In the light of disruptions caused by outbreak of Covid-19, the
Government of India has announced a slew of measures in the past
few months. One such significant measure is the Ministry of
Finance’s proposal to decriminalize thirty-nine minor economic
offences including decriminalization of offence of dishonour of
cheques under Section 138 of the Negotiable Instruments Act, 1881
(“NI Act“).

With the objective of facilitating ease of doing business in
India and reducing the fear of penalties for minor violations,
various sections of different laws have been brought under the
ambit of this notification. These legislations are as follows:

• Insurance Act 1938 (Section 12 and
  Section 103);
• SARFAESI Act 2002 (Section 29);
• PFRDA Act, 2013 (Section 16(7) and
  32(1));
• RBI Act, 1934 (Section 58B);
• Payment and Settlement Systems Act,
  2007 (Section 26(1) and 26(4));
• NABARD Act, 1981 (Section
  56(1));
• NHB Act, 1987 (Section 49);
• State Financial Corporations Act,
  1951 (Section 42(1) and 42(2));
• Credit Information Companies
  (Regulation) Act, 2005 (Section 23(1));
• Factoring Regulation Act, 2011
  (Section 23);
• Actuaries Act, 2006 (Section 37,
  38(2) and 40(2));
• Banking Regulation Act, 1949 (Section
  36AD(2),and 46);
• General Insurance Business
  (Nationalisation) Act, 1972 (Section 30);
• LIC Act, 1956 (Section 40);
• Banning of Unregulated Deposit
  Schemes Act, 2019 (Section 21(1), 21(2), 21(3), 22, 23 and
  24);
• Chit funds Act, 1982 (Section 76(1),
  76(3) and 77);
• DICGC Act, 1961 (Section 47(1));
• Negotiable Instruments Act, 1881
  (Section 138 and 143(1)); and
• Prize Chits and Money Circulation
  Schemes (Banning) Act, 1978 (Section 4 and 5).

Whilst most of the proposals relate to offences in respect of
which virtually no prosecutions have been initiated, the most
relevant is the proposal to decriminalise Section 138 of the NI
Act. Section 138 of the NI Act provides that in case of dishonour
of cheque for insufficiency of funds or for any of the prescribed
reasons, the defaulter may be punished with imprisonment for a term
which may extend to two years, or with fine which may extend to
twice the amount of the dishonoured cheque, or both. This offence
can also be made compoundable between the parties (consent of both
the parties is required) and there is no requirement to attain
formal permission from the court. Even if there is no consent, the
accused can be discharged if the court is of the discretion that
the complainant has been duly compensated.

While the intent behind this recommendation has been appreciated
by a few experts due to the excessive backlog of
‘check-bouncing’ cases pending at various levels of the
judiciary, the announcement has caused much furore among various
stakeholders, including lawyers, banks etc. The proposed amendment
of decriminalization of Section 138 of the NI Act has been opposed
by the Bar Council of Delhi as well as Bar Council of Maharashtra
and Goa. One of the most significant downsides highlighted by them
is that this measure would result in encouraging the minds of
perpetrators to defraud and cheat innocent persons, and there would
be absolutely no fear in the minds of people. Moreover, this would
take away the confidence and legal security of the individuals in
the judicial system of the country, thus rendering them helpless.
It has also been said that the proposed move virtually tends to
negate the very basic scope and object of Section 138 of the NI Act
which was brought into action to inculcate the faith and confidence
of the trading community in the commercial transactions.

It is important to highlight here that according to the
213^th report of the Law Commission, approximately 20
percent of the pending court cases relate to disputes for cheque
dishonour. The fear of criminal litigation and imprisonment is the
alleviating factor behind the timely payment of the cheques. If
decriminalization of the offence under section 138 of the NI Act is
approved, this may lead to a low rate of recovery of dues and the
possibility is that the litigation process will become more
time-consuming. It will not be wrong to assume that if Section 138
of the NI Act gets decriminalised, the day-to-day commercial
transactions may go for a toss.

On the other hand, it is also being argued that this proposal
will impactfully reduce the burden on the criminal justice delivery
system and bring the law in line with the policy, legislative and
legal initiatives undertaken over the last two decades. Though
there was initially a push to increase the use of cheques as a
system of non-cash payment, with the advent of the internet,
technology quickly took over. Following the digital revolution,
cheques have now outlived their use as a form of payment.

Combined with the shift in culture and commerce, it is important
to notice that the legislature and courts have also been setting
the stage for decriminalising Section 138. The proposal to amend
the NI Act was first made by the Ministry of Law in 2011 as a part
of a pendency reduction move. Thereafter, an inter-ministerial
group, set up in 2012 to look into the policy and legislative
changes to curb the increasing number of cheque-bouncing cases,
suggested decriminalisation and proposed certain amendments on that
basis. Some of the suggestions included the use of alternative
dispute resolution mechanisms on the lines of Section 89 of the
Code of Civil Procedure, through arbitration, conciliation,
judicial settlement (including settlement through Lok Adalats), and
the introduction of a summary procedure for dealing with cheque
bouncing cases. It was also suggested that the court fee may be
made ad-valorem to act as a deterrent for indiscreet and vexatious
proceedings. Unfortunately, however, these proposals never came
into effect.

At various stages, the courts have diluted the strict procedural
provisions of criminal law in the context of this offence, clearly
recognising that a civil wrong was being tried under the veil of
criminal law. This position was reiterated by the Supreme Court in
2017 in the case of M/S Meters and Instruments Private Limited
vs Kanchan Mehta¹ wherein it stated that Section
138 was “primarily a civil wrong”. Right from its
inception, Indian Courts have given latitude to the accused to
discharge the civil liability to avoid imprisonment. This was not a
crime against society.

In order to reach a consensus, the Ministry of Finance invited
the comments of state governments, UT administrations, civil
society, academicians, public and private sector organisations and
members of the public on the said proposal. Given the pros and cons
of decriminalization and the different views, as outlined above,
the incumbent Government will need to strike a balance and
interests of various stakeholders will need to be taken into
consideration, while focusing simultaneously on an effective
redressal mechanism for such offences.

Footnote

1. Criminal Appeal No. 1731 OF 2017

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