Background

The Ministry of Finance through its Financial Services Department issued a notification on 8thJune, 2020 titled “The Decriminalisation of Minor Offences for Improving Business Sentiment and Unclogging Court Processes” which decriminalises minor corporate offences in the country in order to secure ease of doing business for foreign multinational companies. The government rationalised its recommendation with the argument that such action will attract investments.

The Purpose of the Provision

The government has proposed to decriminalize many white-collar crimes, but the most pertinent of all is Section 138 of the Negotiable Instrument Act. The section states that where any person draws a cheque on any account maintained by him in any bank for payment of any amount to another person for the discharge of a debt or a liability, is returned by the bank unpaid, either because money in the account is insufficient or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, then such person becomes liable to face the imprisonment up to two years or to pay twice of the amount of the cheque or both.

Section 138: As a Criminal Offence

The section originally was a civil wrong and got criminalized in the year 1988 by an amendment. Cheque has been a widely accepted instrument for exchange in business transactions. It has been serving its purpose since then and has acted as deterrence for cheque defaulters and helped in maintaining smooth business transactions without creating a fear of fraud. The following provision has helped the creditors to invest freely and wholeheartedly, and created a trust on the system to get back their dues, if there is any, by the use of such Section under the Negotiable Instrument Act. Presently, cheques have been used everywhere from payment of rent to school fees to payment of loan and debts. The NI Act, 1881 was amended in 1988 and Sections 138-142  were introduced to dispense the disputes arising due to the dishonor of cheques. The object of the same was “to introduce financial discipline in business dealings and encourage the efficiency of banking operations”.

Decriminalizing the Offence

The ministry of finance has stated that criminalizing procedural lapses and minor non-compliances increases the burden on businesses and it is essential to re-look the provisions which are merely procedural and do not impact national security, public safety and interest at large. The ministry of finance stated that the following principles should be kept in mind when deciding on the reclassification of criminal offences to compoundable offences:

  • Decrease the financial burden on businesses and inspire confidence amongst investors to carry on business smoothly;
  • Focus on public interest, national security and economic growth should remain significant;
  • Mens reae the malafide or the criminal intent plays an important role in pressing of criminal liability, so it becomes critical and important to evaluate nature of non-compliance, i.e. fraud as compared to negligence or inadvertent omission; and
  • The habitual nature of non-compliance.

The ministry stated that legislative measures have been considered and are consequently taken to help in restoring trust in doing business, given the nature of pendency of cases in all tiers of the courts and the time that is taken for disputes to be resolved. And thus, the decriminalization of these minor offences are expected to help in unclogging the court system and also, improving ease of doing business.

Pendency and Execution of the Justice

Close examination of this section makes this as construable to have a blend of both civil and criminal consequences/liabilities. The absence of a purely criminal stricture in this section entails in less indulgence of state machinery and enforcement authorities in such offences. The Supreme Court in the case Makwani Mangaldas Tulsidas v. State of Gujarat has mentioned that there are more than thirty-five lakhs cases pending which makes it more than 15% of the total criminal cases that are pending at the district level.

 Section 143 of the negotiable instrument act states that all the cases under section 138 must be disposed of within a period of six months, but the statistics narrate a very different story. The offence has to be disposed under the section 138 under six months, as stated above but because it also has a civil reverberation as well, it becomes nearly impossible to fetch the offender despite summoning them to the court.

The government intends to turn the listed offences into a compoundable one, but as stated under section 147 of the said act, which states “Notwithstanding anything contained in the Code of Criminal Procedure, 1973 every offence punishable under this Act shall be compoundable” which clearly shows that every section mentioned or listed under the act is already of compoundable nature, thus the re-declaration of the provision as compoundable does not make any sense and renders it more inutile.

The Aftermath of Decriminalization

The provision has a lot of defence to the strictness of its consequences, the punitive measures like imprisonment for two years and paying double the dishonored amount or both; cannot be taken until and unless the offender continues at failing to repay the amount even after being served with a legal notice to make the payment. Therefore, the contention of principle for evaluation of the mens-rea is not complied in the following situation, as the offender gets a chance to repay the arrear amount and the accused is punished only if he intentionally avoids to do so. An honest drawer of the cheque gets more opportunity to prove that he has not committed any fraud,

The remarkable difference between the consequence of the punitive action of a criminal offence and a civil offence is the taint that is attached to the wrongdoer. The label of being a criminal offender calls for ostracisation in society. Society refrains from having or maintaining any kind of relationship with such offenders and this surely acts as a great deterrence, which is not the situation with civil offenders, they are less morally culpable.  The decriminalization will surely end the stigma and therefore the deterrence, to not commit the fraud.

The decriminalization will make it nearly impossible to dig out money from the offenders, the creditors may choose to pursue their cases under section 420 and section 406 of IPC, 1806, which is Cheating and Criminal Breach of Trust respectively, but this  does not ensure getting payment which was in arrears to the creditor. While the proceedings under Section 138 are also cheaper than the civil proceedings. Decriminalization would add burden to initiate such cases for recovery.

Also, the investors (from foreign and from our own nation) will have to face problems as there is/are no strict provision(s) for the investors to ensure proper repayment of credit, which is turn creates a hurdle for them. Thus, this decriminalization can become more burdensome and can backfire to the government itself.

Even if we talk about landlords and the owners of a real estate business, who usually get their payments through Post Dated Cheques [PDC] dishonoring of which could attract imprisonment, provides a security to the lender or such dealers. Even the small businesses and retail shops or the micro small and medium enterprises depend upon this section primarily to implicate such defaulters legally.

The decriminalization of Section 138, of The Negotiable Instruments Act, 1881 would not reduce the burden as the financial liability against default would still augment on the business, in case of dishonor of the cheque, and any business person or corporation might be exposed to the risk of being not paid and subsequently getting up involved in the insolvency proceedings, which is more degrading to any financial institution or a business entity.

The Stand of Stakeholders

Banks have voiced their resistance and hostility to the Finance Ministry’s proposal to decriminalize the offence of dishonouring of cheques under Section 138 of the Negotiable Instruments Act, 1881. The Indian Banks’ Association, have stated that there should not be any decriminalization of this offence and the present nature of the offence should stay enforced.

The fright of criminal action against the offenders; including imprisonment for up to two years or fine maybe extending to twice the amount of the cheque, or both acts as a hindrance for such dishonouring and creates a system of check and balances on such offenders. Also, the following provision does not resort to punishing the offender at once but checks the intention and willfulness of the debtor. Though statutes like The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 [SARFAESI Act] and The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 [DRT Act]] provide alternate measures to catch hold such defaulters, section 138 seems most useful to them.

The FIDC or Finance Industry Development Council, which is a representative body of asset and loan financing non-banking finance companies (NBFCs), too has opposed the proposal to do away with Section 138. The Director-General of FIDC has cautioned that decriminalizing the offence under Section 138 of the NI Act would lead to further deterioration in enforcement of contract, especially in terms of honouring acknowledged debt and liability.

Confederation of All India Traders has urged the government not to decriminalize Section 138 of the Negotiable Instruments Act, 1881 under any circumstances, and has stated that such a move would nullify the purpose of cheques and affect the virtue of the banking sector of India. They stated that the proposed decriminalization, if implemented, will distort the business conditions and give tremendous rise to unfair and unethical trade practices, thereby putting crores of businessmen under the severe risk of losing money to immoral and fraudulent elements of society.

Post pandemic effects

The world has been hit hard by the new Coronavirus disease. The pandemic has brought the global economy to a  standstill during its course. The World Bank predicted that the global GDP would fall back upto 5.2 percent, bringing out one of the world’s greatest recession. India, being one of the fastest developing countries and one of the most populous country, has been affected hard so far. The government wants to revive the economy by calling out investments from foreign, by supporting our own industries and other micro small and medium industries, by taking proper financial measurements to ease off the carrying out business in India. The decriminalization of Section 138 was aimed to do the same and lessen the financial burden upon the business but the post-pandemic effect needs different measures. There will be recession and economic pressure and therefore the implementation of this policy might not be very fruitful at this particular condition.

Conclusion

The notification that has been released by the finance ministry stated that it is important to find a balance so that malafide intent is punished while other less serious offences are compounded. Accordingly, a proportional framework is required, such that the penalty levied is just as much as it is called for to act as a deterrent. If the mala fide intent can be proved, then there is no need to decriminalize the provision. All the Stakeholders like banks and other financial institutions have raised their concern over such decriminalization. They have rightly conveyed that the decriminalization would only result in defaults in the payment and absence of any strict offence to catch hold of the defaulters would increase the burden on such institutions. The investors would also have to face problems as such decriminalization would backfire making it nearly impossible for them to extract the arrears from their own debtors. Small businesses and real estate businesses will also be drastically affected. And especially at this time, when the Indian economy has seen a fall of -24% for the first time in history, the idea of decriminalization of the mentioned provision would not be efficacious. The need of the hour is not to decriminalize the provision but to find ways to dispose off the long-pending cases in the court, which would help the smooth functioning of the financial industries. Therefore, the presumption of the government that such a step would actually improve the ease of doing business in the country is totally wrong and the business transaction would become slow and disrupted.


About the Authors:

Yukta Ambastha [2018-23] is pursuing UG Law from National University of Study and Research in Law, Ranchi. She is interested in Criminal law, Human Rights and International Law.
Shreya Srivastava [2018-23] is pursuing UG Law from National University of Study and Research in Law, Ranchi, and is interested in Criminal law, Arbitration and Constitutional Law.

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