Leniency during COVID-19 is fine, but decriminalising Section 138 encourages financial crime, harms creditors' confidence and hurts economy

Farhad Singh Kohli

On 8 June, 2020, the Ministry of Finance proposed decriminalising various offences "for improving business sentiment and unclogging court processes ", including Section 138 of Negotiable Instruments Act, 1881 ("Act"), which makes dishonour of cheques a punishable offence. The press release mentions that criminal penalties are "perceived as one of the major reasons impacting business sentiment and hindering investments both from domestic and foreign investors." The finance ministry has also highlighted the delay in disposal of cases involving such offences and stated that decriminalisation will form a part of the post-COVID-19 response strategy to revive the economy and improve the justice system in India.

As per Section 138, if a cheque drawn on a beneficiary for the discharge of any debt or liability, is dishonoured by the bank upon presentation, the drawer can be punished with imprisonment for a term which may extend to two years, or with a fine which may extend to twice the amount of the cheque, or both. However, the drawer of the cheque is given a 15-day period within which he can settle accounts with the holder of the cheque.

However, decriminalising Section 138 might not be the right means for achieving an otherwise laudable end.

Need to criminalise bad cheques

Just as the need to decriminalise Section 138 is felt to create a more favourable business climate, the need for a sense of security among holders of cheques cannot be ignored.

The importance of credit in the Indian economy can hardly be overestimated. Traditionally, Post-Dated Cheques (PDCs) have been one of the popular ways of facilitating credit in India. PDCs are widely used for obtaining home finance and other products including personal, auto and consumer durable loans. Some loan agreements provide for handing over of PDCs as security for instalments.

It is a common for landlords to take PDCs from tenants to secure property lease agreements. Also, many MSMEs deliver goods and services against PDCs. This system has developed only on account of the reassurance provided by Section 138.

Also, decriminalising this provision is going to serve as a setback for those creditors who lend money to companies, and are later unable to recover their dues. The Insolvency and Bankruptcy Code, 2016 does provide the option of filing an application before the National Company Law Tribunal (NCLT). However, the government has recently raised the threshold for default under the Code to Rs 1 crore from Rs 1 lakh. Perhaps, Section 138 is now the only effective recourse which an aggrieved creditor has when the amount involved is under  Rs 1 crore.

Decriminalising Section 138 is only going to make creditors more insecure, which could cause unfathomable harm to the Indian economy.

Moreover, considering the malaise of tax-evaded income in the form of cash, and its adverse impact on the economy, there is an imperative need for promoting the use of cheques. The deterrent provisions of Section 138 have been more than efficacious in this regard since people feel much safer using cheques. Decriminalising this provision will undeniably, serve as a major blow to transparency in financial transactions.

What the Supreme Court has said

Over the years the Supreme Court has made a conscious effort to create an effective safety mechanism to prevent the misuse of Section 138.

In Damodar S. Prabhu Vs. Sayed Babalal H case, the court held with respect to Section 138, that it is the compensatory aspect of the remedy which should be given priority over the punitive aspect. The court took cognisance of the tendency of litigants to belatedly choose the method of compromise to resolve their dispute, instead of doing so at an earlier stage of litigation.

The early settlement was incentivised by introducing a graded scheme for imposing costs and it was held that if the accused makes an application for compromise at the first or second hearing of the case, settlement may be allowed without imposing any costs on the accused. While observing that vexatious filing of multiple complaints relatable to the same offence causes undue harassment, the court directed that it should be mandatory for the complainant to disclose that no other complaint has been filed in any other court in respect of the same transaction and if he fails to do so, heavy costs must be imposed upon him.

Among the primary causes for the colossal amount of Section 138 cases in Indian courts is the reprehensible act of filing complaints in various places for cheques dishonoured in the same transaction and at the same place, in order to extract money from the accused by dragging him from place to place.

In Dashrath Rupsingh Rathod Vs. State of Maharashtra, the court held that territorial jurisdiction for filing Section 138 complaints is restricted to the court within whose jurisdiction the cheque is dishonoured (area within which drawer's bank is located). However, soon Section 142 (2) was inserted via the Negotiable Instruments (Amendment) Act, 2015 which essentially limits jurisdiction to the place where the holder of the cheque ordinarily maintains his account or where that branch of the holder's bank is located in which the drawer maintains his account.

Even though the rule laid down by the apex court was found unsuitable by the Legislature, this judgment was instrumental in bringing to light the need to restrict jurisdiction within which complaints could be filed.

Many a time when a company has issued cheques which are later dishonoured, the directors of the company are needlessly named in the complaint for the sole purpose of harassment. In the A.R. Radha Krishna Vs. Dasari Deepthi and Ors., it was held that a complaint under Section 138 must contain a specific averment that the director was in charge of and responsible for the conduct of the company's business when the offence was committed. Moreover, the court must check whether there is evidence which proves the director's innocence.

These are just a few among an array of judgments in which the Supreme Court has laid down strict guidelines to ensure that Section 138 is not misemployed by exploitative litigants.

International perspective

Internationally as well, the need has been felt to make cheque dishonour a punishable offence.

In the American state of Georgia, section 16-9-20 of the Official Code of Georgia sets out penalties that may be imposed on someone who writes a dishonoured cheque, including hefty fines and imprisonment which may extend to three years. In Ohio, section 2913.11 of the Ohio Revised Code provides for similar punishment.

In UAE, article 401 of the UAE Federal Penal Code provides that the drawer of a bounced cheque should be fined or detained for a period which could extend to three years. In Thailand, as per section 4 of the Offences Arising from the Use of Cheque Act, B.E. 2534 ( 1991 ), offences involving dishonoured cheques are punishable with a fine or imprisonment which may extend to one year.

The abovementioned countries find themselves placed amongst the top twenty-five countries on the World Bank Ease Of Doing Business Rankings, despite strict financial laws.

Need for fast track courts in India

Admittedly, Section 138 cases have congested courts across the country. However, decriminalising this provision is not the solution to the problem.

The 213th Report of the Law Commission of India (November, 2008) had recommended that Fast Track Courts of Magistrates should be created to dispose of Section 138 cases in order to solve the perennial problem of pendency and ensure that litigants are guaranteed the right to a speedy trial. Moreover, on 6 February, 2020 the Confederation of All India Traders (CAIT) had addressed a letter to the finance minister suggesting setting up of fast track courts at the district level to dispose of cheque bounce cases.

Unfortunately, there has been little progress in this regard. The fast track courts will be instrumental in reducing the pendency of cheque dishonour cases in India. However, these courts can only be set up if the government is willing to provide necessary funds to meet the expenditure involved in their creation and for subsequently staffing them.

Final word

The COVID-19 pandemic has caused economic hardship across the globe and a consequent rise in financial crime is indubitable. While regulatory forbearance, higher barriers to entry into formal insolvency proceedings and extension of procedural deadlines are all welcome moves, decriminalising Section 138 might be a step too far.

Fraud is often at its most virulent during crises and now more than ever before, it is critical to be vigilant in preventing financial crime. The current crises have made people overly insecure about finances and economic revival can only be achieved by reinstating confidence among them. Not just Section 138, but many other provisions dealing with financial offences are bound to play a vital role in India's economic revival.

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