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Is Decriminalisation of Section 138 of Negotiable Instrument Act, 1881 a step ahead?

Article by Sakshi Satnalika

(Student at Symbiosis Law School, Noida)


With increase in trade and commerce, cheque and other negotiable instruments emerged as effective modes of discharging one’s debt liabilities under contracts or otherwise, especially by MSMEs and small traders. Thus, with the intention to maintain the creditability in cheques and to provide protection against the unscrupulous use on cheque, section 138 of the Negotiable Instrument Ac, 1881 (for brevity NI Act) was enacted.

Section 138 of the NI Act provides for legal action against the drawer on dishonour of cheque due to insufficiency of amount in his bank account or other reason as prescribed, thereby protecting the drawee/ payee from unscrupulous drawers who present cheques without the intent of honestly discharging their dues. In Meters and Instruments Private Limited and Another vs. Kanchan Mehta[i], the Apex Court has observed the nature of offence under Section 138 primarily relates to a civil wrong, and that while criminalising of dishonour of cheques took place in the year 1988 taking into account the magnitude of economic transactions today, decriminalisation of dishonours of cheque of a small amount may also be considered, leaving it to be dealt with under civil jurisdiction. This further highlighted the importance of introducing a criminality angle by imposing two years of imprisonment on dishonour of cheques which acted as a deterrent for drawers from breaching their obligation as the being tagged as a criminal had various social implications. The criminality so added to the section subsequently thereby safeguarded the interests of the drawee against mala fide and fraudulent drawers.

Moreover, the section further provides safeguard for bona fide drawers, by providing a provision for the drawer to discharge his liability within a short period after his cheque has been dishonoured, before initiation a legal proceeding against him. The provision thereby thrives to strike a balance between the protection and punishment in case of dishonour of cheques.

Recently on 8th June, 2020, the Government of India Ministry of Finance Department of Financial Services proposed decriminalisation of section 138 of NI Act along with other minor offences under 39 provisions contained in 19 different Acts, with the intention of promoting ease of doing business by removing unnecessary procedures and unclogging court processes. However there is a doubt that decriminalising of the section 138 NI Act would lead to the desired motive.

Cheques are widely used in business transactions for discharging one’s debts, and are readily accepted by the payee in view of the criminal penalty imposed by the given section on dishonour of the cheque, which on one hand provides a assurance to the drawee that his dues would be timely and adequately met by the drawer or in alternative can be enforced by him through a summary trial. On the other hand it deters the drawer from failing his liability for the fear of imprisonment and/or fine imposed on dishonour, though giving his a buffer period to make good his liability on its dishonour. Decriminalising of section 138 NI Act will not only remove the assurance/ deterrent effect given at present but also effect the reliance placed on banking services creating doubt on the creditability of the negotiable instrument, thereby causing a shift towards cash transaction, which is turn would take us a step back from our PM’s vision of cashless economy. However, one would argue that it would even promote net-banking and other online transactions, but given the technological literacy and scepticism prevalent in our country, the same cannot be viewed as an effective substitute. Furthermore the Payment and Settlement Systems Act, 2007 regulating such online transactions is itself in a nascent stage thereby discouraging such online transactions as an effective alternative.

Further it is observed that 20% of litigation matters pending in the courts are related to cheque dishonours[ii] which all the more highlights the necessity of section 138 NI Act to remain in place and the dependence of advocates and other legal practioners who depend on filing such cases for their livelihood. Moreover even if the section is decriminalised, the cases for dishonour would be filed under civil courts as cases of cheating under section 420 IPC and relevant provisions, which in turn would be a lengthy and costly procedure without adequate relief at the time when needed, in contrast to the summary trials presently undertaken in such cases with are comparatively less time consuming and cost-effective.

Lastly such a sudden decision of decriminalisation can be seen in stare contrast of the recent amendment of interim compensation and alike taken by the Ministry to strengthen the enforceability of section NI Act in light of the increased dependability on the instrument to further promote effective and continuous trade. Thus the government should not completely base its decision in the light of the Covid-19 situation prevailing today, but shall weigh the far-fetched repercussions of decriminalisation section 138 which prime facie appears to be in contrast to the very objective for which the proposal is made.

Decriminalising section 13 of NI Act in totality does not seems very appealing in its entirety and the government should aim at other effective alternatives to reduce the burden of courts alongside with maintaining the integrity of the instruments. On similar lines, the Supreme Court in Makwana suggested decriminalising of dishonours of smaller amount which can be dealt with alternative dispute resolutions and the same was concurred by the Delhi High Court in Dayawati v. Yogesh Kumar Gosin[iii], which encouraged mediation to resolve cheque bounce disputes. Decriminalising of cheques of smaller amount can be an effective measure as in observed in UAE.

[i] (2018) 1 SCC 560 [ii] https://ccs.in/sites/default/files/research/research-criminalizing-cheque-bounce-cases.pdf [iii] (2001) 6 SCC 463 Photo by Micheile Henderson on Unsplash

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