Introduction
The Negotiable Instruments Act of 1881 (hereinafter referred to as the “Act”), has always been a bedrock of banking transactions for the commercial market in India, providing a legal framework for instruments such as cheques, bills of exchange, and promissory notes for prompt cashless transactions. Under this Act, section 138 deals with the dishonor of cheques and criminalizes the same. This criminalization has come to a crisis since post-pandemic notification via the Ministry of Finance suggesting the same to be decriminalized for the sake of increasing the number of cheque bounce cases in criminal courts so may the attention could be transferred to more severe offences. This article discusses the implications, benefits, and challenges of the potential decriminalization of said provision.
Context
Section 138 was initially introduced in 1988 in order to address and solidify the credibility of cheques so it may boost businesses across India to utilize cheques in the regular course of business and commercial transactions. This provision criminalized the dishonor of cheques and declared a severe punishment where the offender would be sentenced to imprisonment for up to two years or with a fine which may extend to double the cheque amount or both.
However, over the years, criminalizing the dishonor of cheques led to an increase in the number of criminal cases of cheque dishonor in the courts across India. As per Times of India till April 2022 around 33.44 lakh cheque bouncing cases are still pending across the country.[1] Such an overwhelming number of cases only proven to be overburdening our courts and subsequently raised questions about whether criminalization of this provision is efficient enough to resolve matters that are essentially civil in nature.
Reason for Decriminalization
1. Judicial Burden
One of the reasons for an overwhelming number of cases is the criminalization of section 138 under the Act which tends the claimant to frequently file the cheque dishonor case even over petty amounts. So, there is a belief that the decriminalization of Section 138 would result in a significant drop in the number of cases and eventually reduce the burden on the criminal courts in the country.
In the case of Makwana Mangaldas Tulsidas v. State of Gujarat (2020)[2], the Supreme Court also addressed the overburdening of the judicial system due to the criminalization of cheque bounce cases and further underlines the need to evaluate the idea of decriminalization of the said provision for cheques of smaller amounts.
2. Following Global Footsteps
In many other countries, the cheque bounce/dishonor cases are not criminalized or have already been decriminalized rather in certain countries penalties would be imposed upon the person issuing the cheque. Thereby, decriminalization of cheque bounce/dishonor provisions would map the country in the global footsteps and potentially improve its ease of doing business ranking.
3. Boost of Doing Business
Any criminal proceedings in the business relationship prove to be detrimental and might discourage honest and sincere businessmen from entering into commercial transactions or engaging in trades as it would always sway a sword of criminal proceedings above their neck. Whereby decriminalization could boost a more business-friendly atmosphere in the commercial market of India where the matters of cheque bounce/dishonor would be treated as a civil matter rather than a criminal offense.
Challenges and Concerns
1. Deterrence Effect
The first and foremost ground against the decriminalization of the said provision has been the loss of any repercussions for wrongdoers. The Supreme Court also states this deterrent effect in the case Vinay Devanna Nayak v. Ryot Sewa Sahakari Bank Ltd. (2008)[3].
The criminal proceedings has always proven to be disincentive against the offenders under Section 138 of the act as it serves the repercussions for the wrongdoings, the intentional issuance of cheques with insufficient funds which further leads to settlement of the dispute in major cases.
2. Protection for Creditors/Claimant
Section 138 offers major protection for creditors and establishes the credibility of cheques in cashless commercial transactions. Decriminalization of the same would not only amount to the loss of credibility of cheques in the market but also increase deliberate defaults and offenders due to the deterrence effect.
Possible Reforms
1. Level Approach to Decriminalization
Rather than decriminalization of the provision at once, a leveled approach could be adopted, whereby the provision would be decriminalized for offenders below a certain monetary threshold and have to pay a fixed penalty for the default while the offenders above a specified amount would face the criminal charges. This approach would also adhere to the Supreme Court emphasis in the case of Makwana Mangaldas Tulsidas v. State of Gujarat (2020)[4].
2. Alternative Dispute Resolution
There are pre-established and robust alternative mechanisms for dispute resolution in the Indian judicial system rather than decriminalization of the provision that could be put in place. Such mechanisms could include establishing fast-track courts for cheque dishonor cases and enhancing the role of alternative dispute resolution methods (Mediation and Arbitration).
Promoting the mediation and arbitration proceedings for resolution of cheque dishonor cases under section 138 prior to filing a case, similar to section 12A of the Commercial Courts Act, 2015. This step would not only boost and lead to a faster but also more amicable resolution of disputes, thereby reducing the burden on criminal courts where the parties amicably settle disputes in the middle of the proceedings.
Impact on Stakeholders
1. Banks and Financial Institutions
Decriminalization would increase the distrust in accepting cheques in the commercial market. This would also fails the government agenda to push the cashless economy in India. Furthermore, the banks would have to develop more elegant and advanced digital/electronic payment methods along with more robust risk assessment mechanisms.
2. Small and Medium Enterprises
Small and Medium Enterprises that rely on post-dated cheques for their regular course of business operations would face major challenges. As having a post-dated cheque in their favor ensures their payment, the decriminalization would completely disrupt that assurance and credibility which might eventually oppose the Ministry of Finance’s agenda to boost the ease of doing business in India.
Conclusion
The decriminalization of Section 138 under the Act presents opportunities as well as challenges. While its aim is to provide a more robust and business-friendly environment as well as reduce the burden over the criminal courts in India but the concerns pertaining to the deterrence, credibility of negotiable instruments in commercial transactions, and protection of creditor/claimant’s funds need to be addressed.
The optimum reform could provide the means for the country to improve the ease of doing business and align with global practices. However, a careful reconsideration of Section 138 is necessary, simply hoping on to decisions and improper evaluation without a credible instrument in the market for commercial transactions would eventually lead to drastic collapse due to no credibility and distrust in the market.
Decriminalization must be done with a phased implementation plan that ensures the interests of all parties are protected with more efficiency and equity while handling cases under the Act.
[1] Times of India. (2022). Summary trial in cheque bouncing cases will be norm: SC. Times of India.
[2] Makwana Mangaldas Tulsidas v. State of Gujarat, (2020) 4 SCC 695.
[3] Vinay Devanna Nayak v. Ryot Sewa Sahakari Bank Ltd., (2008) 2 SCC 305.
[4] Ibid.
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