Return of the Debtor’s Paradise? A case against decriminalisation of Section 138 of the NI Act

Let’s face it: our civil processes of enforcement of contracts and decrees are largely broken. They are Kafkaesque, prohibitively expensive, and unduly protracted. At the very outset, we agree that a cheque is essentially a contract, and, therefore, strictly speaking, dishonour of a cheque ought to amount to a breach of contract simpliciter.

However, the legislature, in its wisdom, and for good reason criminalized it in 1989 and provided a legal framework to ensure that cheques are honoured and there is a huge disincentive to issuing a bad cheque.

The legislative policy of giving more teeth to the Negotiable Instruments Act, 1881 (NI Act) over the last few years has also been very clear. For instance, the 2018 amendment saw the addition of two sections, namely, Sections 143A and 148 to the NI Act. The legislative intent behind the amendment was to strengthen the legal regime penalizing dishonour of cheques by providing for enhanced safeguards in favour of the payee and interim relief.

Section 138 served a salutary purpose and amendments further strengthened it. But then comes a rather striking somersault; an epidemic changes it all.

The recent circular dated June 8 (proposal) released by the Department of Financial Services proposes to decriminalise certain “minor offences”, including Section 138, purportedly to “improve business sentiment” and “unclog court processes”. This is striking. From the legislative policy of making the legal regime of cheque bounce cases more efficacious to entirely decriminalising the dishonour of a widely trusted banking instrument, the pendulum clearly has swung to the other extreme. The authors believe that this move may not be apposite and will try to demonstrate why.

To start at the start, there is no denying that the criminalisation or decriminalisation of any act (including omission) is an aspect of policy and depends upon the socio-temporal perceptions of the society. However, the propriety of any such decision ought to be seriously questioned when there appears to be a huge gap/disconnect between the societal and governmental perceptions.

Let’s take a quick look at what these social and governmental perceptions were at the time when cheque dishonour was first made an offence. At the time of insertion in 1988, Section 138 was inserted with an objective “to enhance the acceptability of cheques in settlement of liabilities.”

The same intent was reflected in the 2015 amendment, where the official Cabinet statement noted how “clarity on jurisdictional issues...would increased the credibility of the cheque as a financial instrument.”

From its very inception, therefore, it is clear that the thrust of the legislature has been on strengthening prosecutions for cheque bounce cases and making wriggling-out of a cheque dishonor relatively difficult.

After having concretised the regime of cheque bounce cases, the legislature now seeks to decriminalise the offence altogether. Broadly, on account of two reasons (both of which appear to have been triggered by the COVID-19 crisis and its adverse impact on economic activity). These reasons are:

1. Section 138 is blocking businesses and investments;

2. Section 138’s contribution to huge pendency in courts.

Let us examine each.

Does Section 138 pose a threat to businesses and investments?

Section 138 recognises the usage of cheques (including post-dated cheques) in business transactions and renders the act of dishonour of cheque punishable, so as to deter future dishonours. It seeks to deter by providing for sentence up to two years, in case of conviction. It also provides for restorative justice by envisioning a speedier remedy to the complainant by providing for a fine upto twice the cheque amount as compensation.

But how does S.138 benefit businesses?

Liquidity is the life-blood of a business. Before the enactment of the NI Act in 1881, businesses relied on informal accounting and payment systems. “Bahi-khata” or ledger account, as we know it, used to be the only record of payment. The informal nature of accounting systems led to more defaults and eventually, businesses were forced to shut down or sustain heavy losses as there was no method to secure timely discharge of debts.

With the enactment of the NI Act, businesses came to rely more on cheques as they were drawn upon a bank and involved a trusted formal middle entity and, therefore, commanded great credibility. But even cheques lacked certainty and security of payment. Undischarged debts surmounted. Businesses needed a guarantee, or at any rate, a huge disincentive to dishonour of cheques.

To sustain the trust of businesses in cheques, the legislature introduced S.138 as a guarantee of payment. Post S.138, a drawer learnt to put her signature on a cheque more responsibly, and only after satisfying herself that she is maintaining sufficient balance in her account. Simultaneously, a payee learnt to present her cheque to the bank within a specified time, and take further steps to recover her money if the cheque could not be honoured. Now, a trader is not compelled to wait for years to get back her rightful money. This bodes well since time is really of the essence in such transactions.

Section 138 sought to make cashflow more balanced, predictable and time-bound. Chapter XVII of the NI Act, in its present form and with latest amendments, takes care of liquidity concerns as it entitles the payee to claim some cash in hand for running business operations even during the pendency of S.138 proceedings. Businesses are not forced to shut down. Incalculable and unpredictable losses are not forced upon them.

To balance things out, S.138 does not give any cause of action to the payee on mere information of dishonour. What this means is that a drawer gets a buffer time of a few more days for arranging the funds in case she could not arrange them in her bank account for any reason. Be it cash or an online transaction, instant availability of funds is a pre-requisite for carrying on any business. With a cheque, however, a small trader can place an instant order with her dealer for urgent supplies merely by issuing a cheque under her signature. She can arrange funds in a day or two. S.138 provides statutory recognition to the ground realities of businesses.

This flexibility offered by S.138, without compromising on the guarantee of payment, is very useful for small and medium level traders who may face issues in arranging funds.

The sense of security coupled with necessary flexibility provided a boom to the usage of cheques. Micro, Small and Medium Enterprises (MSMEs) are known to rely heavily on cheques as they associate security and trust with this instrument and find it easy to document in their books of account. A cheque offers credible information about the drawer (account number, name, signature etc.) to the payee so as to enable her to maintain faith in the transaction she is entering into. It enables parties to undertake charge-less transactions and keeps them away from cyber frauds. In practical terms, S.138 takes care of an indispensable segment of any business activity - payments and flow of money. This remedy, therefore, can only be said to add credibility to businesses and not to pose a threat to them.

The proposal nowhere disputes the legal tender of cheques as legal instruments and therefore, the usage of cheques is not sought to be curbed. Strikingly, what is being curbed is the remedy. Without a fairly balanced and proportionate remedy such as Section 138, the affected parties shall be left either with a purely civil remedy in the form of a suit for recovery of money or with a criminal remedy under the Indian Penal Code, 1860 (IPC).

It is no secret that civil processes in India are plagued with delays and any businessman of even elementary prudence won’t touch a civil case with a 100 foot pole. Civil remedies, therefore, are insufficient, and doing away with Section 138 would push people to use serious provisions under the IPC as a remedy. Now, this would be problematic. The parties would be incentivised to give a criminal hue to purely civil transactions.

Section 138 strikes a balance and provides an effective legal recourse. Decriminalisation would amount to dragging the parties to old legal processes and, in the long term, severely impact the prospects of ease of doing business in India.

Pendency and delays in court processes

Indisputably, the volume of cases filed under Section 138 has grown exponentially over the course of time. But that’s hardly the reason for repeal. This, in fact, shows that Section 138 of the Act really works. Section 138, in that sense, is a victim of its own success as it has emerged as an effective remedy. Too effective a remedy possibly which has led to too many cases.

But repeal is not an answer. In fact, the increasing number of frauds/financial shenanigans the post-pandemic society is likely to see requires the government to further strengthen the remedy and not to decriminalise the fraud itself.

In order to cater to the problem of pendency and delays, attempts are being made on the judicial side, which, if rightly adopted at the trial stage, may lead to positive outcomes. Such attempts must be met with appropriate government response.

For instance, the Supreme Court in Indian Bank Association and Others v. Union of India recognised the issue of pendency and issued a slew of directives to be followed by Magistrates. The Delhi High Court, in Dayawati v. Yogesh Kumar Gosain, provided judicial backing to practice of mediation in cheque bounce cases.

In Meters and Instruments Private Ltd. and Others v. Kanchan Mehta, the Supreme Court called for stricter compliance of summary procedure and compounding. In one of the most recent developments, in Makwana Mangaldas Tulsidas v. State of Gujarat and Anr., the Court suggested pro-active steps by banks and introduction of pre-litigation settlement with a view to reduce the volume of cases.

Interestingly, in Meters and Instruments, the Court also called for the use of modern technology in dealing with cheque bounce cases, and suggested online proceedings to tackle the concern of pendency.

These cases reveal that various issues concerning Section 138 have been addressed time and again by the judiciary. Inarguably, this frequent judicial intervention is born out of the fact that the remedy in Section 138 has been instrumental in securing credibility of financial transactions involving cheques and, as such, needs to be preserved and further strengthened.

We reiterate that merely because a subject matter has posed issues of pendency, it does not ipso facto make a good case for decriminalising the subject matter. It, however, does make a good case for radical legislative reforms in line with judicial directives, to make it more effective. Once the utility of a provision is unquestioned, as is the case with Section 138, the road must go forward and not backward.

Indeed, there are grave financial constraints that have emerged in light of the pandemic. Liquidity has taken a great beating. Consequently, there could be cases of dishonour wherein the drawer issued the cheque with a bona fide intention to honour it. However, the emergence of this black swan event rendered her incapable in honouring it. Law must be alive to such situations and afford protection to such drawers by suspending the application of S.138, albeit narrowly tailoring it only for a specified time-frame and for certain debtors.

This, we believe, is precisely the area where legislative intervention is required presently. Through suitable modification, the legislative policy should aim to protect innocent businessmen in this hour of need and not to do away an effective tool like S.138.

Bharat Chugh is a former Judge and a Partner at L&L Partners Law Offices. Yashdeep is a Judicial Law Clerk at the Supreme Court of India. The views expressed here are personal.