The government has been on its feet since the beginning of this pandemic. A panoply of measures dominate the prevailing times where incessant efforts are being made in order to make ends meet to mitigate the foreseen nightmare. Recently, on 8th June in one such tranche, the government has proposed to decriminalise various minor offences citing improvement of business sentiment and unclogging of Court Processes. Interestingly, Section 138 of the Negotiable Instruments Act (NI Act) finds its place in the list forwarded by the proposal.
Section 138 reads as: “ Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for [a term which may be extended to two years], or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless…”
The era preceding the insertion of S138 was marked by never ending cases for recovery from dishonoured cheques as the lender only had the option to file a recovery suit which was governed by our adversarial judicial system. The cases including the appeals used to be perpetual and there was no provision for recovery of any sum until a conclusive decree was passed in this regard. Therefore, this provision was inserted to ensure that obligations undertaken by issuing cheques as a mode of deferred payment are honoured. In a brief, it provides conditions for a filing for dishonour of cheques either due to insufficient funds or any other factor.
In the period from the release of the Official proposal suggesting decriminalising of 138, we have read various reasons as to why decriminalising 138 is a delightful move and a probusiness approach. However, the following stint of words are solely dedicated to the factor that we might have overridden few important factors while rushing to a pro-business model. It is posited why decriminalising 138 without a substitute would only exacerbate the derogation of the Indian credit market.
The GoI in a slew of its ‘Aatmanirbhar’ measures revealed its credit-oriented strategy and targeted benefits for entrepreneurs. It is to be noted that on one hand the government is focussed on creating a healthy credit market with increased lending. However, on the other it seems to forget the dilapidated conditions of loan recovery provisions provided in the Indian Laws. Although the government has tried to secure most of these loans it could under its fascinating schemes, but to attract the confidence of the lenders it is paramount that there exists a robust recovery framework.
Further, sole proprietors and partnerships forms the majority of the businesses in the Indian economy. Most of these businesses are facing a massive cash crunch amidst the series of lockdowns. To remain afloat these entities will be requiring to secure huge sums of unsecured loans. Granting unsecured loans precedes sound financial health in order to gain confidence over recoveries. There is one more way in which this confidence could be gathered and that is by providing a robust individual recovery regime which India lacks as of now.
The Parliament in 2016 formulated a consolidated and comprehensive set of provisions for insolvency and bankruptcy. The revamped Code is well acclaimed and celebrated although as of now only the provisions pertaining to corporate debtors have been enacted. However, Part III of the Code which encapsulates provisions pertaining to individuals and sole proprietorships is yet to be enacted. The provisions currently in force governing the system of recovery from these business entities date back to the British epoch. We have Presidency Town Insolvency Act (PTIA),1909 for Calcutta, Madras and Bombay and Provincial Insolvency Act (PIA), 1920 for other provinces. Unlike the new era established by the IBC, these provisions still rely on the adversarial judicial system approach. Although these provisions look good on paper but the matter of fact is that they have rarely been used because of their low success rate, huge costs and excessive Judicial dependency. What has prevailed to date is S138 of the NI Act. Lenders of household debtors, private businesses have developed as a matter of practice the collection of postdated cheques in order to secure the credit while forwarding unsecured loans. In cases of failure, the only recourse with these lenders is activating S138 and to pursue a criminal action in cases of failures in repayment to make adequate recoveries.
The criminal remedy provided by S138 instils fear of action in debtors and a sense of confidence in creditors. This is how the Indian credit market has balanced itself to date. Snatching away the only remedy from these creditors without providing a substitute might act as a catalyst in distorting this confidence of recovery of monies, which will subsequently act in derogation to the debtor as he/she will find it difficult to secure the much needed credit. With decriminalization of S138, and absence of a robust recovery regime the lenders will be forced to take a recourse to a commercial suit. Commercial Courts Act envisages expedited recoveries and lenders will prefer this over the decriminalized S138 as it will merely be a civil suit and emphatically, civil suits in our judicial system don’t play well. In addition, the lenders whose claims don’t qualify the thresholds of a commercial suit will have to take recourse to a normal recovery suit which again will only add to the plight of the lenders. The status quo S138 at the very least guarantees compensation equal or more than the dishonoured cheque in a reasonable time and plus it being a criminal offence instils a fear of incarceration which adds to the responsibilities of the debtor and ensures strict compliance. Without a robust recovery framework, the creditors might be repelled with the idea of forwarding unsecured loans which apparently is the need of the hour for such businesses.
Although the decriminalising initiative heralds a pro-business era but it is important that the Parliament considers the backfire erupting from this unnecessary move. Thus, it is essential to either notify the novel individual insolvency regime to provide the creditors with an alternate to confident recoveries in cases of indebtedness or to back off from moulding S138 for the time being as this will in a way only exacerbate the already shattered market conditions.
Advocate Shivanshu Goswami practices at the Lucknow Bench of the Allahabad High Court. Research and Co-Authored by Animesh Upadhyay, 5th year law student at Ram Manohar Lohiya National Law University, Lucknow and Mudit Ahuja, 5th year Law Student at ILS Law College, Pune.