Decriminalization Of Dishonouring Of Cheque Leads Incitement Or Counterincitement – With Regard To Arbitration & Mediation

PARTIES INVOLVED:

Generally, there are two parties to a cheque. These include the drawer and the drawee. While the drawer is the person who draws a cheque, the drawee is the banker on whom the cheque has drawn. Apart from there parties, there can also be a payee who is liable to pay the amount on the cheque. Furthermore, there can also be a holder who is generally the original payee. When the holder endorses the cheque to somebody, he becomes the endorsee. On the contrary, an endorsee is a person to whom the cheque is endorsed.

WHAT IS MEANT BY CHEQUE? 

Section 6 of the Negotiable Instruments Act defines a cheque is basically a bill of exchange drawn on a specific banker. Furthermore, it is not payable otherwise than on demand. The Negotiable Instruments (Amendment) Act 2015 had amended this definition in broader sense. Accordingly, the term cheque includes electronic cheque also. Despite this amendment the definition remains the same.

A truncated cheque is a cheque which undergoes truncation during a clearing cycle. Truncation basically means the conversion of a physical cheque into digital format. Either a clearing-house or a bank may do this upon generating an electronic image of a cheque. An electronic cheque is a cheque which exists in digital format. A computer resource generates such cheques using digital signatures (either with or without biometrics).

Looking at the definition of a cheque, we can conclude that it is similar to a bill of exchange. Furthermore, it is always drawn on a banker and is payable on demand.

MEANING OF DISHONOUR OF CHEQUE:

It is legally refers to the author of the cheque, who is otherwise called as ‘drawer’, the person in whose favour, the cheque is drawn is called ‘payee’, and the bank who is directed to pay the amount is known as ‘drawee’. The drawer of cheque alone falls within the scope of section 138 of N.I. Act, whether human being or a body corporate or even a firm. Public financial Institutions, Banking, Companies, Business and negotiable instruments laws (Amendment) Act, 1988 (66 of 1988) has inserted chapter XVII comprising of sections 138 to 142 w.e.f. 1 April, 1989. A pay order is a cheque within the meaning of section 138 of the Act and on dishonor of a ‘Pay Order’ section 138 proceedings are competent. (Punjab and Sind Bank v/s Vinkar sahakari Bank Ltd. 2002 Cri LJ 93(SC): (2001) 107 Comp case 208 (SC).

According to section 138 of the N.I.Act, the dishonor of cheque is a criminal offence punishable by imprisonment of term upto 2 years, or with monetary penalty or with both.

The purpose behind the incorporation of section 138 of the Act being to lend credibility for cheque transactions, for establishing the requirement of section 138, there is no burden on the complainant to prove before the court the entire details of the transaction resulting in issuance of cheque.

THREE INGREDIENTS OF SEC. 138:    

  1. There should be a legally enforceable debt.
  2. The cheque that was drawn from the bank account for discharge in whole or in part of any debt or liability which is supposed to be a legally enforceable debt.
  3. That the cheque so issued had been returned due to insufficiency of fund.

It is also very important to examine the Section 139 of the Act as well. The said act is an example of a reverse onus clause that has been included in furtherance of the legislative objective of improving the credibility of Negotiable Instruments.

The rebuttable presumption under section 139 is a device to prevent undue delay in the course of litigation.

However, it must be remembered that the offence made punishable by section 138 can be better described as a regulatory offence since the bouncing of cheque is largely in the nature of civil wrong whose impact is usually continued to the private parties involved in commercial transactions.

In such a scenario, the test of proportionality should guide the construction and interpretation of reverse onus clauses and the accused/defendant cannot be expected to discharge an unduly high standard of proof.

INGREDIENTS OF THE OFFENCE:

  1. Cheque should have been issued for the discharge, in whole, or in part, of any debt or other liability. (The cheque may be presented at any number of times)
  2. The payee or the holder in due course should have issued notice in writing to the drawer within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid.
  3. The cheque should have been presented within the period of 3 months or within the period of its validity, whichever is earlier.
  4. On Non-payment of the amount due on the dishonoured cheque within 15 days of the receipt of the notice by the drawer, the complainant can file a case, within one month from the date thereof, before M.M. or not below the rank of JM 1st
  5. If the payment is made within the said notice period then no offence is committed but in case of failure the offence gets completed. Even if the payment is made on the 16th day the same is not sufficient to come out of the rigorous of section 138 of the Act. In criminal law, the commission of an offence is one thing and the prosecution is quite another. Commission is governed by section 138 of the Act. Prosecution is governed by section 142 of the Act.

LIABILITY OF PARTIES: 

The provisions relating to the liability of parties to negotiable instruments are under section 30 to 32 and 35 to 42 of the Negotiable Instruments Act, 1881.

LIABILITY OF DRAWER (SECTION 30):

Drawer means a person who signs a cheque or a bill of exchange ordering his or her bank to pay the amount to the payee.

In case of dishonour of cheque or bill of exchange by the drawee or the acceptor, the drawer of such cheque or bill of exchange needs to compensate the holder such amount. But, the drawer needs to receive due notice of dishonour.

So, the nature of the drawer’s liability on drawing a bill is:

  1. The Bill should be accepted and payable accordingly.
  2. Drawer needs to compensate the holder such amount on receiving a notice of dishonour by the drawee.

LIABILITY OF THE DRAWEE (SECTION 31):

The person who draws a cheque i.e. drawer having insufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required to do so and, or in default of such payment, he shall compensate the drawer for any loss or damage caused by such default.

The drawee of the cheque will always be a banker. As a cheque is a bill of exchange, drawn on a specified banker by the drawer, the banker is bound to pay the cheque of the drawer, i.e., the customer. For the following conditions are need to be satisfied:

  1. Sufficient amount of funds to the credit of customer’s account should be there with the banker.
  2. Such funds are required to be properly applied against the payment of such cheque, e.g., the funds are not under any kind of lien etc.
  3. The cheque is duly required to be paid, during banking hours and on or after the date on which it is made payable.

If the banker is unjustifiable refuses to honour the cheque of its customer, it shall be liable for damages.

LIABILITY OF ACCEPTOR OF THE BILL:

As per section 32 of negotiable instrument act, in the absence of a contract to the contrary, the maker of a promissory note and the acceptor before the maturity of a bill of exchange are under the liability to pay the amount thereof at maturity.

They need to pay the amount according to the apparent tenor of the note or acceptance respectively. The acceptor of a bill of exchange at or after maturity is liable to pay the amount thereof to the holder on demand.

The liability of the acceptor of a bill or the maker of a note is absolute and unconditional but is subject to a contract to the contrary and may be excluded or modified by a collateral agreement.

LIABILITY OF ENDORSER:

An endorser is the one who endorses and delivers a negotiable instrument before maturity. Every endorser has a liability to the parties that are subsequent to him. Also he is bound to every subsequent holder in case of dishonour of the instrument by the drawee, acceptor or maker, to compensate such holder of any loss or damage caused to him by such dishonour. However, he is to compensate only after the fulfillment of the following conditions:

  • There is no contract to the contrary.
  • The Endorser has not expressly excluded, limited or made conditional his own liability.
  • And, such endorser shall receive due notice of dishonour.

LIABILITY OF PRIOR PARTIES:

Until the instrument is duly satisfied, every prior party to a negotiable instrument has a liability towards the holder in due course. The prior parties include the maker or drawer, the acceptor and all the intervening endorsers. Also, there liability to a holder in due course is joint and several. In the case of dishonour, the holder in due course is joint and several. In the case of dishonour, the holder in due course may declare any or all prior parties liability for the amount.

LIABILITY INTER-SE:

Every liable party has a different footing or stand with respect to the nature of liability of each of them.

LIABILITY OF ACCEPTOR ON FORGED ENDORSEMENT:

An acceptor of a bill of exchange who had already endorsed the bill is not relieved from liability even if such endorsement is forged. This is so even if he knew or had reason to believe that the endorsement is forged. This is so even if he knew or had reason to believe that the endorsement was forged when he accepted the bill.

ACCEPTOR’S LIABILITY ON FICTITIOUS BILL:

An acceptor of a bill of exchange who draws a bill in a fictitious name, payable to the drawer’s order will be liable to pay any holder in due course. He or she will not be relieved from such liability by reason that such name is fictitious.

NOTICE:

Notice is a very important stage. It is the non-payment of dishonoured cheque within 15 days from the receipt of the notice that constitutes an offence. Issuing of a cheque and its dishonour is not an offence. The offence is when the drawer receives a notice from the payee and he fails to pay the dishonoured cheque amount within the grace period of 15 days that constitute an offence any demand made after the dishonour of cheque will constitute a notice. The requirement of giving of notice is mandatory. The main problem is the serving of the notice to the accused as accused makes all efforts to avoid the receipt of the notice. In order to deal with such situations, the courts have evolved a principle called as deemed service of a notice under section 138(b). The legal position regarding deemed service of a notice under U/s 138(b) has been that whenever a notice is sent by the payee to the drawer of the cheque and the said notice is refused to be taken or the addressee deliberately avoids its service, there is deemed to be service of the same.

FILING OF COMPLAINT:

A fair reading of s.138 of the act together with its proviso will make it clear the cause of action for initiating proceedings would complete when the drawer of the cheque fails to make the payment within 15 days of receipt of the notice. The offence would be deemed to have committed only from the date when the notice period expired. A complaint under section 138 is to be filed within one month of the date on which the cause of action arises. The day on which cause of action occurs is to be excluded for reckoning the period of limitation for filing a complaint U/s 138 of the act.

JURISDICTION:

Hon’ble Apex Court in case of K. Bhaskaran vs. Shankara, had given jurisdiction to initiate the prosecution at any of the following places.

  1. Where cheque is drawn.
  2. Where payment had to be made.
  3. Where cheque is presented for payment.
  4. Where cheque is dishonoured.
  5. Where notice is served upto drawer.

However, in its recent decision in Dashrath Rupsingh Rathod v. State of Maharashtra & Anr. The Supreme Court held that in cases of dishonour of cheque, only those courts within whose territorial limits the drawee bank is suited would have the jurisdiction to try the case.

Subsequently, many people had raised difficulties about this judgment. This is so because the payee of the cheque had to file the case at the place where the drawer of the cheque has a bank account. However, now the legal position has completely changed with above new Ordinance, i.e., the Negotiable Instruments (Amendment) Ordinance, 2015, which has been promulgated by the president on 15th June 2015, and which has immediately come into force with effect from 15 June 2015. The above Supreme Court judgement is now of no consequence since this Ordinance supersedes it, clarifying jurisdiction related issues for filing cases of offence committed under S.138. The main amendment included in this is the stipulation that the offence of rejection/return of cheque u/s 138 of NI Act will be enquired into and tried only by a court within whose local jurisdiction the bank branch of the payee, where the payee presents the cheque for payment is situated.

The jurisdiction of filing cheque dishonour cases under Section 138 of the N.I.Act is now changed by the above ordinance as under:

  • Now a cheque bouncing case can be filed only in the court at the place where the bank in which the payee has account is located.
  • Secondly, once a cheque case has been filed in one particular court at a place in this manner, subsequently if there is any other cheque of the same party (drawer) which has also bounced, then all such subsequent cheque bounce cases against the same drawer will also have to be filed in the same court (even if the payee present them in some bank in some other city or area). This will ensure that the drawer of cheques is not harassed by filing multiple cheque bounce cases at different locations.
  • Thirdly, all cheque bounce cases which are pending as on 15 June 2015 in different courts in India, will be transferred to the court which has jurisdiction to try such case in the manner mentioned above, i.e., such pending cases will be transferred to the court which has jurisdiction over the place where the bank of the payee is located. If there are multiple cheque bounce cases pending between the same parties as on 15 June 2015, then all such multiple cases will be transferred to the court where the first case has jurisdiction as per above principle.
  • Thus, this new Ordinance now introduces some clarity and uniformity in the matter of cheque dishonour cases. This Ordinance takes care of the interests of the payee of the cheque while at the same time also taking care that the drawer of the multiple cheques is not harassed by filing multiple litigations at different locations to harass him (if more than one cheque has bounced ). This Ordinance supersedes the Supreme Court decision dated 1 August 2014 [Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129] or any other judgment/decision of any court (Supreme Court or High Courts) on this issue.

PUNISHMENT: 

Bouncing of cheque invites criminal prosecution under section 138 of the Negotiable instruments Act, 1881. Punishment for the offence under Section 138 of NI Act is imprisonment up to two years or fine which may extend to twice the cheque amount or both. The offence is bailable, compoundable and non-cognizable.

CIVIL ACTION:

The payee may also initiate money recovery procedure in a jurisdictional civil court apart from prosecuting the drawer for criminal offence.

ARBITRATION PROCEEDINGS UNDER S.138:

For the purpose of the ICC Mediation Rules (the “Rules”), mediation is a flexible settlement technique, conducted privately and confidentially, in which a mediator acts as a neutral facilitator to help the parties try to arrive at a negotiated settlement of their dispute. The parties have control over both the decision to settle and the terms of any settlement agreement.

In these Guidance Notes, the term “mediation” refers to the entire proceedings and the term “mediation session” refers to one or more sessions during the proceedings when the mediator and the parties meet together.

Since mediation is flexible, the mediation procedure to be used can be adapted to the needs of the parties, including their cultural and legal backgrounds, and the ingredients of the dispute. The manner in which the procedure is to be conducted will be the subject of the discussion provided for in Article 7(1) of the Rules. As provided for in Article 7(3) of the rules, in establishing and conducting the mediation, the mediator is guided by the wishes of the parties and treats them with fairness and impartiality.

During the mediation, the mediator may hold meetings or conference calls with all of the parties present and may also hold separate meetings or calls with each of the parties alone.

In the course of the mediation, the parties can exchange settlement proposals, which may lead to a negotiated agreement. Such proposals can be made directly between the parties or through the mediator.

Since control over the decision to settle and the terms of any settlement agreement remains with the parties, the mediator has no power to impose a settlement on the parties.

SCOPE OF MEDIATION:

Mediation is one of the most preferred notes of Alternative Dispute Resolution (ADR).In mediation; there is a neutral third party, which helps the parties at dispute to come to the settlement.

Though mediation being followed in Ancient India. But later through section 89 of the CPC 1908, it got the legal recognition.

Whereas section 138 of the NI Act states the dishonour of cheque for insufficient also includes the punishment of imprisonment for a term which may extend to one year or fine which may extend to twice the amount of the cheque or with both.

FACTS OF THE CASE:

Dayawanti, the appellant in 2014, supplied firefighting equipment to the respondent, yogesh. In return to that, Yogesh issued two cheques of Rs.11 lakhs and Rs.16 lakhs each in favor of dayawanti. But both the cheques were dishonoured due to insufficient funds. The appellant demanded money from the respondent but was ignored. Consequently, the appellant filed the two complaints under section 138 of the NI Act.

The court referred the cases to Delhi High Court Mediation and Conciliation Centre. Through it, the parties came up with a mutual decision. And the respondent agreed to give           Rs. 55, 54, 600 in installments. But the respondent failed to follow the mediation agreement and the Patiala Court referred the case to Delhi High Court.

ISSUES RAISED:

  1. Is it legal to refer a criminal compoundable case as of section 138 of Negotiable Instrument Act 1881, to mediation?
  2. Whether the arbitration and conciliation act 1996,The mediation and conciliation rules 2004, enacted under CPC is applicable to criminal case or not?
  3. Once dispute referred to mediation, which procedure should be followed?
  4. Whether the court proceeds with case by conducting trial on merits or hold such settlement to be executable as decree?
  5. If the Mediation settlement agreement itself consider to tantamount to a decree, then, how the same is to be executed?

JUDICIAL EXPLANATION FOR THE ISSUES RAISED:

  1. It is a settled principle that as per as a civil dispute is concerned, Courts shall adopt the principles as laid down in the case of Afcon infrastructure Limited. Accordingly, Courts first ascertain if it’s a fit case for adjudication by means of ADR process and then accordingly decide the kind of ADR as per consent of the parties. In the instant case, the bench opined that even though there is no express statutory provision under the criminal code to refer the parties to mediation, such matters can be referred to ADR if they fall under the ambit of Section 320, Cr.P.C. and such settlement shall be an order of the court.
  1. The Delhi Court framed “The Mediation and Conciliation Rules, 2004” in exercise of the rule making power under Part X of the Code of Civil Procedure, 1908 (“CPC”). The rules cover all the proceedings which are pending before the Delhi High Court or any other sub-coordinate court. As far as the nature of the proceeding under Section 138 are concerned, they are quasi-civil in nature and the criminal courts follow the principle used by civil court’s to adjudicate the same.
  2. PROCEDURE FOR SETTLEMENT OF OFFENCE THROUGH MEDIATION UNDER SEC.138:
  • when the respondent first enters appearance in a complaint under Section 138 of the NI Act, before proceeding further with the case, the Magistrate may proceed to record admission and denial of documents in accordance with Section 294 of the Cr.P.C., and if satisfied, at any stage before the complaint is taken up for hearing, there exist elements of settlement, the magistrate shall inquire from the parties if they are open to exploring possibility of an amicable resolution of the disputes.
  • If the parties are so inclined, they should be informed by the court of the various mechanisms available to them by which they can arrive at such settlement including out of Court settlement; referral to Lok Adalat under the Legal Services Authorities Act, 1987; referral to the court annexed mediation centre; as well as conciliation under the Arbitration and Conciliation Act, 1996.
  • Once the parties have chosen the appropriate mechanism which they would be willing to use to resolve their disputes, the court should refer the parties to such forum while stipulating the prescribed time period, within which the matter should be negotiated (ideally a period of six weeks) and the next date of hearing when the case should be again placed before the concerned court to enable it to monitor the progress and outcome of such negotiations.
  • In the event that the parties seek reference to mediation, the court should list the matter before the concerned mediation centre/ mediator on a fixed date directing the presence of the parties/ authorized representatives before the mediator on the said date.
  • If referred to mediation, the courts, as well as the mediators, should encourage parties to resolve their overall disputes, not confined to the case in which the reference is made or the subject matter of the criminal complaint which relates only to dishonouring of a particular cheque
  • The parties should endeavour to interact/discuss their individual resolutions/proposals with each other as well and facilitate as many interactions necessary for efficient resolution within the period granted by the court. The parties shall be directed to appear before the mediator in a time period fixed by the magistrate.

In the event that all parties seek extension of time beyond the initial six week period, the magistrate may, after considering the progress of the mediation proceedings, in the interest of justice, grant extension of time to the parties for facilitating settlement.

  1. In case of breach of the terms of the settlement agreement, Section 421 of Cr.P.C comes into play which provides the mechanism to recover fines. Also, under section 431 of Cr.P.C in case money is to be collected other than fine under CrPC and the method is not expressly provided, it shall be recoverable in terms of Section 421 CrPC. Also, if a Court accepts an undertaking in the form of an Agreement and there is non-compliance of the same, the parties shall be punished under Section 2(b) Contempt of Courts Act, 1971.
  2. As in the case of civil dispute, the settlement between the parties is in terms of the decree of the court and is to be executed under the procedure of Order XXIII of the CPC unlike in criminal cases which cannot be executed similarly. Also, a settlement in mediation arising out of referral in a civil court can result in a decree upon compliance with the procedure under Order XXIII of the C.P.C. which cannot be done in case of a criminal matter.

DECRIMINALIZATION OF CHEQUE BOUNCE:

The decriminalization of cheque bounce has brought various impacts in various field and also various acts. Many Public financial institutions and banks were against the decriminalization order passed by Supreme Court. Let us see the opinion of various sectors regarding the decriminalization as follows:

CHEQUE BOUNCE CASE AND MEDIATION:

Delhi high court has held that even if a criminal cheques bounce case is settled in mediation in respect of cheque given for liability under an earlier MOU, the earlier MOU shall remains enforceable if the payment is not made under the mediation settlement.

A bench of Justice Narula has passed the order in case titled SMT.AVATAR KAUR vs. MRS. ZULEIKHA KARNIK on 26.03.2019.

Plaintiff filed a summary suit to recover an amount based on bill of exchange and cited one MOU of the year 2016. Defendant wants leave to defend unconditionally on the premise that the said MOU was super ceded by a subsequent mediation settlement arrived at in a complaint proceeding for bouncing of cheque which was given under the said MOU.

In accordance with MOU between the parties, a cheque (640046) amounts Rs. 2,65,00,000/- ( Rupees Two Crore & Sixty Five Lacs Only) dated 30th June, 2016 drawn on DCB Bank, New Delhi was handed over to the plaintiff. On presentation for encashment, the said cheque got dishonoured with the remarks “insufficient funds”. Plaintiff then issued a demand notice dated 17th October, 2016 demanding the payment and predictably, the plaintiff filed a complaint under S.138 of NI Act, 1881. During the pendency of the said complaint before the Court of Ld. Metropolitan magistrate, the parties, once again arrived at a settlement.

In accordance with the aforesaid terms of the mediation settlement, the defendant was required to make a payment of Rs. 2,00,000,00/- to the plaintiff within a period of four months from 02nd August, 2017. The defendant, however, did not adhere to the aforesaid condition and again requested for time to make the payment. The plaintiff has filed an application under section 431 read with section 421Cr.P.C. against the defendant. The said proceedings are stated to be pending before the Court of Ld. Metropolitan Magistrate, Saket.

The defendant by way of an application seeks unconditional leave to defend the present suit. On perusal of the affidavit filed along with the said application, it is noticed that the singular ground seeking leave to defend is that the settlement Agreement dated 08th August, 2017 super cedes the terms and conditions of the previous MOU dated 30th June, 2016 and thus, the terms of the said MOU are no longer enforceable.

It is in this context that the High Court observed “The proceedings before the Mediation Centre were pursuant to the criminal complaint filed by the plaintiff on account of dishonour of the cheque given under the MOU. No doubt, the amount of the dishonoured cheque of Rs. 2,65,000,000/- was agreed to be settled for Rs. 2,00,000,00/-, however the settlement was arrived at in the criminal proceedings and more pertinently that settlement was conditional.

The condition being that the defendant had to make the payment of Rs. 2,00,000,00/- within a period of four months from 02nd August, 2017 which expired on 02nd December, 2017. Concededly, the defendant has failed to discharge the obligations recorded in the said settlement and make the payment within the aforesaid time period.

It is further noteworthy that clause 3 of the settlement term categorically records that in case of default in making the payment of Rs.2,00,000,00/- within the mentioned period, the first party would be free to pursue its remedies against the second party as per the law. Therefore, the terms of the settlement recorded before the mediation Centre, at the highest can be construed to be suspension of the obligations of the parties subject to the fulfillment of the terms of the settlement.

The defendant, not having complied with the said terms, cannot be permitted to take benefit of the said settlement. The plaintiff is thus entitled to pursue its remedy in terms of the MOU dated 30th June, 2016. The said agreement cannot be said to be unenforceable or super ceded particularly in view of the default and breach committed by the defendant”.

 IN THE FIELD OF COMPANY:

In the perspective of company the Negotiable Instruments Act, 1881 provides for an early mode for redressal where a cheque, for discharge of debt or liability, is dishonored due to paucity of funds or where it exceeds arrangement. On one hand the government has recently inserted certain S.143 A & 148 to make NI Act more effective and powerful in providing redressal to the complainants and all on the other hand diluting the said act is itself self contradictory and unwarranted.

It is pertinent to note that as per the 213th report of law commission, almost 20% of the pending litigation relates to cheque dishonor disputes u/s 138 of the NI Act. This speaks of the existing trends in the financial world today. People give postdated cheques against purchases from MSME’s and other business entities. Similarly business entities and even individuals take personal/private loans from outsiders and issue post-dated cheques. If S.138 of the Negotiable Instruments Act 1881 was not what enacted it is for sure that there would be no fear in the minds of the drawees to get the cheques honored from their banks. The fear of criminal litigation & imprisonment is the precipitating factor for making timely payments of the cheques.

Moreover, the proposed amendment in the NI Act by removing the provisions of imprisonment does not qualify the basic inter-alia tenets for bringing about these changes viz;

  1. Decrease the burden on businesses and inspire confidence amongst investors;
  2. Mens rea (malafide/ criminal intent) plays an important role in imposition of criminal liability, therefore, it is critical to evaluate nature of non-compliance, i.e.fraud as compared to negligence or inadvertent omission; and
  3. The habitual nature of non-compliance”

On none of these doctrines, the proposed dilution/ decriminalization of S.138 of the NI Act is justified. The government should refrain from making any such change in NI Act which blows the trust/ sanctity of cheques, the banking sector, the businesses and the common man who treat the cheques as a guaranteed payment. By decriminalization of Section 138 of the whole section would become nugatory and render toothless and the very purpose of this Section/ Act would be defeated.

IN THE FIELD OF BANKS:   

Bankers state that legal action is taken only in cases where borrowers willfully default on loans and also added their voice to the increasing chorus of stakeholders opposing the finance Ministry’s proposal to decriminalize the offence of cheque return under section 138 of the NI Act, 1881. Banks, under the aegis of the Indian Banks Association, have represented to the finance ministry that this provision in the NI Act should continue.

Bankers say they resort to legal action under Section 138 (relating to dishonour of cheque) only in cases where borrowers willfully default on loans. The fear of criminal action, including imprisonment for upto 2 years or fine, which may be twice the amount of the cheque, or both, acts as a deterrent to such borrowers.

While banks can launch recovery action under ‘The Recovery of debts due to Banks and Financial Institutions Act, 2002’, bankers feel they need to have the section 138 option also to proceed against recalcitrant borrowers.

The Finance Industry Development Council (FIDC), a representative body of asset and loan financing non-banking finance companies (NBFCs), too has opposed the proposal to do away with section 138.

Mahesh Thakkar, Director General, FIDC, cautioned that decriminalizing the offence under S.138 of the NI Act would lead to further deterioration in enforcement of contract, especially in terms of honoring acknowledged debt and liability.

IN THE FIELD OF FINANCIAL ENTITY:

Many financial entities and NBFCs were against the decision of the ministry. Mr.N.Jegatheesan, president, The Tamil Nadu Chamber of commerce and Industry, Madurai states that “the ministry has sought comments, and we have opposed the move. We want the existing system to continue. Cheques have a value only because there was criminal liability”. If a case go to civil court, it will take at atleast 20years for a case to get settled and it would not work for the trade and commerce community.

MY OBSERVATION:        

The objectives of the proceedings of section 138 of the act are that the cheques should not be used by persons as a tool of dishonesty and when a cheque is issued by a person, it must be honored and if it is not honored, the person is given an opportunity to pay the cheque amount by the issuance of a notice and if he still does not pay, he must face the criminal trial and consequences”. The Bombay High Court in the case Rajesh Laxmichand Udeshi v. Pravin Hiralal recognized the legitative intent behind the enactment of S.138 and 139 of the NI Act is to prevent abuse of the banking system. Thus, one who issues a cheque extends a solemn promise to pay. Based on the promise and action, the recipient arranges their affairs and quite often enters into further transactions. Unless extraordinary circumstances are made out, one who issues a cheque is deemed to have undertaken to pay. NI Act enforces the promise strictly by raising statutory presumption and treating it as an offence. This provision elevates a cheque to a higher status than the other instruments, such as written contract, etc. to which no such statutory presumptions is attached”.

Recently, The NI Amendment Act 2018, came into effect, broadening the roads of hope for the claimants. The amendment allows the court trying the offence under section 138 to direct the drawer to pay interim compensation not exceeding 20% of the amount of the bounced cheque to the complainant within 60days from the date of such order or within a further period, not exceeding 30 days as may be directed by the court on account of sufficient cause being shown by the drawer. Furthermore, Section 148 was inserted, in case of an appeal against the conviction under section 138; the appellate court may order the appellant to deposit a minimum of 20% of the amount of fine/ compensation awarded by the trial court in addition to the interim compensation.

The Supreme Court in its recent order dated 05.03.2020 in Makwana Mangaldas Tulsidas v. state of Gujarat, opined on decriminalization of dishonor of cheques of smaller amounts. The main focus of the order was to decriminalize dishonor of cheques for only smaller amounts so that the over flooded situation of cheque bounces cases can be dealt with through alternative dispute methods. It was not expected that the Government would not consider the suggestions of the Supreme Court and propose to Decriminalize S.138 as a whole. It is a well-established fact that recovery suits take a minimum of 7-8 years for the decision if section 138 is decriminalized the criminal edge given to the section to penalize the offenders will defy the basic intent of the section. In India majority, cheque bounce case arose from the business contractual relationships if the said section is decriminalized it will dilute the legal certainty of getting justice by rightful claimant.

CONCLUSION:

The objective of Central government behind the proposal is Sabka saath, Sabka Vikas and Sabka Vishwas. But this decriminalization of S.138 dilutes the fear of criminal proceedings and leads to drastic increase in unresolved civil cases. The dishonor of cheque due to insufficient fund without legal burden leads to the raise in the forgery and technical frauds. The measure taken by Central government regarding the IBC enforcement for a prescribed period also affected the creditors negatively. It may lead to bankruptcy and financial loss of the nation. The Financial statement of the country should maintain appropriate debt equity ratio, fund flow and cash flow. This act of decriminalization deviates the financial balances and also causes threshold to the country. The strong opposition by different bar councils has created loop on the effect that is to be caused to the stake holders. Thus, I conclude it that he act of decriminalization of S.138 is beneficial to debtors and also creates equality but simultaneously it leads to the national loss and also leads to incitement such as technological fraud, money launding etc. I also suggest to revise the decriminalization act of Central government.