This article is written by Aliza Alam from Faculty of Law, Delhi University and Nayan Saini from Bharati Vidyapeeth Deemed University, Delhi.
“When I was young I thought that money was the most important thing in life; now that I am old I know that it is.” -Oscar Wilde
Table of Contents
Introduction
The COVID-19 pandemic has affected the Indian economy drastically. To curb as well as minimize the effect of the ongoing crisis the central government has introduced some changes in the implementation and applicability of various laws in the areas like Income tax, GST, Customs and Central Excise, and Insolvency and Bankruptcy Code 2016 (hereinafter referred to as ‘IBC’). One such measure which the Ministry of Finance has proposed is regarding the decriminalization of thirty-nine minor economic offences including decriminalization of offence of dishonour of cheques under Section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred to as ‘the Act’) Finance Minister, Nirmala Sitharaman in a notification dated June 8, 2020, stated out the reasons for the decriminalization of minor offences which aren’t fraudulent or with malafide intent, aiming to ensure ease doing business and attracting investment both foreign and domestic. The notification stated out certain principles for the proposed intention:
“The following principles should be kept in mind when deciding on the reclassification of criminal offences to compoundable offences:
- Decrease the burden on businesses and inspire confidence amongst investors;
- Focus on economic growth, public interest and national security should remain paramount;
- Mens rea (malafide/ criminal intent) plays an important role in the imposition of criminal liability, therefore, it is critical to evaluate nature of non-compliance, i.e. fraud as compared to negligence or inadvertent omission; and
- The habitual nature of non-compliance.”
In addition to this, various provisions of IBC have been also done away for a limited period through Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020. The Finance Minister increased the threshold of the ‘minimum default limit’ under the code. The ordinance introduces two new sections giving effect to suspend the initiation of corporate insolvency resolution process under Sections 7, 9, and 10 of IBC for default on or after March 23, 2020, for 6 months or for such other period as may be specified, not exceeding one year. The ordinance specifies that the process can be initiated for defaults arising before March 23, 2020.
Why Decriminalization is not the Solution?
Section 138: Dishonor of cheque for insufficiency, etc., of funds in the account. The above-mentioned section of the Act comes into picture when the drawer has issued a cheque in the favor of the drawee for the discharge of debt or liability, and the cheque is dishonoured by the bank on presentation due to insufficiency of funds in the account of the drawer. The Section casts criminal liability punishable with imprisonment which may extend to 2 years or with fine which may extend to twice the amount of the cheque, or with both. But, the Supreme Court of India in a catena of judgments has held that the offence committed under Section 138 of the Act is more of a civil nature. The proposed amendment in the act is based on some principles highlighted in the notification by the Ministry of Finance. The principles as well the government intends to enhance ease of doing business and creating a balance so that only malafide intent is punished while less serious offences are compounded. Comparing the proposed amendment and the principles governing it, no harmonious match can be found between them. In India, contractual relationships are a common way of doing business. The whole purpose of issuing a cheque is to make payment ultimately, and if the person knows that even if he is unable to make the payment, no strict legal action can be taken against him, a cheque will lose its value as a negotiable instrument as there is no promise of getting the payment.
One of the underlying principles behind the proposal is that mala fide intent and habitual nature of non-compliance should be kept in mind before turning criminal offences into compoundable ones. Decriminalizing Section 138 of the act means, the issuer of a bounced cheque will face no criminal liability despite him being a habitual offender or if he has issued the cheque with malafide intent. A lender will stand at the edge of a sword if the proposed amendment becomes reality since the proposal makes no difference between an innocent person and a person issuing cheque with a mala fide intent of not making the payment. It is pertinent to note that as per the 213th report of the Law Commission; almost 20 percent of the pending litigation relates to cheque dishonour disputes. The fear of criminal litigation and imprisonment is the mitigating factor behind the timely payments of the cheques. If decriminalization of the offence under section 138 of the act is done, this will lead to a low rate of recovery of dues and the possibility is that the litigation process will become more time-consuming.
Why is Decriminalization opposed by Litigants?
The proposed amendment of decriminalization of dishonour of cheque under section 138 of the act has been opposed by the Bar Council of Delhi as well as Bar Council of Maharashtra and Goa. Bar council of Delhi, Co-chairman (Mr Sanjay Rathi) issued a letter to the Finance Minister stating that the proposal would result in eroding public confidence and legal security in the judicial system. It stressed that the government should consult the statutory bodies before making such amendments to get advice from the experienced bar members.
The letter reads, “This measure would for sure 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” On the other hand, the Bar Council of Maharashtra and Goa placed its ‘strong objection and protest’ in a letter written to the Ministry of Finance. The letter reads, “The proposed move virtually tends to negate the very basic scope and object of Section 138 of the Negotiable Instruments Act which was brought into action to inculcate the faith and confidence of the trading community in the commercial transaction. It is equally pertinent to note that the majority of the lawyers are practising in this field of the law. That proposed move to Decriminalization will certainly affect their livelihood, careers and their survival will be put to great stake.” The letter goes on to say that while the act safeguards bona fide defaulters, it will affect honest traders, business persons, etc.
How the proposed Amendment is going to affect the Legislative intent of Section 138 of the Act?
Section 138 of the Act is a tool for achieving a more full-proof way of dealing with the defaulters, payment through cheques is one of the most trusted ways for making payment. Apart from being safe as compared to other modes of payment, the legislature has provided much better recourse for recovery of debt when payments are made through negotiable instruments like cheques. Various judgments have been delivered by the courts emphasizing the importance of Section 138 and highlighting the object of the Act. The legislature has drafted it and our courts interpreted it in the best possible manner so that the real object of increasing the debt recovery rate can be fulfilled and adequate relief can be given to rightful claimants. The Supreme Court in M/s. Dalmia Cement (Bharat) Ltd. v. M/s. Galaxy Traders and Agencies Ltd. and Others 2 have pointed out the object and purpose of Section 138 of the Act.
The court observed: “The Act was enacted and Section 138 thereof incorporated with a specified object of making a special provision by incorporating a strict liability so far as the cheque, a negotiable instrument, is concerned. The law relating to negotiable instruments is the law of the commercial world legislated to facilitate the activities in trade and commerce making provision of giving sanctity to the instruments of credit which could be deemed to be convertible into money and easily passable from one person to another….. To achieve the objectives of the Act, the legislature has, in its wisdom thought it proper to make such provisions in the Act for conferring such privileges to the mercantile instruments contemplated under it and provide special penalties and procedure in case the obligations under the instruments are not discharged. The laws relating to the Act are, therefore, required to be interpreted in the light of the objects intended to be achieved by it despite there being deviations from the general law and the procedure provided for the redressal of the grievances to the litigants. Efforts to defeat the objectives of law by resorting to innovative measures and methods are to be discouraged, lest it may affect the commercial and mercantile activities in a smooth and healthy manner, ultimately affecting the economy of the country.” Also, the Supreme Court in Indian Bank Association and others v. Union of India and others 3 emphasized on having a criminal liability:
“The objectives of the proceedings of Section 138 of the Act are that the cheques should not be used by persons as a tool of dishonesty and when a cheque is issued by a person, it must be honoured and if it is not honoured, the person is given an opportunity to pay the cheque amount by the issuance of a notice and if he still does not pay, he must face the criminal trial and consequences.” The Bombay High Court in Rajesh Laxmichand Udeshi v. Pravin Hiralal 4 recognized the legislative intent behind Section 138 of the Act and observed: “The legislative intent behind the enactment of Sections 138 and 139 of the Negotiable Instruments Act is to prevent abuse of the banking system. Thus, one who issues a cheque extends a solemn promise to pay. Based on this promise and action, the recipients arrange their affairs and quite often enter into further transactions. Unless extraordinary circumstances are made out, one who issues a cheque is deemed to have undertaken to pay. Negotiable Instruments Act enforces the promise strictly by raising statutory presumption and treating it as an offence. This provision elevates a cheque to a higher status than the other instruments, such as written contract, etc. to which no such statutory presumption is attached.”
Recently, The Negotiable Instruments (Amendment) Act, 2018 came into effect, broadening the roads of hope for the claimants. The amendment allows the court trying the offence under Section 138 to direct the drawer to pay interim compensation not exceeding 20% of the amount of the bounced cheque to the complainant within 60 days from the date of such order or within a further period, not exceeding 30 days as may be directed by the court on account of sufficient cause being shown by the drawer. Furthermore, Section 148 was inserted, in case of an appeal against the conviction under Section 138; the appellate court may order the appellant to deposit a minimum of 20% of the amount of fine/compensation awarded by the trial court in addition to the interim compensation.
The Supreme Court in its recent order dated 5.03.2020 in Makwana Mangaldas Tulsidas v State of Gujarat 5, opined on decriminalization of dishonour of cheques of smaller amounts. The main focus of the order was to decriminalize dishonour of cheques for only smaller 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. It is a well-established fact that recovery suits take a minimum of 7-8 years for the decision if section 138 is decriminalized the criminal edge given to the section to penalize the offenders will defy the basic intent of the section. In India majority, cheque bounce cases arose from the business contractual relationships if the said section is decriminalized it will dilute the legal certainty of getting justice by rightful claimant.
Conclusion
The central government has proposed this amendment with the objective of, SabkaSaath, Sabka Vikas and Sabka Vishwas;. Whether everyone will be benefited from this step is something that the policymakers need to have a look at. The proposal is going to benefit one side of the economy at the expense of the other. Decriminalization will evaporate the fear of criminal proceedings, leading to the issuing of cheques with no legal burden of actually making the payment. The central government needs to think about other alternatives to the decriminalization of Section 138 of the Act. Implementing this proposal will create more hurdles for a better economy than reducing one. Through various supreme court judgments, it has been established that offence mentioned under Section 138 is a civil wrong in nature however it was given a criminal edge to penalize the offenders, considering the very nature of the offence civil courts can be given jurisdiction to adjudicate upon cases relating to dishonour of cheques of small amounts, it will reduce the number of frivolous suits filed in the civil court since the party will be having an additional burden of paying court fees for filing a plaint 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.
The step taken by the central government of halting IBC for a limited period has already affected the creditors negatively. If this proposal came into effect, it may lead to creditors being on the verge of bankruptcy. The strong opposition by different Bar Councils has posed a big question on the effect which will be caused to various stakeholders. How is it going to affect the economy and whether the objects stated will be achieved, only time can answer these questions.
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