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Decriminalization Of Dishonour Of Cheque And Fundamentals About Section 138 Of The N.I Act, 1881

Hardik Gautam
15 Jun 2020 9:33 AM GMT
Decriminalization Of Dishonour Of Cheque And Fundamentals About Section 138 Of The N.I Act, 1881
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The outbreak of the novel COVID-19 has an impact on almost all the sectors across the globe and economy being no exception. The pandemic is causing ripping effect on various sectors of Indian economy as well. To mitigate the effect of this pandemic on the economy, the Central Government announced several important relief measures in the areas of Income Tax, GST, Customs and Central Excise, and Insolvency & Bankruptcy Code, with the aim to boost the economy. One such measure which the Ministry of Finance has proposed on June 8, 2020, is regarding decriminalization of 39 minor economic offences, including dishonor of cheques under Section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred to as 'the Act'). The said notification can be accessed here.

Section 138 of the Act casts criminal liability punishable with imprisonment which may extend to 2 years or with fine which may extend to twice the amount of the cheque or both. The cheque must be issued to discharge a debt or liability as a whole or in part which is legally enforceable and it is dishonored by the bank on presentation. Before going into the analysis of the said notification by the Central Government, let us have a brief discussion on some fundamental aspects of Section 138 of the Act, with the help of judicial pronouncements.

1. Under Section 138 of the Act, the Court takes cognizance of the offender and not the offence.

The bench comprising of Chelameswar and Nazeer JJ, had recently in N. Harihara Krishnan v. J. Thomas[1], decided an issue wherein it was held that the scheme of the prosecution in punishing an offender under Section 138 of the Act is different from the scheme of the Code of Criminal Procedure, 1973. As per Section 138 of the Act, for constituting an offence, all the ingredients laid down under the said provision need to be fulfilled. Failure to comply with any of the steps laid down under it would not provide for "cause of action of prosecution". One such mandatory condition is lodging a complaint disclosing all the necessary factual allegations against the person drawing the cheque. Unless the name of the person drawing a cheque is mentioned in the complaint under Section 138 of the Act, the Court cannot take cognizance of the offence and there would be no person against whom the Court can proceed. Hence, there cannot be any prosecution in absence of the name of the accused because Court takes cognizance of the offender under Section 138 of the Act and not of the offence.

2. Cheque issued in respect of a time barred debt cannot be enforced under law.

An issue came up before the Supreme Court in A.V. Murthy v. B.S. Nagabasavanna[2] regarding whether a cheque issued for repaying a debt which is time barred can be enforced under law. In this case, the Sessions Court and subsequently the High Court had quashed a complaint against the accused because of the fact that the debt had become time barred and there was no legally enforceable debt on the part of the accused. The Supreme Court while reversing the order passed by the High Court and the Sessions Court held that as per Section 118 of the Act, there is a presumption that until the contrary is proved, every negotiable instrument was drawn for consideration. Moreover, under Section 139 of the Act, it is specifically stated that it shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in Section 138 for discharge, in whole or in part, of any debt or other liability. The Court made it clear that the contentions urged by the complainant can be examined during trial since it involves examination of facts and the issue whether debt was time barred or not can also be decided at that stage only.

In S. Natarajan v. Sama Dharman[3], similar issue arose before the Supreme Court wherein it was categorically held that whether a debt is time barred or not could be decided only after evidence is adduced, as it involves mixed questions of law and facts. The High Court was not correct in quashing the proceedings under Section 138 of the Act on ground that at time of issuance of cheque, debt had become time barred and therefore, the complaint was not maintainable.

Further, in Sasseriyil Joseph v. Devassia[4], vide order dated 10.09.2001, while upholding the view taken by the High Court of Kerala, the Supreme Court held that the cheque in question was issued by the accused for debt which was barred by limitation, and thus, the penal provision under Section 138 of the Act is not attracted in this case.

3. Offence committed under Section 138 of the Act is more of a civil wrong.

In Meters and Instruments Private Limited and Ors. v. Kanchan Mehta[5], the Supreme Court has held that the offence under Section 138 of the Act is primarily a civil wrong. Section 139 of the Act casts burden of proof on the accused but the standard of such proof is 'preponderance of probability'. It was also held that the object of the provision is primarily compensatory and the Court may compound it at an initial stage, although the Court is not debarred to compound it at later stage subject to appropriate compensation as may be found acceptable to the parties or the Court.

Another Division Bench of the Supreme Court in Kaushalya Devi Massand v. Roopkishore Khore[6], emphatically held that the offence committed under Section 138 of the Act is almost of the nature of a civil wrong which has been given criminal overtones. The gravity of offence under Section 138 of the Act cannot be equated with an offence under the provisions of the Indian Penal Code or other criminal offences.

4. Compensation under Section 357 (3) of the Code of Criminal Procedure cannot be granted along with sentence including fine imposed by a Court under Section 138 of the Act.

The issue regarding granting compensation as envisaged under Section 357 (3) of the Code of Criminal Procedure along with the sentence including fine as imposed by a Court while holding an accused guilty under Section 138 of the Act was addressed by the Supreme Court in R. Vijayan v. Baby & Ors.[7] The Court discusses a legal conundrum created under Chapter XVII of the Act as it appears to be both punitive and also compensatory and restitutive with regard to 'dishonor of cheque' cases. The said chapter provides jurisdiction to both civil and criminal forums, for enforcing of criminal liability (for dishonoring the cheque) and for enforcement of the civil liability (for realization of the cheque amount). The Court has provided a solution for the issue raised above. It was held that there is no need to award separate compensation if it can be paid out of the fine imposed under Section 138 of the Act since, under Section 357 (3) of the Code of Criminal Procedure, the Court is permitted to award compensation when the sentence does not include fine. In order to bring uniformity it was held that the Courts should, unless there are special circumstances, uniformly exercise the power to levy fine up to twice the cheque amount and direct payment of such amount as compensation in all the case.

Let us now analyze the notification of the Central Government decriminalizing dishonour of cheques under Section 138 of the Act.

The aim behind proposing such a measure, as suggested by the Ministry, is that imprisonment for actions or omissions that aren't necessarily fraudulent or the outcome of malafide, is a big hurdle in attracting investments from the government and this move will help in improving business sentiment and unclogging court processes. Such a drastic step by the Government, if implemented, will have both pros and cons on the cases pertaining to dishonor of cheques. The Act was enacted in the year 1881 and originally dishonour of cheque gave cause of action to file a civil suit. However, in the year 1988, an amendment was brought and chapter XVII was inserted in the Act to the criminalize dishonour of cheques. The legislative intent behind criminalizing the acts of dishonor of cheques, was to provide a penal remedy to deter such incidents and also to ensure adequate compensation to the rightful claimants. The Supreme Court, recently, vide order dated 05.03.2020, in Makwana Mangaldas Tulsidas v. State of Gujarat & Ors.[8], (which was separately registered as 'Expeditious trial of cases under Section 138 of the N.I. Act, 1881) opined on decriminalization of dishonour of cheques of smaller amounts. The Court suggested various ways to deal with the over flooded situation of cheque bounce cases pending for adjudication across the country. The main focus of the Supreme Court was to decriminalize dishonour of cheques of smaller amounts and not those of bigger amounts. It was expected that the Government would consider those suggestions as propounded by the Supreme Court before announcing such move. One such important suggestion made by the Court was developing a mechanism for pre-litigation settlement in these cases. It was suggested that the National Legal Services Authority, being the concerned authority, may come up with a scheme for disposal of dishonour of cheque cases through alternate dispute redressal methods. Such a measure of pre-litigation process can be very helpful in settling the cases before they come to Court.

In addition to the above, it can also be suggested that the Supreme Court in catena of judgments[9] has held that an offence under Section 138 of the Act, is in the nature of a civil wrong which has been given criminal edge by providing punishment of imprisonment. Following the said position, a civil court may be given jurisdiction to deal with cases relating to dishonour of cheques of small amounts. If the civil courts are being given jurisdiction to adjudicate cheque bounce cases of small amount, it will also have so many benefits. One such benefit can be that it will reduce the number of frivolous suits filed in the civil courts since the party will be having an additional burden of paying court fees for filing a plaint and unless the person is a bonafide claimant, he will have to think before approaching the Court.

It needs to be noted that a cursory reading of the said proposal does not provide any suggestions for dealing with the proceedings pertaining to dishonour of cheque cases. There can be various other problems which the Government needs to be taken care off. In India, large number of people dealing in small business contract and it is often seen that majority of cheque bounce cases are related to contractual businesses. The step of decriminalization of dishonor of cheque will vanish a deterrent created by this provision against reneging and will also be done away with a considerable legal certainty of getting justice to a rightful claimant by way of penal action in case when a contract is violated. Legal cost which may be imposed on a defaulter would also wear off.

It is also pertinent to note that the holder of a dishonoured cheque can take advantage of the provisions of the Indian Penal Code such as Section 406 (Criminal Breach of Trust) and Section 420 (Cheating) even if Section 138 of the Act is decriminalized. As held by the Supreme Court, the aggrieved party is free to initiate prosecution against the defaulter under the Indian Penal Code and the Act both being independent remedies and not mutually exclusive. In other words, prosecution against a defaulter can be initiated under the provisions of the Indian Penal Code and it is unfettered from initiating a proceedings under Section 138 of the Act.[10] Hence, the purpose underlying decriminalization of dishonour of cheques will be defeated considering the said position.

Way forward

Decriminalization of dishonour of cheque may also turn out to be a draconian step for a bonafide holder of cheque seeking penal action from a criminal court. Instead of decriminalization of Section 138 of the Act, there can be other methods which can be resorted to by the Government. One method can be to lay down guidelines for the banks in India to levy hefty penalty in case of a cheque bounce which is very minimal in India presently. Another practice which is adopted in some of the states in United States, can be to impose increased penalty for the defaulters who have defaulted multiple times and bringing such step will also fulfil the purpose of deterrent created by Section 138 of the Act. Moreover, the best and effective step to achieve the aim of the proposal of the Government is to adopt complete electronic system replacing cheques. Electronic method of payment is the most viable which can easily side-step the burden created by cheque bounce cases.

Considering all these suggestions, instead of proposing decriminalizing Section 138 of the Act, if the Government had taken these steps into consideration, it would have been a win-win situation for both the Government as well as for a bonafide claimant.

(The author is an Advocate practicing in Supreme Court of India and can be reached at [email protected] The views of the author are personal.)

[1] (2018) 13 SCC 663.

[2] (2002) 2 SCC 642.

[3] (2015) 2 RCR (Criminal) 854.

[4] SLP (Cri.) No. 1785 of 2001.

[5] (2018) 1 SCC 560.

[6] (2011) 4 SCC 593.

[7] (2012) 1 SCC 260.

[8] SPL (Cri.) No. 5464 of 2016

[9] Meters and Instruments Private Limited and Ors. v. Kanchan Mehta, (2018) 1 SCC 560; Kaushalya Devi Massand v. Roopkishore Khore, (2011) 4 SCC 593.

[10] Sangeetaben Mahendrabhai Patel v. State of Gujarat, (2012) 7 SCC 621.

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