The Union government has last week, initiated the process for decriminalizing economic offences that are currently punishable with a jail term, fine or both. The government has sought opinions from stakeholders like state governments and the public on proposals to amend 19 Acts that criminalize economic offences one of which is a bounced cheque. As per the current law, anyone accused of issuing a cheque that’s dishonored or running an unregulated deposit scheme that goes insolvent has to face imprisonment or fine or both. The government proposes to decriminalize such offences and instead bring in a method of compounding in which an accused person would have to pay a penalty and the matter would end there.
The proposal at hand, to decriminalize cheque bouncing, amongst other reasons, is essentially rooted to two grounds, both of which arise from the present pandemic scenario.
One such ground, is to circumvent the surge of financial failures which under the current rules can get treated as frauds, even though they are attributable to the economic distress due to COVID-19. Whilst the other, is to reduce business burden, in support and encouragement of the Indian Government’s initiative of reviving the economy via foreign as well as domestic investments. It is apprehended that the fear of imprisonment for actions that aren’t malafide intent, are a big hurdle in attracting investments.
In wake of this proposal passed by the Ministry of Finance, it has once again become pertinent to evaluate and understand the essence and objective of incorporation of The Negotiable Instruments Act so as to be able to formulate one’s opinions and views on the subject matter.
Brief History of The Negotiable Instruments Act; its conceptualisation and theory
The Law relating to the Negotiable Instruments is not the law of one country or of one nation but it is the law of the commercial world at large, as it contains principles of equity and usages of trade of general convenience and a regulation for dealing of merchants and mariners in all the commercial countries of the globalized world. Economic globalization has brought India a significant boost and when commerce and exchange rapidly increased, the use of cheques also expanded leading to the introduction of concepts such as post-dated cheques amongst others.
The Negotiable Instruments Bill having being passed by the Council, received its assent on December 9th, 1881 and the law to govern transactions through instruments was born. This act came into force on March 1st, 1882 (Act 26 of 1881) but this baby got its teeth only after 106 years when it was amended in the year 1988 and a whole chapter relating to penal provisions was inserted. The object of inserting penal provisions in the present statue was to inculcate faith in the efficacy of banking operations and credibility in the transaction business through negotiable instruments. It was also felt necessary by the legislature that to enhance the acceptability of cheques in settlement of liabilities it was imperative to make the drawer liable for penalties in case of bouncing of cheque due to insufficient arrangements in the account of the drawer. In order to ensure promptitude and remedy against the defaulters of a Negotiable Instruments criminal remedy was introduced.
By the Banking, Public, Financial Institutions and Negotiable Instruments Law (Amendment) Act, 1988 (Act 66 of 1988), a new chapter i.e. Chapter XVII relating to the penal provisions for dishonour of a cheque was inserted. The intent of the Legislature to introduce such penal previsions in the Act was to deter dishonest drawers with the consequences of criminal trial if they were to issue cheques with the intention to defraud, alongwith adequate safeguards to prevent harassment of honest drawers. The scope of Section 138 NI Act has also been widened by the Hon’ble Supreme Court on various occasions by providing necessary interpretation to the section whenever required.
The objective of Parliament was to strengthen the use of cheques, distinct from other negotiable instruments, as mercantile tender and therefore it became essential for the Section 138 NI Act offence to be freed from the requirement of proving mens rea. This has been achieved by deeming the commission of an offence de hors mens rea, not only Under Section 138 but also by virtue of the succeeding two Sections. Section 139 carves out the presumption that the holder of a cheque has received it for the discharge of any liability. Section 140 clarifies that it will not be available as a defense to the drawer that he had no reason to believe, when he issued the cheque, that it would be dishonored.
The need for stringent punishment was again felt by the legislature and the punishment as prescribed under Section 138 of the Act was enhanced from one year to two years by way of the Negotiable Instruments (Amendment and Miscellaneous Act), 2002 (Act 55 of 2002). The Supreme Court in Goa Plast (P) Ltd. Vs Chico Ursula D’Souza, Crl. Appeal 1968 of 1996 while considering the object and ingredients of section138 and 139 of the Act observed that “proper and smooth functioning of all the business transactions, particularly, of cheques as instruments, primarily depends upon the integrity and honesty of 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 reliability of issuance of cheques in commercial transactions was eroded to a large extent.”
Debunking The Outcome of Decriminalisation of Cheque Bouncing
Criminal/penal consequences for committing fiscal wrongs or defaults” also finds footing in The Indian Penal Code, 1860, wherein individuals/entities face punishment under the said Act, for failing to comply with their monetary /obligations in matters, where the said default is a part of a premeditated plan, formed at the very inception of the transaction/contract. Economic offences find their bearings in criminal jurisprudence and therefore it is not out of place to prescribe penal consequences for even fiscal defaults.
The proposal at hand, is fundamentally flawed as it overlooks the essence of cheques, especially that of it in the form of security. The Indian business economy relies on cheques as a daily essential in almost all transactions both as a security as well as for making payments. Such practice has also become even more predominant since the Government’s encouragement of cashless transactions. Mistrust of cheques encourages cash transactions with consequent problems of counterfeiting, costs of storing and moving cash and law enforcement problems of an underground economy. The cheque would lose its very purpose if the degree of accountability is reduced and possibly become a redundant instrument.
PDCs taken by Landlords, allows them to bypass the entire rent controller and court systems when rent is not paid on time. Similarly, businesses and financial institutions also use postdated cheques as collateral against credit facilities disbursed, so as to secure their outstanding receivables without inconveniencing the borrower’s immovable assets and without causing business strain. The fear of criminal consequences and punishment, acts as a deterrent against failure of fiscal default.
The decriminalization of Section 138, of The Negotiable Instruments Act, 1881 as such would not reduce business burden as the financial liability against default, would still accrue on the business, in case of dishonor of the cheque, and infact the corporate entity exposes itself to immediate statutory winding up/insolvency proceedings, which is infact more detrimental from a business perspective.
The Act, prior to initiation of criminal proceedings against the defaulter, enshrines within itself, the pre requisite procedure of issuance of a demand notice against the unpaid amount. This provision allows in cases where the default is not premeditated, a window of 30 days from receipt of the notice for the defaulter to rectify the wrong, a leniency infact which is almost alien to criminal law.
Additionally, the offence of cheque bouncing is presently also a compoundable offence and as held by various High Courts, can be referred to mediation, an avenue for circumventing criminal prosecution due to inadvertent non-payment.
In fact, the offences punishable under this Act have already been made compoundable before the initiation of trial, during the pendency of trial and even at the appellate stage (M/s Meters And Instruments Pvt. Ltd. Vs Kanchan Mehta, Cr. Appeal 1731 of 2017), with and without the consent of the complainant when the accused/defaulter is ready to make the payment of the cheque amount. One must understand that a criminal case is purely the punishment for the criminal act and the criminal intention of issuing the cheque without maintaining sufficient balance or with the intention of not honouring the cheque. Decriminalization of The Negotiable Instruments Act, 1881 will leave this Act, which is already on very thin ice, as a toothless Act and will make the commercial transactions in an extremely complex scenario, a redundant one. The legislators must while contemplating on the proposed decriminalization not forget that in our Country there is a common perception- ‘We obey Laws out of fear of punishment and not out of sheer respect for the Law’.
The decriminalization of cheque bouncing, would mean that persons entering into fiscal commitments with malafide intent would go scot-free as recovery and civil proceedings in India are both expensive and slow leading to delayed receipt of payments and debts due, despite willful defaults. Further, when a contract is violated, there is no statutory method for calculating the amount of damages payable. Usually the net receipt is much lower than the amount owed because of such delays and legal administrative costs. Therefore, there is some soundness in the foundation of Section 138 of the Negotiable Instruments Act as it stipulates the fine and imprisonment when a cheque bounces.
In support of the proposal, it has been contended that mere imposition of a penalty is a sufficient deterrent, specifically in those disputes involving a small amount. However, the same holds no ground as delayed payments anyways attract the penalty of interests. When substantially higher payment due to such interest does not act as a deterrent presently, then neither would fines and in India, offences punishable by a monetary consequences are not taken seriously thereby reducing the accountability of an entity or person to make good payments in a timely manner which would result in choking of financial transactions with a domino effect on the fiscal cycle of the country. Further, the intent of the Legislature in formulation of this Act was to ensure that cheques act as an instrument of solid trust and value, which remains unfettered by the quantum of the cheque as the said principle ought to apply to cheques of any and all value. Therefore, the amendment seeking to punish bounced cheques pertaining to smaller amounts only via a monetary penalty whilst those of higher amounts with criminal consequences, fundamentally violates and defeats the very objective of the Act, as the Act does not make any distinction in the amount of the cheque and was enacted to increase the trust in the instrument and its holder, the amount being irrelevant .
The proposal if given effect would result in an increase in the burden of already over burdened civil courts due to a surge in contractual disputes. The IBC has stringent conditions only under which it can be invoked therefore not being an efficacious remedy to all. Arbitration is an expensive and tedious process in itself and the arbitral award would almost always undergo challenge before the Appellate Court and therefore cannot be considered an efficient alternative to recovery proceedings.
This proposal is infact selfcontradictory and unwarranted by the Government as on one hand the government has recently inserted Sections 143A & 148 to make the N I Act more effective and powerful in providing redressal to the complainants with the further objective to strengthen the use of cheques, distinguishing them from other negotiable instruments, whilst on the other hand, is attempting to take measures to decriminalize and dilute the said Act.
Some of the most infamous and burning cases in our country presently are those of financial defrauders, as they have shaken the root of the economy and destroyed the ease in extension of lines of credit and facilities to the masses at large. Penal consequences are the only effective deterrent against such crimes, which though garb themselves as “white collar” are part of a premeditated nefarious design.
In complete conformity, with the opposition expressed by the Bar Council of India, it is felt and feared that if such proposal is given effect, the same would inevitably encourage perpetrators to defraud and cheat innocent persons and there would be absolutely no fear in the minds of people. The fear of criminal litigation & imprisonment is one of the most vital and paramount precipitating factor for not only making timely payments of the cheques but for the judicial system as a whole. By decriminalizing such minor economic offences especially Section 138, the very purpose of enacting these Sections/Acts would be ultimately defeated.
India ought to infact incorporate some penalties similar to those being imposed in other countries against cheque bounce offenders in addition to the existing laws:
France though imposes a civil liability when it comes to cases involving dishonor of cheques, but implements a unique feature of registering frequent offenders to a master database/ register called the Fichier Central de Cheque (FCC) or The Central Cheque Register and bans them from issuing any cheque for 5 years, irrespective of the offender being an individual or a corporate. Analysts say that this policy has obviously shown good results.
There are different laws in different states imposing civil as well as criminal liability. Civil liability ranging from double to treble the amount of the cheque (or a check as called there) and the criminal liability ranges from 1-10 years. The law there is flexible which enables the judiciary to enhance punishment and fine for frequent offenders. For instance, in the state of Alaska, USA the fine ranges upto double the amount of the cheque and imprisonment upto 10 years for cases amounting to $25000 or more, whilst as per the Arkansas Statue, bad cheque (check) is a felony and the class of felony becomes more stringent with the number of convictions.
In India though an offence under section 138 of the Act is punishable for a maximum of 2 years but seldom any defaulter is convicted or even goes to jail. This is because in almost 85 percent of such cases of dishonor of cheques, the defaulter sooner or latter enters into a settlement with the complainant after buying some time to make necessary arrangement of funds and to negotiate the terms , whilst the proceedings under the NI Act are pending in Court. This is also facilitated as the Court proceedings under the NI Act in India, takes considerable time to be completed, even though the Act contemplates a strict stipulation of the proceeding to be over within a period of 6 months.
Hence many reformists firmly believe that the objective of the Legislature must be to take steps and bring about reforms for the speedy disposal of the Cheque bouncing cases, within a redrafted realistic time frame of one year time in place of the current unrealistic six month period enshrined in the present Act, instead of the current proposal to completely decriminalize the offence
In the current situation, when restructuring of the business and the economy is paramount, decriminalizing the Negotiable Instruments Act would further lead to a situation where everybody, individual or corporate would be issuing cheques like candies, without maintaining the requisite funds or no funds at all. Rather, the need of the hour is to adopt measures such as, amending the law to provide increased penalty for subsequent defaults similar to those being imposed in the USA. T he incorporation of this feature can prove to be an effective deterrent and at least would be more effective than the present penalty. Given that the proposal at hand has stemmed from the Covid-19 pandemic, a situation though likely to last for the immediate future, but not forever, the focus of the Government and its agencies should be on interim measures for promoting the economic revival cause, such as temporary relaxations under the Act, extensions of period of statutory limitations, government aid and fiscal policies instead of proposing fundamental changes in the well established and effective judicial framework.
Samarjit G. Pattnaik is Partner, Karanjawala & Co, Bonita Singh and Puneet Relan are both Senior Associates, Karanjawala & Co.