The COVID 19 pandemic has pushed the economy towards the brink of collapse. With India's GDP growth going into negative for the first time since 1979, the finance ministry has come up with many schemes and policies to make business transactions more efficient and prevent the economy from collapsing.
One such proposal was passed via circular dated 8th June1 to fulfill the objective of SabkaSaath, SabkaVikas and SabkaVishwas by decriminalizing Dishonour of Cheque along with 38 other petty economic offenses. The objective is to ease the path of business transactions because imprisonment for such offense can have a deterrent impact on business and investments.
This reason for such proposal can be drawn from the Makwana case. In March 2020, the Hon'ble Supreme Court in the case of Makwana Mangaldas Tulsidas v State of Gujarat, noted that over 35 lakh cases of dishonour of cheque were pending and registered a suo motu case to devise a mechanism to dispose off such cases.
Thus, decriminalization would result in a reduction of clogged cases.
WHAT IS SECTION 138, NEGOTIABLE INSTRUMENTS ACT, 1881?
Chapter XVII (Sections 138 to 147) of the Negotiable Instrument Act, 1881 states Penalties in Case of Dishonour of Certain Cheques for Insufficiency of Funds in the Accounts. This Chapter was inserted by the Act 66 of 1988 effective from 1st April, 1989. The objective was to make business transactions more efficient and add credibility to cheque payment.
The Hon'ble Supreme Court in the case of Kusum Ingots And Alloys Ltd vs Pennar Peterson Securities Ltd2 has laid out the ingredients of section 138 as:
(i) a person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person from out of that account for the discharge of any debt or other liability;
(ii) that cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity whichever is earlier;
(iii) that cheque is returned by the bank unpaid. Either because of the amount of money standing to the credit of the account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank;
(iv) the payee or the holder in due course of the cheque makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within 15 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;
(v) the drawer of such cheque fails to make payment of the said amount of money to the payee or the holder in due course of the cheque within 15 days of the receipt of the said notice
LIABILITY OF DISHONOUR OF CHEQUE
1. Civil liability
- A Fine twice the amount of dishonoured cheque under section 138, Negotiable Instruments Act, 1881.
- Under order 37, Civil Procedure Code, 1908, amount as directed by the court.
2. Criminal liability
Section 138 provides imprisonment of 2 years or fine or both and drawer will be prosecuted under section 417 and 420 of Indian Penal Code.
Pros of decriminalization
1. As per 213th Report of Law Commission of India, over 38 lakh cases of dishonour of cheque were pending in courts and out of them over 7.6 lakh cases were pending in criminal courts in Delhi at magistrate level alone.
2. Due to the huge backlog of these cases, trial of other cases are also sidelined giving poor name to our criminal justice system.
3. Dishonour of cheque can be penalized under sec 420 IPC, therefore there is no need for another provision for the same purpose.
4. Its criminality has also been substantially decreased by making it a compoundable offense, which shows the intention of legislature towards reducing the backlog of such case.
Cons of decriminalization
1. The purpose of section 138 is to enhance the credibility of cheques thus making business transactions more safe and efficient. Decriminalising it might create hindrance towards accepting cheques. This can lead to distrust in trade practices.
2. The alternate remedy of civil court is time-consuming and costly. Many payees belong to economically weaker section and cannot afford the expense of civil litigation.
3. The fear of criminal prosecution ensures that the cheques are honoured by the drawer, decriminalization will remove this fear.
4. A cheque is mainly used as means of credit in the form of 'post-dated cheque', Decriminalising it would strip away the credibility which can cause decline to economic activity.
5. It will over-burden the civil courts.
It is important to decriminalize petty offenses and especially ones whose civil remedy is available to decrease the burden on the criminal justice system. But at the same time it cannot be ignored that the backbone of business transaction in this country is cheque. Cheque is still the most common and most reliable mode of payment and this is only because of the criminal aspect of section 138. Decriminalising it especially during the time of COVID can do more harm than good. It can increase the number of cheques bounce cases and can burden the judicial system at a time where most physical courts are closed and conversion from physical to online court is still not very efficient.
Thus, the proposal can be unnecessary and could further cause economic downfall.
2 (2002) 2 SCC 745
Originally published 22 August, 2020
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