The Ministry of Finance recently issued a public notice titled “Decriminalisation Of Minor Offences For Improving Business Sentiment and Unclogging Court Processes” inviting comments from stakeholders regarding the proposed decriminalization of a host of offences, including S.138 of the Negotiable Instruments Act 1881, which makes dishonor of cheques a punishable offence.
The main reasons discernable for this proposal are (i) the risk of imprisonment for actions/omissions which are not necessarily fraudulent deters domestic and foreign investments; (ii) uncertainty in legal process and the time taken by the courts in resolution hurts the ease of doing business (iii) these are even more pertinent in formulating a post COVID-19 response strategy to stimulate economic growth and improve the justice system (iv) there is a need to relook at provisions which are merely procedural in nature and do not impact national security or public interest (v) reclassifying criminal offences to compoundable offences should be done keeping in mind decreasing burden on business; inspiring confidence among investors; keeping economic growth, national security and public interest as paramount; evaluate non-compliance keeping mens rea in mind as opposed to negligence or inadvertent omissions; and the habitual nature of non-compliance.
It is my view that the decriminalization of dishonor of cheques does not fit in with this reasoning and would be a step in the wrong direction.
The main purpose of the proposal appears to be the desire of the Government to facilitate the ease of doing business and encouraging investment. Abolishing S.138 would have the opposite effect. Dishonor of cheques was originally a civil wrong and did not attract criminal penalty until the amendment of the N.I. Act in 1988, by which Chapter XVII was added, inserting Sections 138 with allied provisions in the Act. As noted in various judicial pronouncements, the purpose of this amendment was to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. The intent was to discourage people from not honoring their commitments by way of making payment through cheques.
It is a fact that cheques are still largely used for various transactions in India across all sectors, and thus, the objective of the amendment holds good even today. The holder of the cheque feels reassured that s/he has a strong weapon to enforce payment in case of dishonor, which is infinitely preferable to winding one’s way through a recovery suit. In the COVID-19 induced weak economic scenario, this is all the more important. To remove this provision will lead to loss of confidence in cheque transactions and will adversely affect the conduct of business, especially on credit. Some industry bodies have already written to the Finance Ministry opposing the decriminialization move. Hence, the proposal defeats the stated purpose in this respect.
Secondly, dishonor of cheques cannot be termed as a minor offence, without any mens rea/malafide intent being present, or merely negligent/inadvertent/procedural in nature. While the statute itself imposes a sort of strict liability which does not require presence of mens rea, still, if the process is looked at closely, an element of mens rea can be discerned. Certainly, at its core, dishonor of cheque is a failure to pay one’s debt. However, it has to be distinguished from a simple act of non payment of money. When a person omits to pay the due amount to another person, it is just that – an omission. On the other hand, issuing a cheque is an overt act of commission, which is accompanied by an implied, and often express promise, that the cheque would be honored upon presentation.
The person/entity issuing the cheque knows that the holder will present it to the bank for payment. In such a situation, when the cheque is dishonored, it shows an intent not to honor the commitment made by issuing the cheque. However even at this stage, the offence is not complete. The holder of the cheque has to issue notice to the drawer intimating the fact of dishonor and demand the payment of the cheque amount within fifteen days of receipt of the notice. It is only upon the failure of the drawer to avail of this second opportunity that the cause of action to file a criminal complaint arises. Thus the drawer of the cheque has at least two chances to pay the amount due. Failure to pay on the second occasion clearly brings in an element of mens rea, and indicates possible fraud, cheating or criminal breach of trust. No one generally issues a cheque unless it is in discharge of some liability. This is recognized by the statutory presumption under S.139.
Hence, there is a sound basis for making dishonor of cheques a criminal offence. At the same time, there are adequate safeguards for genuine cases, as this presumption can be rebutted at trial, or an in appropriate case, a complaint can even be quashed by the superior courts, on the showing of the accused that either the payment was actually made to the complainant, or that no liability exists against the particular cheque. Practical experience also shows that often, the defaulter, upon being summoned to court, realizes the seriousness of the situation and pays the due amount, thereby compounding the offence as permissible under Section 147. Innocent people would not do this. At this juncture, it must also be recognized that the huge pendency of 138 NI Act cases in our courts shows that there are habitual defaulters in our society when it comes to dishonor of cheques, for which a criminal deterrent is no bad thing. Thus, it cannot be said that dishonor of cheque falls in such minor category of offence which merits decriminalization.
Third, the aspect of unclogging the judicial system through this process of decriminalization also does not hold good. It is true large numbers of such cases are pending before the courts, and the magistrate’s courts especially are overburdened and disposals get delayed. But decriminalization by itself will not solve the problem. Whereas the strain on the criminal courts will be reduced, it will simply shift the burden onto the civil courts, because if the holder of the dishonored cheque cannot file a criminal case, s/he will surely file a recovery suit. Thus the overall pendency will remain unaffected and the burden will only be transferred from one part of the judicial system to another. Besides, over the years, there have been numerous amendments and judicial pronouncements which have streamlined the trials of such cases and it is a much smoother process now. Reducing pendency can only truly be achieved when people honor their commitments as a general rule, thereby obviating the need to approach the courts. Till such time, it would be counter productive to deprive a creditor of a potent weapon against the defaulter. Hence unclogging the court system does not appear to be a valid ground to decriminalize dishonor of cheques.
In my view, rather than decriminalizing the dishonor of cheques altogether, a more balanced approach may be to fix a minimum threshold limit for invoking the criminal jurisdiction in such cases. This could be fixed at Rs. 1 lakh or such other amount as found appropriate by Parliament. This will ensure that holders of cheques in larger transactions are protected by an efficacious criminal remedy, thus maintaining the original legislative intent, while at the same time reducing some level of burden on the criminal courts by weeding out smaller cases and giving some succor to individuals/entities who do not have to face prosecution in case of small transactions.
Thus in conclusion, it is my view that the provisions of Chapter XVII of the Negotiable Instruments Act, 1881, be retained.
The author is an Advocate practicing before the Supreme Court of India and a Partner at JNA LAW.