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  • Piyush Agrawal, Sunil Singh

Decriminalization of Dishonour of Cheque: Doing a Reality Test of MCA’s Proposal and Intentions

[Piyush and Sunil are students at Hidayatullah National Law University, Raipur.]


The Ministry of Corporate Affairs (MCA) issued a notification dated 8 June 2020 (Notification) to invite suggestions on decriminalizing minor offences to make it civil offence for the purpose of improving ease of doing business and facilitating court processes. The deadline set by the MCA for providing suggestions was 23 June 2020.


The Notification includes 19 statutes which according to the government prescribe criminal punishments for minor offences. The aim behind this measure is to:


  • reduce the burden off the business and stimulate confidence among the investors;

  • help in the economic growth post Covid-19; and

  • differentiate between fraud and omission while imposing criminal liability.


One of the statutes included by the MCA is the Negotiable Instruments Act 1881 (Act) which under Section 138 prescribes a criminal punishment for the offence of dishonor of cheque. Section 138 of the Act was inserted by the legislature with the intention of introducing financial regulation and to encourage an individual dealing in commercial transactions to work with a sense of responsibility. The failure on the part of an individual to honor an issued cheque made him liable for criminal prosecution.


Section 138 of the Act provides that if a cheque has been returned by the bank because of insufficiency of fund in the drawer’s account then the drawer shall be deemed to have committed an offence and shall be punishable with an imprisonment which may extend to two years or with fine which may extend to twice the amount of the cheque drawn or both.


Object and intent of Section 138


The object and intent of Section 138 of the Act can be inferred from various judicial pronouncements of the Supreme Court of India (Supreme Court) and the High Courts:


In Electronics Trade & Technology Development Corporation Ltd., Secunderabad v. Indian Technologists & Engineers (Electronics) (P) Ltd. and Anr., the Supreme Court noted that the object of bringing in Section 138 is to inspire confidence in the viability of banking activities and validity in executing business on negotiable instruments. The court further stated that the intention of Section 138 of the Act is to prevent dishonesty or fraud on the part of drawer of a cheque to issue a cheque inspite of insufficient funds in his bank account and compel the payee or holder to act upon it.


In Goa Plast (P) Ltd. v. Chico Ursula D'Souza, the Apex Court observed that the sanctity and credibility of cheques in commercial transactions were destroyed to a greater extent. The cheques were generally issued to defraud the creditors. Indeed, dishonor of cheque causes an irreparable loss, injury and inconvenience to the payee and resulting in the genuine mishap of the business exchanges within and outside the country.


In Shirish Suresh Welling v. Sangeeta Avinash Marathe and Ors., the Bombay High Court ruled that dishonor of cheque should be subjected to severe consequences to the defaulters in addition to the civil remedy accessible against the defaulters.


Further, while dealing with the constitutional validity of Section 138 of the Act, the Allahabad High Court in Smt. Ramawati v. Union of India, held that Section 138 has been given effect because of the malpractices prevalent in our society. Moreover, the Supreme Court in Laxmi Dyechem v. State of Gujarat and Ors., opined that Sections 138 - 142 of the Act intend to penalize just those individuals who know that they have no amount in their bank account yet issue a cheque in release of their obligation or risk previously obtained or caused and not to penalize the individuals who are unable to discharge their obligation for bonafide and sustainable reason.


Existence of civil remedy


Section 138 of the Act already provides for a civil remedy. In Meters and Instruments Private Limited and Ors.v. Kanchan Mehta (Meters and Instruments), the Supreme Court observed that the offence under Section 138 of the Act is primarily a civil wrong. In R. Vijayan v. Baby, the Supreme Court noted that the provision of Section 138 of the Act is both, punitive and compensatory, and restitutive with respect to cheque bouncing cases. The court also observed that Chapter XVII of the Act is an unusual yet interesting exercise which bears the separating line between civil and criminal jurisdictions, and that it offers a single platform to uphold a civil and criminal remedy. The provision specifies the procedure where it states that once a cheque gets dishonored on account of insufficiency of funds, the payee is required to issue a notice to the drawer within 15 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid, asking the drawer to act upon to give effect to the validity of the cheque, and in case the drawer still fails to act upon and make payment to the payee within 15 days of the receipt of the notice, the payee may bring a criminal suit against the drawer.


Availability of compounding of offence


In civil offences, there is always an option for the parties to settle their disputes through compromise. On the contrary, there are only few criminal offences where the legislature provides for the resolution of disputes by compromise. One such criminal offence is dishonor of cheque whereby Section 147 of the Act provides for resolution of the offence of dishonor of cheque by compromise; the payee here has the liberty to enter into a compromise with the drawer and resolve their dispute at any point of time. However, Section 147 does not clearly provide at what stage the offence under Section 138 of the Act can be compounded. However, in O.P. Dholakia v. State of Haryana[1], a Division Bench of the Supreme Court allowed the compounding of the offence even though the petitioner's conviction had been upheld by all three designated forums. This establishes that the remedy which would be available to the parties in the form of compromise on declaration of the said offence as civil offence is already available in another form.


Analysis


In view of the above discussed provisions and decisions, it is argued that the MCA’s proposal will not bring about any significant change since Section 138 of the Act already provides for civil remedy to the aggrieved payee in addition to the criminal suit which has been provided to foil prevailing malpractices and dishonesty among drawers of cheque. Criminal liability acts as a deterrent and if scrapped it will, in fact, worsen the current status as it will be more difficult for poor payees to recover the due cheque-amount. To keep a check on the prevailing propensity of the drawers to defraud the payees, the term of imprisonment under the said section was also extended by the legislature from a year to 2 years on the recommendation of the Standing Committee on Finance which submitted its report to Lok Sabha in November 2001. Further, it is evident that the decriminalization of the said offence will frustrate the recommendation of standing committee and observation of the courts.


Additionally, the whole exercise of decriminalization will be futile as the status of pendency of cases will either remain affected or get worse. This is because the number of cases whether civil or criminal that will be filed in the court for adjudication whether civil or criminal will not reduce. Moreover, when the said offence is decriminalized, the number of defaulting drawers will increase, leading to worsening of the status of pendency of cases.


Furthermore, if the pendency is not reduced, ease of doing business will also not get better thereby ruling out the scope of improvement of economy of the country.


The way forward


Instead of proposing decriminalization of Section 138 of the Act, the MCA could have looked for alternatives. For instance, the MCA could have thought of establishing special courts or tribunals to deal solely with cases of dishonor of cheques to increase the efficiency of dispute resolution. A similar view has been taken by the Supreme Court in Makwana Mangaldas Tulsidas v. The State of Gujarat & Anr., wherein the court had recommended High Courts for setting up special courts to deal with the matters of Section 138 of the Act particularly in establishments where the pendency of cases is above the standard figure.


If the above alternative does not seem feasible for the MCA, yet another alternative could be compounding of the offence at the initial stage of the dispute. It is often observed that parties go for settlement in the later stage of the dispute which is after exhausting the remedy of claiming relief from the court, thereby resulting in loss of time and efforts of the court. Therefore, the MCA should amend Section 147 of the Act to insert a provision to allow for compounding of the said offence only in the initial stage of the dispute rather than later stage. This will ensure unclogging of court processes. Even the Supreme Court in Meters and Instruments had observed that the compounding of offence should be encouraged at the initial stage of the dispute. To sum up, the MCA should reconsider its proposal of decriminalization of Section 138 to make it tenable and sustainable.


[1](2000) 1 SCC 672.

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