer, decriminalization will remove this
fear.

4. A cheque is mainly used as means of credit in the form of
‘post-dated cheque’, Decriminalising it would strip away
the credibility which can cause decline to economic activity.

5. It will over-burden the civil courts.

CONCLUSION

It is important to decriminalize petty offenses and especially
ones whose civil remedy is available to decrease the burden on the
criminal justice system. But at the same time it cannot be ignored
that the backbone of business transaction in this country is
cheque. Cheque is still the most common and most reliable mode of
payment and this is only because of the criminal aspect of section
138. Decriminalising it especially during the time of COVID can do
more harm than good. It can increase the number of cheques bounce
cases and can burden the judicial system at a time where most
physical courts are closed and conversion from physical to online
court is still not very efficient.

Thus, the proposal can be unnecessary and could further cause
economic downfall.

Footnotes

1 https://www.livelaw.in/pdf_upload/pdf_upload-376169.pdf

2 (2002) 2 SCC 745

Originally published 22 August, 2020

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