De-Criminalisation Of Economic Offences: Of Cheques and Balances

The economic fallout of the COVID-19 lockdown, due to the cessation of nearly all commercial activity, is yet be fully ascertained. With “Unlock 1.0” been introduced earlier this month many restrictions which had been in place for over 75 days were lifted. Restaurants and malls were allowed to open their doors as were factories and offices following some protocols. While detailed economic stimulus packages had previously been announced, with uncertainty continuing to loom and market sentiment being low, certain other measures were needed to prop-up the economy.

It was in this background that the Ministry of Finance released its Statement of Reason (SOR) seeking inputs from stakeholders (by June 27^th) on the Government’s proposal to decriminalize certain “minor offences.” The objective is clear, “to help revive the economic growth and improve the justice system.” But despite noble intentions, it’s difficult to overlook that the many statutory provisions which are sought to be amended were put in place to act as deterrents from committing many economic offences in first place. Therefore, it’s important to evaluate whether the Government proposal will provide the intended succor or actually create a more hostile business environment.

The SOR notes that “ensuing uncertainty in legal processes and the time taken for resolution in Courts hurts ease of doing business.” India, ranked 63rd among 190 countries in the World Bank’s Ease of Doing Business Report 2020, up from the previous year’s rank of 77. However, the Government failed to achieve its target of being within the top 50. With an eye on enticing businesses to India, the Government hopes that the decriminalisation of certain economic offenses will increase domestic and foreign investments.

A framework where “malafide intent is punished while other less serious offences are compounded” is proposed, and it is felt that penalties may be sufficient deterrent. The SOR further reasons that minor non-compliances and procedural lapses do not impact national security or the public at large and, thus, ought to be decriminalised. Nothing so far can really be questioned.

It is proposed to amend 19 statutes, including, inter alia, the Insurance Act, 1938, RBI Act, 1934, NABARD Act, 1981, as well as some more recent legislations such as provisions of the Securities and Exchange Board of India Act, 1992, Section 29 of SARFAESI Act, 2002, Sections 26(1) and 26(4) of the Payment and Settlement Systems Act, 2007 and Section 23 of the Factoring Regulation Act, 2011.

Notable is the proposal to amend Section 138 of the Negotiable Instruments Act, 1881 (NIA), which makes the dishonor of a cheque a criminal offence. In elucidating upon the principles to be kept in mind, while considering the reclassification of criminal offences to compoundable offences, the SOR specifies that “[M]ens rea (malafide/ criminal intent) plays an important role in imposition of criminal liability, therefore, it is critical to evaluate nature of non-compliance, i.e. fraud as compared to negligence or inadvertent omission.” However, what seems to have been overlooked is that criminal jurisprudence requires such intent to be proved “beyond a shadow of a doubt” which isn’t always practically possible. It is for this very reason that by virtue of Section 139 of NIA, a presumption resides in favour of the holder of a cheque, that such cheque has been received for the discharge of a debt or liability. Upon the introduction of Section 138 one knew that they could be hauled to court and found criminally liable if a cheque they issued were to bounce. But will the compounding of such an offence, merely by paying a penalty, be enough of a deterrent and facilitate the free flow of trade? Knowing that eventually the matter could be “settled” may afford a limited impunity and result in more cheques being dishonoured, conversely leading to a dip in the ease of doing business.

To address these and similar issues, the SOR stipulates that another principle to be kept in mind is the “habitual nature of non-compliance.” Thus, what can, perhaps, be considered is to allow such offences to be compounded on the first (or second) instance, but for repeat offenders to be punished with harsher sentences.

The proposal to decriminalise these minor offenses comes on the heels of another similar endeavour in the form of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020. This Ordinance has suspended the initiation of fresh insolvency proceedings for a period of six months from 25th March, 2020 (extendable to one year) and has further restricted insolvency proceedings from being initiated for any default which has arisen during the said period. The Ordinance has been promulgated to prevent “corporate persons which are experiencing distress on account of unprecedented situation, being pushed into insolvency proceedings,” what had initially been referred to as Covid Related Debt. However, by discharging companies from liability for all defaults, which have occurred during the lock-down, without ascertaining the nature or cause of the default, is not the Government effectively providing a get-out-of-jail-free card even to wilful defaulters?

In the world of commerce, the interests of both the creditor as also the debtor have to be balanced. If protection is extended only to the debtor would that not impede the commercial viability of the creditor who also needs funds to run her business? Is not a balance likely to be maintained if instead of making blanket exemptions, a procedure was established whereby one had to apply to a nodal agency or an ombudsman citing the financial hardships supported by adequate paper work for then a case specific determination to be made. Also, rather than giving every debtor total immunity, would it not be prudent to cap a monetary limit up to which a creditor may seek exemptions on payments and nothing beyond. Payments in commerce affect a whole value chain. By giving protection to one is going to lead to the whole chain getting affected and someone eventually bearing economic hardship.

In conclusion, while a boost to the economy is no doubt needed and businesses need all impetus to get back on their feet, a balance must also be maintained between competing interests and practicality. To protect only the debtors will swing the pendulum too much on one side and eventually lead to a spurt in cases, which asides from being contrary to the objective of the proposed SOR, will also have their own set of economic and legal challenges.

The author is a commercial litigator based in New Delhi. A graduate of Harvard Law School, he’s licensed to practice both in India and New York. Advocate Tanveer S. Oberoi provided research assistance.