Negotiable Instruments were devised even before the enactment of the law, by the mercantile community as a safe and dependable method of discharging pecuniary liabilities and as a substitute for cash payment which would involve an element of risk due to either the magnitude of amounts ought to be paid or geographical distance between the payer and the payee.
Section 138 of The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002– 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.
Consequences for Decriminalization of Section 138 of the NI Act
While the existing Section 138 of the NI Act is a draconian idea and flawed in many ways, it has interesting positive effects when placed in an environment of poor contract enforcement. Consider the penalties for bouncing a cheque:
- Imprisonment for up to 2 years, or,
- Fine up to twice the amount involved, or,
- Both of the above.
This is draconian, but there is considerable legal certainty. When a contract is violated, there’s no statutory method for calculating the number of damages that the violator has got to pay. Given the delays in contract resolution, and therefore the legal and administrative costs, which are usually not awarded, the net receipt is usually much less than the number owed. Indian courts aren’t bound by a strict statutory requirement of calculating litigation costs and interest accrued is never granted from the date of the dispute. For this reason, there was some method within the madness of S.138 of the N.I. Act.
Almost 30 per cent of the pending litigation relates to cheque dishonour disputes u/s 138 of the NI Act, i.e. up to 35 lakh cases everywhere the country. Decriminalizing such offences would help bring this number down but not serve its ultimate purpose. But, mere large pendency of cases and consumption of more extended periods for disposal of cases by trial courts are not justifiable grounds, it is submitted to repeal the law.
The proposed withdrawal of 138 N.I. has not adequately been thought through, in terms of the implications for the judiciary and therefore the system. It’s being argued that for several cases, arbitration is going to be done. However:
- What about the increased civil court burden? As argued above, post-dated cheques were used as a substitute for contract enforcement services of civil courts. When this mechanism is no longer available, there will be a surge in contract disputes. This flow of cases will at least partially counteract the debottlenecking of courts that will come from removing cases associated with S.138.
- Where will we get the increased number of arbitrators? There are very few arbitrators in India, and there is no institutional system of providing arbitration services outside the larger cities.
- Who will bear the costs? The costs of arbitration are very high in India. While it may be appropriate for large businesses to internalize their dispute resolution mechanisms, smaller companies should have access to a court system.
- Will arbitration be faster? There is no standardized procedure in the arbitration system in India for cheque bouncing cases. The evidentiary and procedural variety will lead to more challenges in appeal and increase the burden of the judiciary where every appeal will have to be checked for procedural propriety.
- Does the judiciary have the availability to cope with the caseload that will appear for review? Orders of arbitrators will be appealed to the higher tribunal. In many cases, the courts will have to intervene to appoint arbitrators.
- Will people write more bad cheques? The authority of the arbitration system is based on the efficiency of the court system. The rational violator knows that the arbitral award will go to the same over-burdened judiciary where penal costs are rarely imposed, so there will be little incentive to honour arbitration awards.
There is no doubt that a Cheque dishonour may cause incalculable loss, damage, or inconvenience to the payee or endorsee thereof, his future commitments to other persons would get affected. Therefore, to retain the credibility and sanctity of a Negotiable Instruments and also encouraging cashless payments and for smooth conduct of business operations in the country, the system has to be strengthened instead of repealing it. Maintaining the system would ensure financial discipline in the mercantile community while providing safeguards to honest parties.
Consequences for Decriminalization of Section 29 SARFAESI of Act
Section 29: If any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or any rules made thereunder, he shall be punishable with imprisonment for a term which may extend to 1 (one) year, or with fine, or with both.
They are making this a civil offence would force creditors to attend longer to recover their legitimate dues. This decriminalization would be needless to say end in encouraging the minds of perpetrators to defraud and cheat innocent persons, and there would be absolutely no fear within the minds of individuals. Moreover, this can deduct the arrogance and legal security of the individuals within the judiciary of the country, thus rendering them helpless. This decriminalization can cause an increase in such offences and dilution of these offences like concealment, Ponzi schemes and lots of more faced within the past committed by large scale corporations and status individuals shaking the stock exchange and therefore the economic process.
There is no doubt that the Covid-19 created havoc within the country, and its impact on the business of the country and its people is valuable. Suppose the government intends to contemplate any measures to scale back the said impact. In that case, it should examine the matter on the lines of actions taken recently for a limited period and specified purpose rather than decriminalization of such offences. Enforcement of these laws, however, will ensure there is no delay in justice and reduce the burden of courts. But by decriminalizing such economic & criminal offences of all other Acts, especially Section 138 of NI Act and Section 29 of SAFASEI Act, of those sections would become nugatory, render toothless and thus the very purpose of enacting these Sections/Acts would be ultimately defeated.