Updated: Sep 13
The current trend in legislation and policy seems to be Decriminalization. Almost immediately after the announcement of the Companies(Amendment) Act, 2020, which decriminalized 46 sections of the Companies Act, 2013, the Ministry of Finance proposed their own legislation. The Ministry proposed to decriminalize minor offences in 19 different economic legislations including the Insurance Act, 1938 and the Reserve Bank of India Act, 1934. However, the other legislations seem relatively insignificant when compared with decriminalizing Section 138 of the Negotiable Instruments Act, 1881 (NI Act).
Section 138 of the NI Act is the provision that penalizes the dishonouring of a cheque. The provision states that a person is criminally liable for imprisonment of two years or with a fine which may extend to twice the amount of the cheque or both. This provision seems very well thought out and stipulates a well-deserved penalty for dishonouring a cheque due to insufficiency of funds or the other prescribed reasons in the section. It has been almost three months since the announcement by the Ministry of Finance towards decriminalizing the section and we are here to analyse the reasons, advantages, and drawbacks of the same.
Reasons sited by the Ministry
In 1989, Section 138 of the NI Act was added as a criminal offence through an amendment, with the objective that there was an increase in the use of cheques and to further increase the credibility of the cheque system. Now, the decriminalization of the same section is open to the public to give their suggestions on. However, the Ministry of Finance believes that if the section is decriminalized now, then it will promote ease of doing business in India. India is progressing in the ease of doing business index as it is now 63rd out of 190 nations. However, we are still behind nations such as Rwanda (38), Moldova (48), Kosovo (57), and the Ministry believes that a move like this will surely improve the rankings.
Moreover, there is strong belief that such a move will increase foreign investment in our country and help the beleaguered MSMEs. Due to the Pandemic the economy is in shambles and business is down, so this decision is a subsidy of sorts, that will help reduce the problems if by chance there is an insufficiency of funds and a cheque is dishonoured. All in all, the government has faith that this legislation will increase economic growth and has been taken in public interest.
Burden on the Judiciary
This point of contention brought about by the 213th Report of Law Commission of India, was a lot more concrete than the ambiguous ease of doing reason given by the Ministry. According to the report, 38 lakh cheque bouncing cases are pending across the country, and more than 7 lakhs just at the Magisterial level in Delhi. This high number is a serious problem because it is causing a huge backlog that is in turn side-lining other important and more serious cases. There is a shadow of doubt on the credibility in the way trade and commerce is being handled, and more importantly there seems to be a loss of faith in how quickly a case may be decided.
The primary reason for such a backlog in cheque bounce cases is because of the absence of the accused. There is no recourse to get the accused to be present during the hearings, and a couple of years may pass just at the summons stage of the case. Another dilemma is that because this is a criminal case, the accused is innocent until proven guilty, which causes the prosecutor a great deal of trouble in building a case.
Stakeholders against the proposal
The reports being provided show a heavy burden on the judiciary, and the ministry has made some arguments that are compelling. However, the public and more importantly individuals who will be affected by these decisions are not happy as most debates with stakeholders end in just one word, ‘Deterrence’. Imprisonment is the ultimate deterrent for most law-abiding citizens, and every business owner will agree that they have made or taken payments on time only due to the fear of being put behind bars. If the section got decriminalized, there could be increasing risk of cheating and fraud, as the credibility in the cheque system would reduce.
Moreover, cheques have been considered a means of credit rather than a means of payment. Financial institutions still rely on post-dated cheques as they provide a level of security like nothing else. The issuer of a post-dated cheque will always come good, just due to the fear of being smeared with the title of ‘criminal’. If the same is turned into a civil offence, the risk to creditors would increase twofold, which would in turn increase their insecurities, causing the system of negotiable instruments to collapse.
Another significant argument brought forward by the public is that Section 138 has a safeguard for an honest drawer of the cheque. The provision states that the offence is not committed as soon as there is a dishonour of a cheque. There must be a notice of demand from the drawee and only after the notice has been received by the drawer and 15 days have passed, then the offence would have been committed. The drawer can rectify the cheque bounce by making the payment within 15 days and not face any criminal action.
If the drawer fails to make the payment within the 15 days, he deserves a criminal charge. Ajit Ranade, a senior economist put it best “A bounced cheque is equivalent to paying in fake currency, a much more serious crime. It also amounts to cheating, since the receiver is under the false impression that there are sufficient funds in the issuer’s bank.”
Suggestions & Conclusion
Many, including us believe that this proposed move by the Union government will not result in ease of doing business. It will in fact create further pandemonium in doing business. It will harm the already affected trade and commerce and cheques will no longer be a preferred form of payment in business, breaking an already broken-down economy.
However, if we must suggest a solution as the proposal gains momentum, we should draw from legislations of other countries. In France, for instance after a cheque is dishonoured, the banks charge a hefty sum from the defaulter. Apart from the service charge, a frequent defaulter is noted in a central register and is warned about being blacklisted in the future. The person can be ultimately banned by the bank from issuing cheques for five years.
There is a service charge that Indians must pay for defaulting, but only if it is increased to a larger sum, will it act as a deterrent. Moreover, a central database should be adopted, where details of frequent defaulters are stored so that their service charges are increased even further. To reduce the burden on the judiciary, cases under the NI Act, should be compulsorily resolved via Alternative Dispute Resolution (ADR). This will not only decrease the workload on the courts and provide speedy redressal but also act as a promotional campaign towards ADR in general.
We can only hope the Ministry of Finance has given deep thought while proposing this legislation, and that the future holds well for trade, commerce, and business in general.