Negotiable Instruments Act 1881 regulates the different types of negotiable instruments like Promissory notes, Bills of Exchange and Cheques. According to Sec. 13 of the Act, negotiable instrument means ‘a Promissory Note, Bills of Exchange or Cheque payable either to order or to bearer’. Thus, Negotiable Instrument in simple terms means any written document which is transferable on delivery.
Section 138 of the act talks about punishment for dishonoring of cheques. Section 138 was introduced as a criminal offence in 1989 by way of an amendment to the Negotiable Instruments Act, 1881.The main objective of introduction of this section was to encourage the use of cheques and increasing the credibility of transactions through cheques by making the dishonoring of the cheques as an offence.
Section 138 provides that when the cheque is dishonored for insufficiency of funds or for any of the prescribed reasons, the one who is at defaulter can 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 cheque, or both. This is also a non-cognizable offence.
Section 138 of Negotiable Instruments Act 1881 states:
"Dishonour of cheque for insufficiency, etc., of funds in the account.—Where any cheque
drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that 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 that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for
[a term which may be extended to two years’], or with fine which may extend to twice the amount of the cheque, or with both:
Provided that nothing contained in this section shall apply unless—
- the 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;
- the payee or the holder in due course of the cheque, as the case may be, 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 thirty days] of the receipt of information by him from the bank regarding the return of the
cheque as unpaid; and
- the drawer of such cheque fails to make the payment of the said amount of money to the payee
or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of
the said notice."
Thus from the above section it is inferred that dishonoring of cheques due to insufficient fund in the account or any other reason is a punishable offence.
Decriminalizing section 138
On 8 June, 2020 the Ministry of Finance proposed decriminalizing various minor offences “for improving business sentiment and unclogging court processes”, which also include Section 138 of Negotiable Instruments Act, 1881.
The main reason for this proposal is to increase the foreign investment in our country and will help in boosting the economy of the country during this condition.
The objective of section 138 of negotiable instruments Act is to promote the efficiency of banking operations and to ensure credibility in transacting business through cheques1 with the corona virus outbreak in the country, the economy is going down and to curb this situation it is proposed to decriminalize section 138 of Negotiable Instruments Act. There are heavy debates and discussions going on decriminalizing section 138 or not because this section effects the public at large. There is no doubt that it will bring an ease to the business but on the other hand it has some bad impact on the business sector as well for example the creditors will lose the credibility in transactions through cheques. The main idea behind the proposal it is the ease of business and attracting investors. In the report the following principles were propounded and certain things are to be kept in mind.
- Decriminalizing will decrease the burden on businesses man and will attract confidence among the investors.
- Increase in the economic growth, public interest and national security.
- Mens rea plays an important role in attracting criminal liability. Therefore it is important to evaluate the nature of the non-compliance.
- The habitual nature of non-compliance has to be kept in mind. Negligence must be differentiated with the non-compliance on regular basis.
Decriminalizing section 138 - Is it desirable ?
The legislative intent to introduce this section in Negotiable Instruments Act was to bring security in the payment mechanism. The punishment introduced under the section would further help in reducing the risk of fraud and cheating.
Generally, ‘mens rea’ is considered as an essential component of a crime, but dishonor of cheque is a criminal offence where there is no need of proving mens rea. Strict liability is an effective measure to build trust and credibility in transactions.
If the section got decriminalized, there would be an increasing risk of cheating and fraud. On one hand that court has pendency of cases and decriminalizing would help in reducing the piles of cases lying in the court but on the other hand there increases a risk in the business and the credibility of the cheque system will decrease. Fear of imprisonment and litigation charges along with fine were the main factors for timely payments of the cheques. In case the punishment are removed by decriminalising section 138, definitely creditors will have to incur lot of risk.
It's true that section 138 has created lots of cases piled up in the court, but decriminalizing it is not the solution. The credibility of the investors would be shaken if there will be no remedy against dishonored cheques. Instead of people taking interest in the investment, other person may take advantage of it. The provisions of section 138 does not allow any person to take any unfair advantage because of the punishment. If there would be no punishment the other person would be free and can take any advantage of the situation. Decriminalizing section 138 would make the creditor more insecure. There would be a cascading effect and the complete system of negotiable instruments would turn futile.
Section 142 talks about the cognizance of the offences. Prosecution of the offence committed under section 138 is governed under section 142 of Negotiable Instruments Act. Section 142 of the Act has prescribed a limit of one month for filing of the complaint from the date the cause of action .Section 142 of the Act categorically underlines the procedure for taking cognizance of offences under the Act. Departing from the general rule under criminal law, motion can be set by any person either by written complaint or any oral information, whereas the provision of section 142 of the Act mandates that the complaint filed under section 138 of the Act should be in writing and it should be filed and signed by the payee in due course. This exception in section 142 serves as a safeguard against all the false and frivolous complaints and eliminates the need to hold a preliminary enquiry under section 202 CrPC.
This decriminalising section 138 will frustrate the main motive behind enforcement of this act. Thus would be encouraging perpetrators and more cases of defrauding money.
Like a coin has its two different sides, decriminalizing section 138 will also has pros and cons of its own. On one hand where there is an ease of doing business, on the other hand creditors will lose confidence in the system.
Decriminalizing is not the only option left for ease of doing business. Thus it's not a good idea to decriminalize this section as the main intent of incorporation of this section was increasing the confidence of the creditors and also to increase the credibility in the cheque system.