[Anuj and Aanchal are students at National Law University, Odisha.]
The economic distress caused due to the global pandemic has increased concerns regarding financial failures which are treated as criminal offences. Under the current law’s cases pertaining to cheques bounce, repayment of loans, and certain offences under Banking Regulation Act, RBI Act, Chit Funds Act, etc. attract criminal liability. Consequently, the Ministry of Finance, on 8 June 2020, proposed decriminalisation of minor economic offences, with the aim to boost economic revival process and ease of doing business in India. It has proposed to decriminalise 39 sections by amending 19 statutes and has invited comments from various stakeholders. This step aims to improve business sentiments and might prove helpful in unclogging the court processes. The proposal is a significant step in achieving the Government of India’s objective of 'Sabka Saath, Sabka Vikas and Sabka Vishwas’. In this post, the authors have analysed the law relating to cheque bounce cases and the challenges which need to be addressed. The authors have then suggested the possible solutions based on the practices of other jurisdictions.
In the late 1970s, the need to criminalise the bouncing of cheques was realised. A committee headed by Dr. Rajamannar, suggested in 1975 for penalising the issuance of cheque without sufficient funds. A recurrent problem of cheque getting dishonoured was coming forth especially for transactions where there was no instant exchange of cash against material purchased. The mistrust in using cheques caused major problems in cash flows. As a result, Banking, Public Financial Institutions and Negotiable Instruments Law (Amendment) Act 1988 was introduced which amended a more than hundred years old provision of Section 138 of Negotiable Instruments Act 1881 and thus imposed a criminal liability for dishonour of cheques. Mr. SB Chavan, the then finance minister justified the amendment as a widespread demand from various industries and trade associations to penalise the bouncing of cheques. Another reason for criminalisation was to make cheque a credible source of exchange in transactions and provide a safety net against carrying cash. It was also needed to curb the situations where payments were deliberately delayed and people submitted cheques with no amount in account to delay the process of payment.
Even though the intent of the amendment was straightforward and rationale, it created more harm than good for the reasons discussed below.
One of the main reasons for this legislation to suffer backlash is that it allows imposition of a criminal liability without proving mens rea, thereby creating an unfair burden on the defendants. This has caused havoc in a country like India where debtors are majorly farmers who have genuine claims of non-repayment due to reasons beyond their will. Overlooking such a reason has not only created unnecessary burden on the debtors in monetary terms, but also 2 years of imprisonment further act’s as a kick on an empty belly. With this amendment, there came numerous cases of cheque bounce, so much that it flooded courts with burden. Even till today, around 40 lakh cases of cheque bounce (which is around 20% of the pending litigation) are pending in criminal courts as per the 213th Law Commission Report of India.
Another reason for the backlash of this statute is that direct imprisonment with double the penalty creates a chilling effect on the people using cheque as a mode for payment. Surely, the aim was to deter dishonouring of a cheque; however, due to stringent legislation, it has become unfair in the sense that the harm outweighs the rationale. Instead of earning money to pay back, the debtor is most likely to land directly in jail, causing harm to himself and the persons associated with him.
As a result, lenders are unable to recover the money and are stuck in the loop of years of litigation. Therefore, the legislation failed to achieve its objectives and the need to decriminalise petty offences like cheque bounce was felt.
Blanket proposal: A bigger challenge before the government
The primary intent of the recent proposal is to improve ease of doing business and unclog the court processes. In the current situation of financial crises and empty pockets of people due to unemployment or lay-offs, there might be a surge in the cases relating to cheque bounce. If not criminal courts, considering the amount of cases pending in civil courts and the years taken to deliver the judgment, it would still take a long way to fulfil the above intent.
Further, there are two reasons to make cheque bounce either a criminal offence or a civil wrong - first, to timely recover the money from the borrowers/debtors and second, to deter the borrowers from wilfully delaying the repayment of the loan amount. Against this backdrop, only decriminalising the cheque bounce cases without developing an efficient mechanism to resolve such cases will pose bigger challenges. In the absence of effective remedy, even the lenders will resist from lending money. Besides, the problem of clogging up cases will still persist.
A way forward
Looking at the international practices, the authors have tried to suggest the best possible mechanism that can be implemented to address the above-mentioned challenges.
Structured re-payment plan
The government's aim is to strike a balance between debtor & creditor, where the debtors are able to repay their debts and creditors are able to recover their financial dues. The legal framework should be such that the government is able to bolster financial, economic and social stability in the country. To achieve the same, the civil courts can appoint a financial expert who will formulate a time bound repayment plan. Once the plan is approved and agreed upon by both the parties, the debtor will not face any legal prosecution. Further, if all the payments are made as per this plan, any criminal case registered against the debtor in respect of cheque bounce will be dismissed. However, if the debtor fails to follow the repayment plan, then in such criminal liability shall be imposed. A similar approach is being followed by other nations like UAE, and India can follow this mechanism mutatis mutandis. The authors endeavour to explain that there is no need to decriminalise cheque bounce cases. Rather, a different approach to solve these cases will provide better results along with punishing people who are intentionally delaying the payment by issuing dud cheques.
An easier resolution to one of the major challenges of laidback litigation could be resolved by opting to invoke Section 89 of Code of Civil Procedure 1908. It suggests to resolve the issue either through the medium of arbitration, conciliation or mediation under Arbitration and Conciliation Act 1996 or through Lok Adalats under Legal Services Authority Act 1987. A similar approach was suggested by the Supreme Court of India. The court suggested out-of-court pre-litigation settlement mechanism in Lok Adalats under Sections 19 and 20 of the Legal Services Authority Act 1987. Further, the decree by these Lok Adalats shall be considered final and binding under Section 21, thus giving it a statutory force. This will ensure a faster resolution which is acceptable to both the parties. Moreover, the ultimate goal of timely recovery of loans and unclogging the burden of courts would be achieved.
Effective civil remedies
Alternatively, in addition to the existing civil remedies, India should start maintaining a central register where details of frequent and prolonged offenders should be registered. These defaulters should be banned from issuing cheques for a period of 5 years. Moreover, the banks can charge a substantial monetary penalty and decrease the credit rating of such offenders. These measures will prove as an effective deterrent in the cheque bouncing cases and the people will refrain from issuing dud cheques. These measures have been proved beneficial for countries like France and Australia, which are way ahead of India in the ease of doing business rankings.
The proposal of the government is a welcome step; however, certain grey areas have been left unaddressed in this proposal. The authors believe that only decriminalisation of cheque bounce cases will not address the elephant in the room. A balanced mechanism needs to be developed through which the interest of all the stakeholders are met. Criminalisation not only harms debtors but also the creditors. Putting debtors behind the bars does not seem to solve the problem of repayment of loan. Financial institutions pay the price of non-payment which hampers the economy and ease of doing business. Adopting the above suggested mechanisms will prove to be one of the ways of easing the process of repayment to the satisfaction of parties.