Decriminalising Dishonouring Of Cheques: The Saga And The NeedBloombergQuintOpinion
Decriminalisation appears to be in vogue. Is this the new normal? Shortly after the introduction of the Companies (Amendment) Act 2020, which decriminalises 46 sections of the Companies Act 2013, the Ministry of Finance put forward a statement of reasons proposing the decriminalisation of minor offences. 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 Negotiable Instruments Act, 1881.
The primary objective of the offence of dishonouring of cheques was improving the efficacy of the banking system and not enforcing civil law rights through criminal law. Dishonoured cheques were blocking clearing systems and the offence was targeted at reducing this burden. Despite the criticism this proposal has received from various stakeholders, I believe that, for an offence that has outlived its usefulness, the Ministry of Finance’s proposal is a logical conclusion to various commercial and legal developments. This move will impactfully lessen 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 and improve India’s position in the Rule of Law Index.
Origins Of The Offence
In 1975, when the internet was still non-existent, the Committee on Banking Laws, headed by Justice PV Rajamannar, suggested penalising the issuance of a cheque without sufficient funds. But it took thirteen years before the provision criminalising dishonouring cheques was introduced in the Negotiable Instruments Act. In the 1970s and 1980s, India used multiple clearance platforms and did not have a national clearing system. The processes were manual and dishonoured cheques used to slow down and/or clog the clearance systems.
Consequently, the amendment was introduced by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (Act 66 of 1988) with the objectives of inculcating faith in the efficacy of banking operations, giving credibility to negotiable instruments in business transactions and promoting the efficacy of banking operations. Around this time, the Magnetic Ink Character Recognition clearance system was introduced to enable mechanised clearance systems which speeded up the process.
Shift In The Nature Of Commercial Transactions
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. From the mid-1990s, the Magnetic Media-Based Clearing System, which was based on electronically submitted settlement data, was introduced. The Electronic Clearing Service (Credit) scheme was introduced during the 1990s to handle bulk and repetitive payment requirements (like salary, interest, and dividend payments) of corporates and other institutions. The Negotiable Instruments Act was amended in 2002 to allow scanned cheque images and use the electronic form of cheques.
Real-Time Gross Settlement, in March 2004, and National Electronic Funds Transfer, in November 2005, were introduced, which meant transactions could be settled in almost real-time. This pushed the large-value and retail interbank payments, which were predominantly cheque-based, to this new system. A further push came in March 2008 with the subsequent issuance of instructions on the mandatory use of electronic payments for transactions between RBI regulated entities and markets. In March 2010, the RBI discontinued high-value clearing, which meant the cheques would go through regular MICR clearing, with the introduction of the Cheque Truncation System. This could be seen as a clear sign in the policy having come a full circle from pushing cheques as a means of payment to discouraging the use of cheques and encouragement of electronic forms of payment. Even the CTS relied on converting the cheques to images/electronic form thereby speeding up the process of overall clearance.
Various commercial, policy, and legislative developments have continued to promote different forms of digital payment, including the introduction of the United Payments Interface and the rise of digital wallets, which have pushed cheques further to the sideline.
It is interesting to note that the Payments and Settlements Act, 2007, also created an offence similar to Section 138 for electronic fund transfers, however, the Ministry of Finance has not suggested decriminalising the equivalent offence.
Following the digital revolution, cheques have now outlived their use as a form of payment. The trend across the world has been a reduced reliance on cheques. The 2017 World Payments Report highlighted the declining role of cheques world-wide due to the increased usage of electronic payment methods. According to that report, cheque volumes had decreased globally by about 10.8% in 2014 and 13.4% in 2015, a trend which was consistent since 2000. Even in India, the RBI has recorded a reduction in the use of cheques. Between FY 2014-15 to 2018-19, we saw a 6% drop in the use of cheques in spite of a brief rise in 2016-17 in the context of demonetisation. An informal calculation by BloombergQuint showed that payments made by cheques made up barely 3% of the total value of payments as of the end of the June 2018 quarter, a decline from 14% in 2010.
The aforesaid policy, cultural and statutory changes set the stage for decriminalisation of the cheque bouncing cases. With the world and India going paperless and cashless, it is time to rethink Section 138.
Natural Culmination Of Legal Developments
Alongside 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.
Legislative amendments towards decriminalisation
The proposal to amend the Negotiable Instruments Act was first made by the law ministry in 2011 as a part of a pendency reduction drive. 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, the proposals did not see the light of day.
In 2018, additional amendments were made providing for interim compensation/deposit of part of the fine amount, pending disposal of an appeal from conviction with the intention of speeding up the disposal.
While, given the pendency of the Section 138 cases, it appears that the amendments have not really helped speed up Section 138 proceedings, there has been a steady move by the legislature towards tempering the criminal nature of the offence thereby heading towards decriminalisation.
Not Treated As A Purely Criminal Offence
The courts dealing with the dishonour of cheques have treated this offence very differently from other economic offences. It has been described as a regulatory offence since the bouncing of a cheque is largely in the nature of a civil wrong which has been given criminal overtones whose impact is usually confined to the private parties involved in commercial transactions. The courts have also recognised that the said provision has been used as a tool of harassment by complainants.
This position was reiterated by the Supreme Court in 2017 wherein it stated that Section 138 was “primarily a civil wrong”. Right from its inception, the courts have given latitude to the accused to discharge the civil liability to avoid imprisonment. This was not a crime against society.
Compounding And Compromise
The Supreme Court, even prior to this offence being made statutorily compoundable (a form of settlement of criminal offences), had permitted the compounding of the offence. After the introduction of statutory compounding for Section 138 offences, the court introduced a graded imposition of costs on the parties to act as a deterrent for delayed composition recognising the fact that a majority of cases were indeed being compromised or settled by way of compounding. It is interesting to point out while the inter-ministerial group’s suggestion of graded court fees did not find its way into the statutes, the courts re-created a similar effect through judicial innovation.
With the introduction of the Legal Services Authorities Act, 1987, the emphasis of the justice system was to encourage the Lok Adalats to speedily compromise cases, including s. 138 cases. Cheque bouncing cases that clogged the justice system were the biggest benefactors of this new procedure and, although compounding came in later, the Lok Adalats compromised many such cases.
In 2012, the Supreme Court recognised the fact that an award passed by Lok Adalats based on a compromise is to be treated as a decree capable of execution by a civil court even though the case was a criminal case. According to the last official numbers available from NALSA, the National Lok Adalat settled 3,63,565 cases relating to banking matters under Section 138 and recovery suits etc. at the National Lok Adalat held on 13.02.2016 and 4,09,487 such cases on the National Lok Adalat held on 13.08.2016, indicating the extent of cases being settled through a civil law mechanism. Trends arising from the limited data available suggest that majority of cases have been settled pre-conviction and many more post-conviction, resulting in acquittals.
In 2014, the Supreme Court even directed that the trial court may indicate in the summons if the accused could make an application for compounding of offences at the first hearing of the case and, when such an application is made, the court may pass appropriate orders at the earliest. It went a step further in 2018 to say that, even though compounding generally requires the consent of both parties, when a complainant has been duly compensated, the trial court can discharge an accused in the interests of justice even in the absence of such consent.
The Supreme Court in March 2020 has emphasised a pragmatic approach to solving these cases outside the criminal system by the evolution of a scheme for settlement of disputes relating to cheque bounce before filing the private complaint. The Supreme Court went on to question whether, taking into account the magnitude of economic transactions today, decriminalisation of dishonours of cheque of a small amount may also be considered, leaving it to be dealt with by civil jurisdiction.
Unburdening Of The Judicial System
When the offence was criminalised in 1988, no research was undertaken to assess how the change would impact the judicial system. The Law Commission in 2008 estimated that over 38 lakh Section 138 cases were pending in courts across India. The pendency of such a large number of cases has always vexed the Supreme Court, which has led to it try speed up the process in different ways. Be it in Govindan Kutty Menon’s case in 2012, the Indian Bank Association’s case in 2014, the Meters and Instruments Pvt. Ltd.’s case in 2018 and more recently in the Makwana Tulsidas’ case.
As per the Supreme Court, a recent study pegged the total number of pending cases to be at about 35 lakh.
This large number of cases is worrisome to all stakeholders. It has also meant that an overburdened judiciary is not able to do justice to anybody, causing delays across the board. What is also worth noting is that more than half of these cases, about 18 lakh, are pending solely due to the absence of the accused. I have no doubt that if we were to analyse the salutary impact of this offence on society, it would suggest an unnecessarily higher burden on the society in prosecuting the offence than the benefits of the deterrence in issuing dud cheques.
There is no study to show that the introduction of the offence has reduced the instances of dishonour of cheque nor is there anything to indicate that its decriminalisation would lead to an increase in the dishonour of the cheques. There is nothing also to indicate that the various amendments which were introduced to improve the ease of doing business or the ability to enforce the contracts have actually made a difference. In fact, the number of persons avoiding the summons leading to cases remaining pending clearly shows that the accused are willing to take a chance of avoiding the criminal justice system rather than face the proceedings given, how skewed the Section 138 proceedings have been in favour of the complainant.
If the number of cases that were disposed of at the Lok Adalat can be taken as any indication, it appears that it may be better to use alternate dispute mechanism rather than to go through the criminal justice system. If the number of cases that have been settled by way of Lok Adalat, where the settlement is being enforced by way of a civil decree, is any indication it should not make a difference whether the same has been referred to by a civil court or a criminal court.
Even in developed economies, similar provisions have not found their way to the statutes. In countries like the United Kingdom and the United States (some states), deception and dishonesty are key elements that must be proved to bring dishonouring a cheque within the ambit of criminal law.
France has also decriminalised dishonouring cheques except in limited circumstances. It has provided for disqualification from issuing cheques as a means of checking dishonour, a practice that has been adopted in Italy and Spain also. Taking a leaf from France, it may help for banks to keep track of persons whose cheques are dishonoured and such persons are prevented from issuing further cheques.
India currently ranks 68 out of 128 overall (78 in criminal justice) on the World Justice Project’s Rule of Law Index, below many Latin American and African countries. Small measures like decriminalising Section 138 will go a long way to improving the judicial process, such as by reducing delays and improving legal certainty, improving India’s position on the index.
Recommendations And Conclusion
Decriminalising dishonouring of cheques will bring the law in line with the ground reality. The courts have, through judicial innovations, reduced the bite of Section 138. The legislature has tried to also reduced its effect by skewing the balance in favour of complainants to ensure speedy disposal. While decriminalising the dishonour of cheques, it is necessary to protect persons who are already before the courts seeking relief under Section 138, especially bearing in mind the limitation periods applicable to civil disputes.
Going forward, the civil procedure rules will need to be amended to include special provisions to permit filing for civil reliefs and also to introduce a summary procedure providing for a time-bound procedure with strict deadlines.
Due to the high number of pending Section 138 cases, the amended civil rules should contain special provisions allowing a seamless transfer of these cases, without issues such as limitation, failure to invoke civil jurisdiction in the first instance, etc. Parties should be pushed to use alternate methods of settling the cases, like arbitration, conciliation, judicial settlement including settlement through Lok Adalat or mediation. With a move to making all transactions cashless and paperless, given how much the courts have been burdened with this, the need of the hour may be to decriminalise the dishonour of cheques.
Amit Desai is a Senior Advocate based in Mumbai and is among the leading criminal lawyers in India.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.