Introduction
In these unprecedented times, the country has witnessed various ups and downs. The coronavirus situation has taken us to a crossroad where we need to relook at every policy to ensure that it remains updated with the changing time. During this revaluating phrase, the Government has decided to decriminalize section 138 of the Negotiable Instrument Act, 1881[1].
This decision by the Ministry of Finance has awakened a long-awaited talk on the credibility of the section.In light of the same, this article aims to analyze the structure and spirit of section 138 of NI act consequent to the recent times.
Background
During the development of the banking system, cheques became one of the most preferred negotiable instruments. It became the convenient mode of transferring money and became readily acceptable in place of payment. Initially, the negotiable instruments, including cheques, were recognized as the medium of speedy commerce; but with the effect of time and fall in the moral standards of people, cheques became an issue of concern. Subsequently, the long procedure of getting to court for the collection of cheques was defeating the purpose of negotiable instruments. Keeping the same in mind, Section 4 of the Banking, Public Financial Institutions, and Negotiable Instruments Laws (Amendment) Act, 1988[2]inserted Chapter XVII in the Negotiable Instruments Act, 1881[3].The act was enacted on December 9, 1881, and came into force on March 1, 1882.[4] It contains the laws relating to the negotiable instruments which are written transferable documents. These documents generally include written statements given as security, usually for the payment of money, which may be transferred by endorsement or delivery to the payer, usually named on the document. Under the title of the holder’s negotiable instrument, the holder is free from all the defects, which means the transferor passes a bona fide title to payment to the transferee[5].
Section 138 of the NI Act, specifically talks about the inclusion of penalties on the person by whom the amount is to be paid in whole or in part to fulfil any debt or other liability. The section provides that if the transferor passes a cheque to the transferee for the payment of legally enforceable debt either whole or in part through the bank and if it gets dishonoured, that means the bank refuses to pay the amount due to the insufficiency of the funds; then, the transferor is liable for dishonour. The section subsequently mentions the punishment for such an offense with the fine which may extend to twice the amount stated in the cheque and imprisonment not exceeding two years, or both[6].
Scope and Intention of Section
- Increase in the credibility of financial instrument
As the act suggests that the intention behind the enactment of the negotiable instrument act was to increase the credibility of the financial instruments, the section further enhances the credibility of the cheques in the settlement of liabilities. The Government in the 2015 amendment bill[7]also stated that the section is important as it clarifies jurisdictional issue which would increase the credibility of the cheque as a financial instrument[8].
Also, in the case of M/s. Dalmia Cement (Bharat) Ltd. v M/s. Galaxy Traders and Agencies Ltd. and other[9], Supreme Court held that-
“The section was inserted to impose strict liability on the defaulters, increase the debt recovery rates, and provide the rightful claimants with adequate relief.”
- Civil liability into criminal liability
In the recent case of Dayawati v. Yogesh Kumar Gosain[10], Hon’ble Delhi High Court stated that-
“Proceedings under Section 138 of the NI Act have a special character. They arise from a civil dispute relating to dishonoring to a cheque but may result in a criminal consequence. Even though the statute is punitive, its spirit, intent, and object are to provide compensation and ensure restitution as well which aspects must receive priority over punishment.”
This gives us an overview that the section provides the inclusion of criminal liability in civil acts. Further to avoid misuse of the section, Government also stated that the offense is a minor financial offense as it does not impact the national security or public interest.
- Inclusion of strict liability
In all criminal offenses, mens rea is considered the most important element;as expressed in the legal maxim “actus non facitreum nisi mens sit rea.” The maxim states the principle the act is not culpable unless the mind is guilty[11].
Nevertheless, in the famous case of Mayuri Pulse Mills v. Union of India[12], Hon’ble Bombay High Court recognized that-
“Section 138 of the Negotiable Instruments Act, 1881, provides for an offense which is not based on mens rea. Normally, in criminal law, the existence of guilty intent is an essential ingredient of a crime. However, the Legislature can always create an offense of absolute liability or strict liability where mens rea is not at all necessary. Such a measure is resorted to in public interest, and such laws of strict liability are justified and cannot be said to be unreasonable.”
Also, in the case of Dalmia Cement Ltd. v. Galaxy Traders and Agencies Ltd.[13], the apex court held that-
“The act was enacted and section 138 thereof incorporated with a specified object of making a special provision by incorporating a strict liability so far as the cheque, a negotiable instrument, is concerned.”
Essentials of the section
The following conditions should be satisfied for an act to fall under the purview of section 138-
- A cheque was drawn on an account maintained by the person with the banker;
- The cheque, when presented to the bank, was returned by the bank unpaid;
- The cheque was presented to the bank within three months [As per RBI, w.e.f April 2012 a cheque is only valid for a limited period of 3 months]
- The payee demanded in writing from the drawer of the cheque the payment of the amount of money due under the cheque to the payee; and
- The notice of payment is made within 30 days from the date of the receipt of the information by the payee from the bank regarding the return of the cheque as unpaid.
- The complaint should have been made within one month of the cause of action being arisen[14]. [Section 142B]
After the dishonouring of the cheque, a legal notice is sent to the drawer via registered post. This notice provides all the relevant facts and allows 15 days to the drawer to make the payment. If the amount is paid, then the issue is settled. But if the drawer fails to pay the amount of the cheque, then a written criminal complainant is to be made within 30 days from the date of expiry of 15 days specified in the notice within the jurisdiction.
Later on, if the court is satisfied with the complainant and the complaint is accompanied by the affidavit and the affidavit and the documents, if any, are found to be in order; then the concerned Magistrate will issue the summon to the accused to appear in the court.In the case of non-appearance of the accused/Drawer, the court has the power to issue bailable and non- bailable warrant against the accused.
On the accused’s appearance, in case he pleads guilty, the court will proceed for the punishment. On the other hand, if the accused denies the charge, then the accused will be provided with the opportunity to present his/her evidence and cross-examine the complainant.
In both instances of acquittal and conviction, both the complainant and accused can appeal in the High Court and Sessions court, respectively.
To protect, the principle of Audi alteram partem, the apex court in the case of Indian Bank Association and others v. Union of India & Others[15] issued various directions and stated that- “Metropolitan Magistrate/ Judicial Magistrate should adopt a pragmatic and realistic approach while issuing summons. Summons must be properly addressed and sent by post and by email address got from the complainant. If the summons is received back unserved, immediately the following action is taken.”
The court also stated that-
“If the accused makes an application for compounding of offenses at the first hearing of the case and if an application is made, Court may pass appropriate order at the earliest.”
As the offense under section 138 is a criminally compoundable offense, in the case of Dayawati v. Yogesh Kumar Gosain[16], the Delhi High Court also held that-
“The Legislature has not specifically provided an express statutory provision enabling the criminal court to refer the complainant and accused persons to alternate dispute redressal mechanisms. Hence, the case could be settled by mediation.”
Recent Developments
According to the 213th Report of the Law Commission of India[17], 38 lakh cheque bouncing cases were pending in various courts in the country as of then, and over 7.6 lakh cases were pending in the criminal courts in Delhi at the Magisterial level alone. This huge backlog of cases related to section 138 has resulted in the sidelining of other important cases. After the emergence of the coronavirus pandemic, courts have opted for online videoconferencing mechanism to avert the complete shutdown of the Indian legal system due to which only urgent cases were being addressed by the court, which resulted in even more pendency of the cases. In the recent case of MakwanaMangaldasTulsidas v. the State of Gujarat[18], the Supreme Court noted that-
“Over 35 lakh cases of cheque bouncing were pending and utilizing judicial time and money, and registered a suo moto case to devise a mechanism to dispose of these cases rapidly.”
Apart from the clogging effect on the courts due to the effect of coronavirus, the economy has been on the verge of collapsing. Unprecedented lockdown in the entire nation has severely affected small and big businesses. To improve the business sector by further supporting them in reviving and avoiding unclogging court processes, the Ministry of Finance has stated to decriminalize minor offenses. As the scope of the section suggests that the offense under section 138 is of a minor nature, the Government has suggested decriminalizing the offense under section 138. Since the day this decision has been in the public domain, there was criticism concerning the same. The Bar Councils of Delhi, Goa, and Maharashtra opposed this decision and confronted the Government concerning the consequences of the decriminalization[19].
Conclusion
From the above analysis of section 138 of the NI Act, it can be concluded that the spirit of the section lies in the principle of bona fide. The section discards the use of the tool with dishonesty by implying criminal punishment. In the wake of recent developments concerning the section, it is a well-established fact that the decriminalization might remove the fear of wrongdoing in the market can eventually result in the loss of trust and faith. As stated by the Ministry of Finance, the section is proposed to be decriminalized to encourage foreign and local investors to whom criminal liability was a very big concern. But it is well observed from the above context that the act itself protects the honest drawee by providing them the opportunity of 15 days to pay the cheque and not face any criminal action[20].
Hence, the proposal is contradictory in itself. At the time of a dwindling economy, we cannot risk losing the cheque’s relevance as the preferred mode of payment. Therefore, before making such a decision, the Government and various policymakers must analyze the act from the perspective of its intention and scope. Just the factual analysis of the section would not suffice the purpose.
By-
Ananya Bhargava,
Dharmashastra National Law University
[1]The Negotiable Instruments Act, 1881, Act No. 26, §138 (1881).
[2]The Banking, Public Financial Institutions and Negotiable Instruments Law (Amendment) Act, 1988, Act No. 66, §4 (1988).
[3]Supra note 1
[4]Ajay Bhargava, Ratnil Chauhan & Karan Gupta, Central Government Amends the Negotiable Instruments Act, 1881: Provides Greater Protection To Payee Of Dishonoured Cheques, Mondaq, (September 3, 2018), https://www.mondaq.com/india/financial-services/732202/central-government-amends-the-negotiable-instruments-act-1881-provides-greater-protection-to-payee-of-dishonoured-cheques.
[5]Supra note 1.
[6]The Negotiable Instruments act, 1881, Act no. 26, (1881).
[7]The Negotiable Instruments (Amendment) Bill, Bill no. 151, (2015).
[8]Press Information Bureau, Ministry of Communications, ‘Approval to introduce the Negotiable Instruments (Amendment) Bill, 2015 in Parliament’, (June 2015), https://pib.gov.in/newsite/PrintRelease.aspx?relid=134187.
[9]Dalmia Cement (Bharat) Ltd. v. Galaxy Traders and Agencies Ltd. and Ors. [(2001) 6SCC 463]
[10]Dayawati v. Yogesh Kumar Gosain [(2017) SCC OnLine Del 11032].
[11]Kousini Gupta, Actus Non FacitReum Nisi Mens Sit Rea – Legal Maxim, Law Times Journal, (June 26, 2019), https://lawtimesjournal.in/actus-non-facit-reum-nisi-mens-sit-rea/.
[12]Mayuri Pulse Mills v. Union of India [(1994) SCC OnLineBom 780].
[13]Supra 9.
[14]The Negotiable Instruments act, 1881, Act no. 26, §142B (1881).
[15]Indian Bank Association &Ors. v. Union of India &Ors. [AIR (2014) SC 2528]
[16]Supra note 11.
[17]Law Commission of India, Fast Track Magisterial Courts for Dishonoured Cheque, Report No.213, (November 24, 2008).
[18]MakwanaMangaldasTulsidas v. the State of Gujarat[(2020) SCC OnLine SC 317].
[19]Aliza Alam&Nayan Saini, Decriminalization of Section 138 of Negotiable Instrument Act, 1881, Ipleaders, (June 27, 2020), https://blog.ipleaders.in/decriminalization-of-section-138-of-negotiable-instrument-act-1881/.
[20]PremRajaniKavita Brid Chavan and KrutikaCheulkar, Decriminalisation of ‘Minor Offences’: Factors to Be Considered and Its Probable Implication, Mondaq, (July 21, 2020), https://www.mondaq.com/india/crime/967648/decriminalisation-of-39minor-offences39-factors-to-be-considered-and-its-probable-implication.
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