Decriminalizing Section 138 of Negotiable Instruments Act, 1881- Good or Bad?

Negotiable Instruments Act 1881 governs the different types of negotiable instruments such as Bills of Exchange, Promissory Notes and Cheques. Negotiable Instrument is defined as a Promissory Notes, Bill of Exchange or Cheque which is payable either to order or to bearer. Section 138 talks about punishment when a cheque is dishonoured due to insufficiency of funds or for any other reason. The defaulter can be imprisoned for two years and/or pay twice the amount in the cheque as fine. It is a non-cognizable offence.

On June 8, 2020, the Ministry of Finance proposed that this section be decriminalized to reduce the burden of criminal liability on companies and unclogging court processes as there are lakhs of pending cheque dishonour cases. The main reason to increase banking operations efficiently and to ensure credibility of financial transactions through cheques because the Covid 19 pandemic has slowed down our economy. 

Under the current law, the payee can file both a criminal as well as civil case. The payee can approach a civil court by filing a suit for recovery against the defendant. Both cases can be filed simultaneously depending on the amount mentioned in the cheque. Though approaching the courts in this case would be helpful to serve justice in both sides, there are some problems namely:

1. It will be too costly for the defendant and the payee as they have to pay separate legal fees to their advocates in both the cases. This is mostly true in case of the defendant because he has to contest in two separate proceedings for the same dishonoured cheque. 

2. If the payee approaches only the criminal court then the proceedings will not be completed as soon as required under the Act and the limitation period under which civil case has to be filed may be over by the time the criminal proceedings are over. 

Decriminalization of Section 138 would lead the payee to approach only the civil court under suit for recovery. The advantage of this is that the payee can claim interest. In criminal court, levying the fine with interest is discretionary whereas in civil court the claiming of interest is necessary under Civil Procedure Code, 1908. 

There are many parties who seek redressal regarding the discarded cheques through alternative dispute resolution. Cases regarding dishonoured cheques can be referred to alternative dispute redressal forums such as arbitration, mediation, conciliation etc. for settlement. Such alternative  dispute resolution processes are used by parties prior to litigation so decriminalization of this offence would not affect the rights of these parties.

Decriminalization of Section 138 would have negative consequences as well. The main reason for introducing this section was to reduce cheating and fraud regarding the payment mechanism. If this section is decriminalized then there would be an increase in cheating and fraud. Though the pendency of lakhs of cases would be greatly reduced due to decriminalization, this increases the risk of credibility of financial transactions through cheques in the business world. 

If this decriminalization happens, the debtor will have no fear in committing fraud or facing punishment. The process of cheque transaction will lose its good faith thereby hampering the financial economy. 

It is perfectly understandable that the government wants to lower the burden of cheque bouncing cases but decriminalizing Section 138 is not the proper answer because every action has its pros and cons. Therefore decriminalizing Section 138 is not a good option because this will dimnish the very purpose of incorporating this section which was instill fear in the defaulters and increase the cheque system's credibility.