Decriminalisation of Section 138, Negotiable Instruments Act: A Civilised Proposition?

Introduction

The Covid-19 pandemic has acclimatized us to coming across a new notification, ordinance, circular and alike, almost on a daily basis. Most of us are the passive recipients of these directives because we understand the unprecedented situation the government has been facing. However, on June 8, 2020, the Ministry of Finance (“MoF”) released aStatement of Reason that has the country divided.

The MoF proposed the decriminalization of minor offences to improve ease of doing business, especially after the hit that the Indian economy has taken due to the pandemic. They invited comments and suggestions from stakeholders regarding decriminalization of 19 offences. The most contentious of the proposed offences is Section 138 of the Negotiable Instruments Act, 1881 (“NIA”). This provision deals with the consequences of cheque dishonor, an offence that has over 40 lakh pending cases. This staggering number is reflective of exactly how many people are affected by cheque bouncing and have yet to find solace in the courts. Most stakeholders have rigidly settled themselves on one side of the decriminalization argument. Their stance is also a result of the MoF not clarifying what exactly the decriminalization of Section 138, NIA entails. This article analyses whether the proposed decriminalization of Section 138, NIA is a beacon of hope for debtors and courts, or a death sentence for creditors and lawyers. It explains the practical working of the provision as it stands currently, and questions whether decriminalization can actually fix the issues that are plaguing the current financial and judicial system.

Fire and Ice

According to government reports, there is an urgent need to revitalize economic growth in India due to the pandemic. For this, it is required to improve India’s Ease of Doing Business ranking and criminalize minor offences as they often act as a deterrent for investors. It is argued that many countries such as France, Italy and Japan have civil and administrative remedies via bank for cheque dishonor, instead of criminal and therefore, India should follow the international trend. However, some states in the United States of America, United Arab Emirates, Thailand and alike have criminalized cheque dishonor and are still amongst the top 25 countries in the Ease of Doing Business rankings.

Nevertheless, it is quite likely that India will attract more investors once it decriminalizes this provision, as currently even directors can be implicated under Section 141 of the Companies Act, 2013. This averts the management of companies from investing in India as directors can be held personally liable. While it is idealistic to say that justice should prevail, the government needs to seek avenues to gather funds for its citizens. It is possible that the burden on society for prosecuting these offences is far more than the benefits in dissuading dud cheques.

Furthermore, the quasi-criminal nature of cheque dishonor has made the legal framework murky, skewing the proceedings in favor of the complainant. Criminal law has safeguards for the accused under Articles 20-22 of the Indian Constitution and International Human Rights law, but labelling Section 138, NIA proceedings as a civil wrong while allowing criminal repercussions such as imprisonment, negates these safeguards. The accused may have to submit up to 20% of the cheque amount even before the trial has commenced, under Section 143A, NIA, and a minimum of 20% of the fine in case they appeal. Section 139, NIA compels the judge to hold a presumption in favor of the holder, unless strong evidence to the contrary is produced. It can be argued that there is no issue with such presumption since no one should issue a cheque unless they have a financial liability. Even in instances of tenancy, many landlords take post-dated cheques from their tenants for the entire year, as a standard business practice. Even if the tenant pays or wants to break their lease, the landlord can file a complaint under Section 138, NIA and the legal framework will be tilted towards the landlord.

Additionally, the Supreme Court has repeatedly mentioned that offences under Section 138, NIA constitute a civil wrong. Regardless, the offence has been given criminal undertones to penalize and deter offenders. With over 40 lakh pending cases, criminalizing the offence clearly, has not dissuaded borrowers. Contrarily, this represents that Section 138, NIA is a victim of its own success, as it is eagerly sought after as a recourse.

The objective of Section 138, NIA is to enhance the credibility of cheques, which contribute towards trade and commerce. The fear of penalties has sustained the sanctity of cheques, but as per the Reserve Bank of India, cheque transfers have dropped by 6% from 2014 to 2019. The government also seems to be pushing for electronic modes of payment. It has not proposed decriminalization of Section 25 of The Payment and Settlement Systems Act, 2007, which is a parallel provision to Section 138, NIA, but for electronic funds transfer. However, it may not be feasible for several industries to switch to online transactions. For instance, stockists of fast-moving consumer goods deliver goods to shops and accept cheques only after issuing an invoice.

If decriminalized, the alternative recourse will be recovery suits. Plaintiffs will have to submit 20% stamp duty to the court, in addition to the legal fees, just to initiate proceedings even though prima facie evidence is in their favor. Furthermore, these suits usually take at least 7-8 years, with other issues of execution, since non-bailable warrants and attachment are generally not allowed in civil proceedings. This will target small and mid-level businesses. Post-dated cheques are a common form of obtaining credit and if the criminal liability is removed, lenders will be apprehensive of extending money. There will be no fear of punitive measures in the minds of the offenders. At a time of liquidity crunch, cutting the cord to this haven for businesses may break down the currently fragile funding system in India.

Conclusion

The scales need to be balanced between increasing ease of doing business and allowing dishonest borrowers to run roughshod over the system. While the government is worried about its Ease of Doing Business ranking, it should also focus on other pressing concerns, such as the country’s 163rd rank on the Enforcing Contracts Indicator, which is a factor in the Ease of Doing Business Report. Investors will not be keen on investing in a country with an unsatisfactory judicial and enforcement system. The courts will also not be unclogged by mere decriminalization of Section 138, NIA since victims will simply switch to civil courts.

The decriminalization of Section 138, NIA will not provide a remedy for the victims or overburdened courts, it will simply lay the red carpet for defrauders. It is a short-term plan to attract investors which forewarns of long-term problems for the public. Under the influence of other jurisdictions, the MoF seems to be on a brink of decriminalization. Lawmakers need to realize that India’s unique jurisprudence requires distinctive adaptation of international laws. The government has taken many ill-thought-out decisions. For instance, earlier in the year, they added Sections 143A and 148 to strengthen Section 138, NIA and provide recourse to creditors, which ironically has now been considered as a “minor offence”. This categorization has once again removed pressure from debtors, and effectively withdraws the remedy provided to creditors.

Other avenues need to be considered before the government settles on the harrowing proposition of decriminalization. If the government does opt for decriminalization, it will be redundant for the courts, unless a speedy disposal mechanism is put into place. The government can suspend punitive action for 6-12 months, similar to the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020. However, similar to this ordinance, which has created trouble for many creditors, it may be problematic for cheque holders who are going through a financial crunch as well. The government can also look into administrative punishment by banks, similar to those in France, whereby defaulters need to pay fines to the bank, perpetual defaulters are added to a central registry for warning purposes and they can be banned from issuing cheques for a period of 5 years. While the pandemic does provide a legitimate reason to loosen the reins, the interests of honest lenders should not be neglected.

Decriminalization lacks any logic or legality. The principles mentioned in the MoF’s Statement of Reasons fail to justify decriminalization of Section 138, NIA. As stated earlier, instead of promoting investments decriminalization will likely lead to an air of uncertainty and disincentivize investors. Cheque dishonor is similar to the usage of counterfeit currency since the receiver assumes that they have been compensated for what they are rightly owed. Mala fide intent of issuer cannot go unpunished, as it will only encourage defrauders. Therefore, the interests of the wrongdoers are furthered while public interest is obliterated. It is absurd that the government aims to decriminalize Section 138, NIA in a hope of attracting investors, at the cost of those already suffering due to the paucity of resources. Therefore, well-thought-out and tried and tested forums need to be approached for “Sabka Saath, Sabka Vikas”, as decriminalization would clearly not be a civilized proposition.