By Harsh Rohan Sistla
ABSTRACT:
The economic landscape of India, like many countries worldwide, has been profoundly impacted by the COVID-19 pandemic. As the nation grapples with economic downturns and challenges, the Ministry of Finance has proposed significant reforms to alleviate burdens on businesses and streamline legal processes. Among these reforms is the contentious issue of decriminalising the dishonour of cheques under Section 138 of the Negotiable Instruments Act, of 1881. This paper discusses the evolution of cheque dishonour law in India and whether decriminalising dishonour of cheques is the right course of action.
INTRODUCTION:
A “cheque” as defined under Section 6 of the Negotiable Instruments Act, 1881 (“Act”), functions as a bill of exchange. When a bank declines to honour the amount specified on such a cheque presented by the payee, it is deemed dishonoured. Various reasons can lead to this, with insufficient funds in the payer’s account being the most common cause. Material alterations such as overwriting, corrections, or missing details, as well as irregular signatures compared to the bank’s specimen, can also result in dishonour. Additionally, presenting a post-dated cheque before its specified date or presenting a cheque that has expired (stale cheque) after three months are other scenarios that can lead to dishonour. Issuing a stop payment request or freezing an account by court order can also cause dishonour, as can closing the account after issuing cheques.
Section 138 of the Act, specifically addresses dishonour of cheques due to insufficient funds. This provision was introduced through an amendment in 1988 and has garnered attention among bankers and legal professionals.
Section 138 of the Act, was introduced with the noble intention of instilling credibility into cheque-based transactions. It imposes criminal liability on individuals who issue cheques that subsequently bounce due to insufficient funds. The provision mandates imprisonment up to two years or a fine extending to twice the cheque amount, or both, thereby aiming to deter dishonest use of cheques.
Section 138 of the Act, implemented in India since 1988, addresses cheque dishonour cases due to insufficient funds or other specified reasons. Originally intended to prevent misuse of cheques and maintain their credibility, the provision has resulted in a substantial caseload, with approximately 20% (around 4 million cases) of all court cases in India related to cheque dishonour.
In February 2020, Finance Minister Nirmala Sitharaman announced the government’s intention to decriminalize cheque dishonour, along with other offences, advocating that such changes would enhance the ease of doing business in India and foster economic growth while safeguarding national security and public interest. The proposed decriminalization aims to relieve the Indian courts of the burden of approximately 4 million cheque-bouncing cases, constituting 20% of all cases in Indian courts. If implemented, these cases would be handled as civil matters instead of criminal offences.
EXISTING LAW IN INDIA:
Section 138 of the Act deals with dishonouring of cheques due to insufficiency of the funds and imposes penalties for such actions. The punishment can either be imprisonment for up to 2 years a fine up to twice the amount of the bounced cheque or both. The offence is non-cognizable and bailable.
The following conditions need to be fulfilled for the section to be applicable as reiterated by the Supreme Court in the case of Kusum Ingots and Alloys v. Penmar Peterson Securities Ltd[i].:
- The account on which the cheque is drawn should be a live account (an account which is in existence at the time when the cheque is issued).
- The debt for which the drawer has issued the cheque shall be legally enforceable.
- The cheque shall be presented to the bank within 3 months from the date mentioned on the cheque.
- The bank further needs to provide a statement which says that the drawer’s bank account has insufficient funds or exceeds the credit limit that the bank can provide to the payer. The bank needs to return the cheque along with this statement.
- The payee must within 30 days after the return of the unpaid cheque, make a demand on the drawer for the amount of the cheque in writing.
- If the payee fails to provide the amount on above mentioned written demand within 15 days from receipt.
- The cheque-holder needs to file a criminal complaint within a month in case of non-payment within the above-mentioned 15 days from the date of the receipt.
This offence can be compounded only with the consent of both parties. A formal permission from the court is not required. However, if the court is of the discretion that the drawer had paid the needful amount even if there is no consent, the accused can be discharged. In such case, the bank is authorized to take the following actions:
- The offenders who repeat the offence can be banned from issuing a cheque
- The drawer can be filed with a penalty
- The bank account can be frozen until the account has sufficient money to pay for the cheque.
Dishonour of the cheque was made an offence by an amendment in the existing Act by inserting Chapter XVII, in the year 1988. The amendment was brought due to an endemic of cheque bounce cases. The amendment eased the situation of asynchronous payment and delivery transactions. Such disarrangement attracted only full cash payments which were further resulting in consequent problems. Therefore, Dr Rajamannar based on the committee report suggested penalizing the offence. Before decriminalization, cheque issues were a civil suit and used to be dragged for years and years. Also, it did not provide for the necessary discouragement to lessen the dishonour cases. The intention behind this amendment was to safeguard the faith of people in banking operations and to encourage cheques as a mode of payment by increasing their credibility. This criminalization was done to discourage people from writing cheques that we’re incapable of being honoured eventually. This also ensures the complainant about the compensation. These cases would be civil cases involving a breach of contract, in case sec 138 is decriminalized.
LAWS IN OTHER COUNTRIES:
Countries like the UK, the USA and France do not have any laws on criminalization of cheque bounce. The UK prohibited imprisonment for failure to repay debts in 1869 while enacting the Debtor’s Act. In the Allen case, a UK High Court judge stated that imprisonment for cheque bounce cases makes no sense. This case involved dishonouring of a cheque due to unfavourable circumstances (accident and illness). The judge pointed out that non-payment due to such reasons is not outside the daily course of life. In countries like the UK and the USA, ‘deception’ and ‘dishonesty’ must be proved to lead to a case of dishonoured cheque towards criminal law.
Similarly, a country like France does not have a system that criminalizes cheque dishonour except in certain situations. France provides for disqualification of the drawer from issuing cheques for up to 5 years and the name can be added to a register (Fichier Central de Chèque) to monitor and prevent repeated offences. At present, the same practice is adopted by countries like Italy and Spain. It can be observed from a country like France those disqualifying individuals who frequently have their cheques dishonoured would assist banks in monitoring such individuals and preventing them from issuing cheques in the future. In addition to this, the banks also impose fines on these defaulters. The USA banned the idea of debtor prisons in 1833 due to the opinion that the debtors could not repay the loans from prisons in cases where the sum of all their assets was not enough to repay the loans. Instead, the banks in the USA now have provisions to increase penalties for each subsequent dishonoured cheque which acts as a discouragement to frequent defaulters.
Therefore, it can be observed that developed countries like the UK, the USA and France have not adopted the criminalization of cheque dishonour in their legal systems.
LAW GOVERNING FOREIGN CHEQUES IN INDIA:
Foreign cheques, also known as international cheques, form the bedrock of Foreign Instruments, aiding individuals and businesses in cross-border money transfers. These cheques, issued by banks outside a specific country, serve as crucial tools for payments and settlements between nations, enabling transactions in foreign currencies.
Unlike electronic transfers, foreign cheques undergo distinct processing steps, including authentication and compliance checks, managed by correspondent banks to ensure seamless transactions. Each country has its legal procedures governing the exchange of currency via foreign cheques.
Businesses heavily rely on foreign cheques for international trade and investment purposes. They utilize them to pay suppliers, receive payments from overseas clients, and settle transactions. Notably, foreign cheques are favoured for import financing and foreign direct investment, playing a pivotal role in the global fund movement.
Individuals also leverage foreign cheques for various needs. Professionals working abroad, students studying overseas, and families receiving support from relatives abroad utilize them for paying tuition fees, medical expenses, and receiving financial assistance.
Foreign Instruments in India, particularly Foreign Cheques, are regulated under Chapter 16 of the Act, titled “Of International Law.” Sections 134-137 of the Act, delineate the liability of the drawer issuing the cheque and govern the jurisdiction concerning dishonored cheques. This jurisdiction applies when a cheque made outside India but drawn according to Indian laws is dishonoured, invoking presumptions of foreign law.
Specifically, Chapter 17 of the Act, encompassing Sections 138-147, governs the scenario when a foreign cheque is dishonoured, presenting the duties of the drawee concisely:
1. The cheque must be presented to the bank within six months from its issuance or within its validity period.
2. The drawee is obligated to demand payment by notifying the drawer.
3. The amount must be paid within fifteen days of the notice.
Additionally, the Act, outlines penalties for dishonoured cheques issued by companies, the applicability of the Code of Criminal Procedure, 1973 procedures for transferring pending cases due to the 2015 amendment, court authority to try cases summarily, and provisions for directing interim compensation.
Understanding these provisions is crucial for legal compliance and resolving disputes related to foreign cheques in India effectively.
The Negotiable Instruments (Amendment) Bill, of 2015 amended the existing legal framework governing cheques, with a specific focus on jurisdictional aspects concerning cheque bouncing cases. One of its key objectives is to provide clarity regarding the jurisdiction within which such cases can be filed.
In a significant judgement in the case of Right Choice Marketing Solutions JLT & Ors. V. the State NCT of Delhi & Anr., the Delhi High Court dismissed the petition and stated that as per section 138 r/w section 142 (2) of the Act, the Indian courts have the jurisdiction to adjudicate a complaint filed under section 138 of the Act, even if the cheque that has been presented was a foreign cheque. The Delhi High Court made it clear that where a foreign cheque is deposited for encashment in India, the Court within whose jurisdiction it is so deposited shall have the jurisdiction to adjudicate on the complaint for its dishonour under section 138 of the Act.
This judgement is a significant step taken towards greater vigilance in financial matters as it underscores the applicability of the legal provisions under the Act, in cross-border transactions.
DEVELOPMENT OF CHEQUE DISHONOUR LAWS OVER YEARS IN INDIA:
The original Act, introduced during British rule, did not include provisions for criminalizing cheque dishonour. It wasn’t until 1988 that an amendment introduced penalties for dishonoured cheques due to insufficient funds. During the 1970s and 1980s, India lacked a national clearing system, relying instead on multiple manual clearance platforms which contributed to delays and dishonoured cheques.
Justice PV Rajamannar proposed criminalizing cheque dishonour in 1975, aiming to enhance efficiency and credibility in banking operations amidst manual processing methods. This proposal materialized thirteen years later, aligning with the introduction of the Magnetic Ink Character Recognition (MICR) system to expedite clearances. By the 1990s, as internet services began in India, there was a concerted effort to promote cheques as a non-cash payment method, supported by schemes like the Electronic Clearing Service introduced in 1990 for bulk payments.
Further amendments to the Act in 2002 facilitated cheque image scanning and electronic cheque usage, followed by mandatory electronic payments between RBI entities and markets in 2008. Despite these advancements, by 2018, cheque payments dwindled from 14% to 3% of total transactions, marking a significant shift in commercial transaction methods.
The lack of foresight in estimating the impact of these amendments resulted in an unforeseen burden on Indian criminal courts. This serves as a lesson for the government to conduct thorough assessments before implementing such regulatory changes.
ANALYSIS OF IMPORTANT JUDGEMENTS:
- In the case of Jayalakshmi Nataraj v. Jeena and Co.[ii], the concept of vicarious liability was highlighted under Section 138 of the Act, where a company’s managing director was held liable for a dishonoured cheque issued by someone else in the company, despite claiming lack of involvement in daily affairs. The director argued that she only dealt with major work and was not involved in the daily administration of the company and therefore she was unaware of any such cheque. However, the court held that even though the director is unaware of everyday affairs, he/she can still be held guilty. The court emphasized that awareness of everyday operations is not necessary for liability.
- In the case of Geekay Exim (India) Ltd. And Ors v. State of Gujarat and Anr.[iii], the presumption of mens rea in the case of section 138 of the Act was questioned as the section does not specify the presumption of mens rea for dishonour of cheques. The Gujarat High Court questioned the presumption of mens rea (criminal intent) under section 138 of the Act, stating that it must be assessed based on the specific facts of each case rather than being automatically presumed.
- In the case of Dalmia Cement (Bharat) Ltd. V. M/s. Galaxy Trades & Agencies Ltd.[iv], the Supreme Court clarified the intention of the legislature behind the enactment of this section. The Apex Court clarified that section 138 of the Act was enacted to enforce strict liability for cheque dishonour, aiming to uphold the credibility of negotiable instruments crucial for commerce and trade in India. The court observes that cheques in India are the most used negotiable instrument which eases the course of commerce and trade and in the absence of the same, bulk trading would become difficult.
- In the case of Dayawanti v. Yogesh Kumar Gosain[v], the Delhi High Court has drawn a clear line between traditional criminal cases and criminal cases under section 138 of the Act. The Delhi High Court distinguished criminal cases under Section 138 of the Act as legally compoundable and suitable for mediation, outlining a process for settlement and emphasizing alternative dispute resolution.
- In the case of M/s. Meters and Instruments Private Limited & Anr. V. Kanchan Mehtaon[vi], the Supreme Court set guidelines for expedited disposal of Section 138 cases, advocating for the use of modern technology to streamline proceedings and reduce court backlog. The Supreme Court via this case issued guidelines for the speedy disposal of cases under section 138 of the Act and stated that the proceedings can take place through video conferencing if required by either party.
- In the case of Smt. Asha Baldwa v. Ram Gopal & Anr.[vii], the petitioner issued a dishonoured cheque to the respondent who knowingly accepted it. The petitioner argued that under Section 141(2) of the Act, liability applies only when negligence on the part of the company or its members can be proven, not when the payee is aware of the cheque’s dishonour. However, the court ruled that when someone promises payment via cheque, they are bound by that promise. According to Section 139 of the Act, it is presumed that the payee accepts such a cheque to discharge any debt or liability.
This case reaffirmed that all company members (such as managing directors, board of directors, etc.) are liable for any cheques signed on behalf of the company, regardless of whether the person who signed the cheque had consent from other members.
- In the case of Electronics Trade & Technology Development Corporation Ltd., Secunderabad v. Indian Technologists & Engineers (Electronics) (P) Ltd. and Anr.[viii], the Supreme Court reiterated the legislative intent behind Section 138 of the Act, emphasizing its role in maintaining the credibility of financial instruments.
- In the case of Goa Plast (P) Ltd. v. Chico Ursula D’Souza[ix], the Supreme Court observed the misuse of cheques for fraud and disruptions in business transactions, suggesting a need for reforms possibly aligned with decriminalization.
- In the case of Makwana Mangaldas Tulsidas v. The State of Gujarat[x], the Supreme Court recommended the establishment of special courts for expediting Section 138 cases, indicating a recognition of the need for more efficient handling of such matters.
GRADUAL PROGRESSION BY THE GOVERNMENT TOWARDS DECRIMINALIZATION:
In 2011, the first proposals for decriminalization were introduced as part of an effort to reduce court delays. A group of ministers was subsequently formed in 2012 to explore policy changes aimed at decreasing the number of cheque dishonour cases. Suggestions included alternative dispute resolution mechanisms and the creation of a summary process to expedite case resolution. However, these initial proposals did not materialize into legislative changes.
The case of Rangappa vs Sri Mohan[xi], categorized cheque dishonour as a regulatory offence rather than a pure criminal or economic offence. This perspective was reinforced in subsequent cases like Kaushalya Devi Massand vs Roopkishore Khore and M/S Meters and Instruments vs Kanchan Mehta, where the courts emphasized that cheque dishonour primarily involves civil wrongs with commercial implications.
Even before statutory provisions allowed for compounding, courts permitted the settlement of cheque dishonour cases. This flexibility was observed in cases like O. P Dholakia vs the State of Haryana[xii], where costs based on the amount of dishonour were imposed, encouraging settlements. The concept of charging ad valorem (based on the value of the cheque) proposed by the group of ministers indirectly influenced court practices in settlement amounts.
The Legal Services Act of 1987 introduced Lok Adalat as a means to resolve cheque dishonour cases through compromise, aiming for swift resolutions. Supreme Court rulings in 2012 allowed awards from Lok Adalat to be treated as decrees enforceable by civil courts, irrespective of the case’s criminal nature.
This approach facilitated pre-conviction and post-conviction settlements, often resulting in acquittals.
In 2014, the Supreme Court directed trial courts to expedite the compounding process for cheque dishonour cases. Courts were instructed to indicate summons early if the accused applied for compounding, ensuring swift judicial decisions. Further clarifications in subsequent cases, like M/S Meters and Instruments vs Kanchan Mehta in 2018, streamlined procedures to discharge defaulters promptly upon compensation to the complainant.
In March 2020, the Supreme Court reiterated the need for a practical and sensible approach to resolving cheque dishonour cases without resorting to criminal proceedings. It emphasized settling cases through compromise or private settlement mechanisms before resorting to formal complaints, aligning with efforts towards decriminalization.
ROLE OF COVID-19 IN DECRIMINALIZATION:
During the COVID-19 pandemic, the Supreme Court’s decision to extend the limitation period for negotiable instruments had significant implications for cheque dishonour cases and contributed to the momentum towards decriminalization.
The nationwide lockdown and subsequent restrictions disrupted normal business operations, making it challenging for individuals and businesses to present cheques within the stipulated timeframes. Logistics difficulties persisted even after the lockdown was lifted, further complicating cheque transactions.
Lockdown measures led to reduced economic activity and cash flow for many individuals and businesses. Maintaining sufficient funds in bank accounts became difficult, which increased the likelihood of cheques being dishonoured due to insufficient funds.
Against this backdrop, the Supreme Court’s decision to extend the limitation period provided temporary relief and highlighted the systemic issues with criminalizing cheque dishonour. It catalysed discussions and actions towards decriminalizing Section 138 of the Act, aligning with efforts to relieve pressure on the courts and provide a more balanced approach to addressing cheque dishonour issues.
APPROPRIATE COURSE OF ACTION FOR DECRIMINALIZATION OF DISHONOUR OF CHEQUE:
Each case of cheque dishonour requires a separate criminal complaint, leading to a significant burden on the judicial system. India already faces a backlog of cases, and decriminalization could simplify legal proceedings, potentially freeing up court resources for more critical matters. Shifting cheque dishonour cases to civil courts could expedite resolution since civil courts typically focus on compensating the aggrieved party rather than punitive measures.
Decriminalizing cheque dishonour aligns with the government’s push towards a cashless economy and promotes digital transactions. It removes the fear of criminal consequences, potentially encouraging more businesses and individuals to adopt cheques and other electronic payment methods. Currently, the fear of imprisonment and heavy fines may deter individuals from using cheques, affecting their utility as a negotiable instrument.
While some have supported the decriminalization of cheque dishonour, I believe it is not the right step. Removing the threat of imprisonment and substantial fines might discourage people from using cheques, thereby diminishing their effectiveness as a reliable payment method. Further, decriminalization of dishonour of cheques will fade the fear of criminal proceedings, leading to the issuing of cheques with no legal burden of actually making the payment.
CONCLUSION AND RECOMMENDATION:
Decriminalization of cheque dishonour under Section 138 of the Act, has been a subject of debate amidst calls for reform in India’s legal landscape. Originally introduced to safeguard the credibility of cheque-based transactions, the provision imposes stringent penalties including imprisonment and fines for offenders. However, over time, it has contributed significantly to the burden on India’s judiciary, with approximately 20% of all court cases related to cheque dishonour.
The rationale behind decriminalization rests on several key arguments. Firstly, shifting these cases from criminal courts to civil courts could alleviate the strain on the judicial system, allowing for quicker resolutions focused on compensatory justice rather than punitive measures. This transition aligns with broader efforts to streamline legal processes and improve the ease of doing business in India.
Moreover, decriminalization is seen as a step towards promoting a cashless economy and encouraging digital transactions. By removing the spectre of criminal penalties, it aims to foster confidence in cheque usage and electronic payments among businesses and individuals alike. This move could potentially reduce reliance on cash transactions, promoting transparency and accountability in financial dealings.
Critics of decriminalization argue that it may weaken the deterrent effect against cheque fraud and dishonourable practices. The fear of imprisonment and heavy fines, they contend, currently serves as a crucial safeguard against the misuse of cheques. Furthermore, without criminal consequences, there is a concern that defaulters may issue cheques without sufficient funds, knowing they can escape legal repercussions. [xiii]
In conclusion, decriminalizing the offence of cheque dishonour has its pros and cons. On one hand, removing criminal penalties could ease the burden on courts and expedite the resolution of cases that currently linger for years. This could potentially boost investor confidence by eliminating the fear of severe legal repercussions for minor cheque-related issues. However, the flip side of this move raises concerns. In a civil framework, the absence of measures like non-bailable warrants or property attachment might make it harder to enforce payments, thereby reducing the credibility of cheques. Investors might hesitate if they perceive weaker legal remedies for recovering dues. Moreover, while alternative provisions in the Indian Penal Code might address fraud or breach of trust, the practical challenges of recovering money remain. Therefore, while decriminalization could streamline legal processes and reduce court backlogs, careful consideration is needed to ensure that it doesn’t inadvertently undermine the effectiveness of cheques as a reliable payment method.
[i] Kusum Ingots and Alloys Ltd vs Pennar Peterson Securities Ltd, (2000) 2 SCC 745.
[ii] Jayalakshmi Nataraj vs Jeena and Co.1996 86 CompCas 265 Mad
[iii] Geekay exim india limited vs. State of Gujarat laws (GJH)-1997-7-26
[iv] Dalmia Cement (Bharat) Ltd vs M/S.Galaxy Trades & Agencies Ltd Appeal (crl.) 957 of 2000
[v] Dayawati vs Yogesh Kumar Gosain CC No. 2429/15 & 2430/15
[vi] M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehtaon Appeal (Crl.), 1731 of 2017
[vii] Smt.Asha Baldwa vs Ram Gopal & Anr Criminal Misc(Pet.) No. 2726 / 2014
[viii] Electronics Trade & Technology Development Corporation Ltd., Secunderabad v. Indian Technologists & Engineers (Electronics) (P) Ltd. and Anr. Appeal (crl.) 124 of 1996
[ix] Goa Plast (P) Ltd vs Chico Ursula D’Souza Appeal (crl.) 1968 of 1996
[x] Makwana Mangaldas Tulsidas v. The State of Gujarat SLP (Crl.) No. 5464 of 2016
[xi] Rangappa vs Sri Mohan (2010) 11 Scc 441, A on 28 September, 2018
[xii] O.P. Dholakia v. State of Haryana & Another S.L.P. (Crl.) No. 2964 of 1999 | 15-11-1999
[xiii] https://www.mondaq.com/india/crime/978864/pros-and-cons-of-decriminalisation-of-dishonour-of-cheque
