In the light of disruptions caused by outbreak of Covid-19, the Government of India has announced a slew of measures in the past few months. One such significant measure is the Ministry of Finance's proposal to decriminalize thirty-nine minor economic offences including decriminalization of offence of dishonour of cheques under Section 138 of the Negotiable Instruments Act, 1881 ("NI Act").

With the objective of facilitating ease of doing business in India and reducing the fear of penalties for minor violations, various sections of different laws have been brought under the ambit of this notification. These legislations are as follows:

  • Insurance Act 1938 (Section 12 and Section 103);
  • SARFAESI Act 2002 (Section 29);
  • PFRDA Act, 2013 (Section 16(7) and 32(1));
  • RBI Act, 1934 (Section 58B);
  • Payment and Settlement Systems Act, 2007 (Section 26(1) and 26(4));
  • NABARD Act, 1981 (Section 56(1));
  • NHB Act, 1987 (Section 49);
  • State Financial Corporations Act, 1951 (Section 42(1) and 42(2));
  • Credit Information Companies (Regulation) Act, 2005 (Section 23(1));
  • Factoring Regulation Act, 2011 (Section 23);
  • Actuaries Act, 2006 (Section 37, 38(2) and 40(2));
  • Banking Regulation Act, 1949 (Section 36AD(2),and 46);
  • General Insurance Business (Nationalisation) Act, 1972 (Section 30);
  • LIC Act, 1956 (Section 40);
  • Banning of Unregulated Deposit Schemes Act, 2019 (Section 21(1), 21(2), 21(3), 22, 23 and 24);
  • Chit funds Act, 1982 (Section 76(1), 76(3) and 77);
  • DICGC Act, 1961 (Section 47(1));
  • Negotiable Instruments Act, 1881 (Section 138 and 143(1)); and
  • Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (Section 4 and 5).

Whilst most of the proposals relate to offences in respect of which virtually no prosecutions have been initiated, the most relevant is the proposal to decriminalise Section 138 of the NI Act. Section 138 of the NI Act provides that in case of dishonour of cheque for insufficiency of funds or for any of the prescribed reasons, the defaulter may be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the dishonoured cheque, or both. This offence can also be made compoundable between the parties (consent of both the parties is required) and there is no requirement to attain formal permission from the court. Even if there is no consent, the accused can be discharged if the court is of the discretion that the complainant has been duly compensated.

While the intent behind this recommendation has been appreciated by a few experts due to the excessive backlog of 'check-bouncing' cases pending at various levels of the judiciary, the announcement has caused much furore among various stakeholders, including lawyers, banks etc. The proposed amendment of decriminalization of Section 138 of the NI Act has been opposed by the Bar Council of Delhi as well as Bar Council of Maharashtra and Goa. One of the most significant downsides highlighted by them is that this measure would result in encouraging the minds of perpetrators to defraud and cheat innocent persons, and there would be absolutely no fear in the minds of people. Moreover, this would take away the confidence and legal security of the individuals in the judicial system of the country, thus rendering them helpless. It has also been said that the proposed move virtually tends to negate the very basic scope and object of Section 138 of the NI Act which was brought into action to inculcate the faith and confidence of the trading community in the commercial transactions.

It is important to highlight here that according to the 213th report of the Law Commission, approximately 20 percent of the pending court cases relate to disputes for cheque dishonour. The fear of criminal litigation and imprisonment is the alleviating factor behind the timely payment of the cheques. If decriminalization of the offence under section 138 of the NI Act is approved, this may lead to a low rate of recovery of dues and the possibility is that the litigation process will become more time-consuming. It will not be wrong to assume that if Section 138 of the NI Act gets decriminalised, the day-to-day commercial transactions may go for a toss.

On the other hand, it is also being argued that this proposal will impactfully reduce the burden on the criminal justice delivery system and bring the law in line with the policy, legislative and legal initiatives undertaken over the last two decades. Though there was initially a push to increase the use of cheques as a system of non-cash payment, with the advent of the internet, technology quickly took over. Following the digital revolution, cheques have now outlived their use as a form of payment.

Combined with the shift in culture and commerce, it is important to notice that the legislature and courts have also been setting the stage for decriminalising Section 138. The proposal to amend the NI Act was first made by the Ministry of Law in 2011 as a part of a pendency reduction move. Thereafter, an inter-ministerial group, set up in 2012 to look into the policy and legislative changes to curb the increasing number of cheque-bouncing cases, suggested decriminalisation and proposed certain amendments on that basis. Some of the suggestions included the use of alternative dispute resolution mechanisms on the lines of Section 89 of the Code of Civil Procedure, through arbitration, conciliation, judicial settlement (including settlement through Lok Adalats), and the introduction of a summary procedure for dealing with cheque bouncing cases. It was also suggested that the court fee may be made ad-valorem to act as a deterrent for indiscreet and vexatious proceedings. Unfortunately, however, these proposals never came into effect.

At various stages, the courts have diluted the strict procedural provisions of criminal law in the context of this offence, clearly recognising that a civil wrong was being tried under the veil of criminal law. This position was reiterated by the Supreme Court in 2017 in the case of M/S Meters and Instruments Private Limited vs Kanchan Mehta1 wherein it stated that Section 138 was "primarily a civil wrong". Right from its inception, Indian Courts have given latitude to the accused to discharge the civil liability to avoid imprisonment. This was not a crime against society.

In order to reach a consensus, the Ministry of Finance invited the comments of state governments, UT administrations, civil society, academicians, public and private sector organisations and members of the public on the said proposal. Given the pros and cons of decriminalization and the different views, as outlined above, the incumbent Government will need to strike a balance and interests of various stakeholders will need to be taken into consideration, while focusing simultaneously on an effective redressal mechanism for such offences.


1. Criminal Appeal No. 1731 OF 2017

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