The primary objective of the proceedings initiated under Section 138 of the Negotiable Instrument Act, 1881 (hereinafter referred to as 'NI Act') is that the cheques should not be used by persons as a tool of dishonesty and when 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 issuance of a notice and if he still does not pay, he must face the criminal trial and consequences.

However, the Ministry of Finance has vide its Statement of Reason dated 8th June 2020, invited comments on decriminalisation of, inter alia, Section 138 of NI Act. We are, therefore, making this Comment to justify keeping the above provision and why the said offence should not be decriminalised.

Brief Overview of Section 138 NI Act

Chapter XVII of the Negotiable Instrument Act, 1881 (which includes Sections 138 to 147) is relating to Penalties in Case of Dishonour of Certain Cheques for Insufficiency of Funds in the Accounts. This Chapter was introduced and inserted by the Act 66 of 1988 effective from 1st April, 1989. Reasons for inserting the said Chapter were as follows:

  1. To enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case of bouncing of cheque due to insufficiency of funds in the accounts or for the reasons that it exceeds the arrangements made by the drawer with adequate safeguards to prevent harassment of honest drawers. 1
  2. To encourage the culture of use of cheques and enhancing the credibility of the instrument.
  3. Despite civil remedy, Section 138 intended to prevent dishonour on the part of the drawer of negotiable instrument to draw a cheque without sufficient funds in his account maintained by him, in a bank and induce payee or holder in due course to act upon it.
  4. The remedy available in a Civil Court is a long drawn matter and unscrupulous drawer normally takes various pleas to defeat the genuine claim of the payee. 2
  5. Section 138 of the Negotiable instruments Act, reflects the anxiety of the Legislature to usher in a new healthy commercial morality through the instrumentality of the penal law. Here is a classic example where, as part of an attempt to evolve a healthy norm of commercial behaviour, the principle of social engineering through the instrumentality of penal law is put into operation.
  6. The Parliament in its wisdom had chosen to bring Section 138 on the statute book in order to introduce financial discipline in business dealings. Prior to insertion of Section 138 of Negotiable Instrument Act, a dishonoured cheque left the person aggrieved with the only remedy of filing a claim. The object and purpose of bringing new provisions in the Act was to make the persons dealings in commercial transactions work with a sense of responsibility and for that reason, under the amended provisions of law, lapse on their part to honour their commitment renders the persons liable for criminal prosecutions.
  7. The object and ingredients under the provisions, in particular, Sections 138 and 139 of the NI Act cannot be ignored. Proper and smooth functioning of all business transactions, particularly, of cheques as instruments, primarily depends upon the integrity and honesty of the parties. In our country, in a large number of commercial transactions, it was noted that the cheques were issued even merely as a device not only to stall but even to defraud the creditors. The sanctity and credibility of issuance of cheques in commercial transactions was eroded to a large extent. Undoubtedly, dishonour of a cheque by the bank causes incalculable loss, injury and inconvenience to the payee and the entire credibility of the business transactions within and outside the country suffers a serious setback. The Parliament, in order to restore the credibility of cheques as a trustworthy substitute for cash payment, enacted the aforesaid provisions.3
  8. The object of Section 138 is to induce faith in efficacy of banking operation and credibility in transacting business.4
  9. For proper and smooth functioning of business transaction in particular, use of cheques as negotiable instruments would primarily depend upon the integrity and honesty of the parties. It was noticed that cheques used to be issued as a device inter alia for defrauding the creditors and stalling the payments.
  10. The objective of the proceedings of Section 138 of the Act is that the cheques should not be used by persons as a tool of dishonesty and when 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 issuance of a notice and if he still does not pay, he must face the criminal trial and consequences.5

Enhancement of Punishment by the Act 55 of 2002

When Section 138 of Negotiable instrument Act was introduced in the year 1989, the punishment for the offence committed under the said section was up to one year. The maximum punishment of one year was later enhanced to two years vide the Amending Act 55 of 2002 which was introduced by the Negotiable Instruments (Amendment) Bill, 2001. This Bill was based upon the recommendations of a Working Group which was constituted to suggest changes needed to effectively achieve the purpose of Section 138. The Negotiable Instruments (Amendment) Bill, 2001 was referred to the Standing Committee on Finance which made certain recommendations in its report submitted to the Lok Sabha in November, 2001.Only on the basis of such recommendations of the Standing Committee on Finance and other representations, the Legislature had, inter alia, increased the maximum punishment of imprisonment from one year to two years.

When the Government, after wide consultation with the experts in the Working Group as well as the experts in the Standing Committee on Finance had enhanced the punishment for the offence, the objective was to further enhance the credibility to the payments made by cheques in commercial transactions or otherwise where the cheque has been issued in discharge of a legally recoverable debt or liability.

Why decriminalisation is not desirable

In such backdrop, decriminalisation of Section 138 of the Negotiable Instrument Act is not desirable for the following reasons:

  1. The purpose and objectives of Section 138 of Negotiable Instrument Act, as already mentioned above, are meant to enhance the credibility of the instrument. This furthers the objective of the Government for improving Business Sentiment and promoting Ease of Doing Business.
  2. The alternative remedy of seeking recovery from Civil Courts is time consuming and is costly as court fee payable at the time of filing of civil suits is much more than the court fee payable at the time of filing of a criminal complaint.
  3. The drawer has a fear of criminal prosecution and that is why he makes sure that the cheques are duly honoured. Decriminalisation will remove such fear. This will lower the credibility of transactions made through cheques.
  4. Decriminalisation will discourage honest parties to adopt cheques as a credible mode of payment. This would be discouraging the Government's initiative of promoting Ease of Doing Business.
  5. The provision under Section 138 itself has a safeguard for honest drawers. First, only after receiving the notice from the payee or holder in due course and upon expiry of 15 days from such receipt, the offence is deemed to have been committed. Therefore, honest drawers have an opportunity to make payment of cheque amount within 15 days and will not face any prosecution. Second, the provision under Section 147 of Negotiable Instruments Act makes the offences under the said Act compoundable. Therefore, parties can settle at any stage and the drawer can escape further prosecution.
  6. Many payees are poor litigants, employees or belonging to economically weaker background. They may not be able to afford costly and time consuming civil litigations for recovering their dues.
  7. Section 142 of Negotiable Instruments Act itself contains safeguard which are to be undertaken by the Judicial Magistrate/Metropolitan Magistrate before taking cognizance of any offence punishable under Section 138 of the Negotiable Instruments Act. They can exercise judicial discretion at the time of taking cognizance.
  8. It has been seen from the experience of Courts handling the criminal complaints filed under Section 138 of the NI Act that a large number of such matters are compounded/settled either on or before the very first date of appearance of the accused or at the initial stage of these proceedings. The objective of filing of such criminal complaints is, therefore, achieved in a large number of cases. On the other hand, availment of civil remedy may not produce desirable results inasmuch the plaintiff may not only face difficulties in obtaining the decree but in also successfully executing such decrees to his satisfaction.

In view of the above, we recommend that Section 138 of the NI Act should remain on the statute book and should not be decriminalised. The impact of decriminalising this offence may adversely impact the initiative of the Government for improving Business Sentiments and promoting Ease of Doing Business.

Footnotes

1.Vide Gazette of India, Extra., No. 49, dated 5th September, 1988

2.Aim and objects, also cited in Goa Plast (P) Ltd. v. Chicko Ursula D'Souza, 2004 SCC (Cri) 499.

3.Aim and objects, also cited in in Goa Plast (P) Ltd. v. Chicko Ursula D'Souza, 2004 SCC (Cri) 499.

4.As cited in in Vinay DevannaNayak v. RyotSevaSahakari Bank Ltd. (2008) 2 SCC 305

5.See Indian Bank Association v. Union of India, (2014) 5 SCC 590 (594)

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