Decriminalisation of Section 138 of the Negotiable Instruments Act,1881
Encouraging businesses during Covid-19

Nayan David

Aug, 07, 2020

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 ....

Section 138 of NI Act, 1881(the Act) - 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 extend 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 —
(a) 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;
(b) 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
(c) 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.
Explanation.—For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.

The Central Government in an attempt to help and improve the ease of doing business and unclogging the load on the courts, has taken a major step with the decision that 39 Sections of 19 different Acts shall be duly decriminalised. The Central Government plans to do away with smaller financial offences and has sought advices from the stakeholders against this move, as they don’t impact national security or public interest at large. The government feels that criminalizing minor procedural lapses directly burden the ease of doing business and it has hence decided to relook at these procedural deficiencies and get rid of prosecutions in such matters to promote the very apparent ailing economy as a part of “Atma-Nirbhar Economic Package”.

Amongst these different Acts, the Central Government wishes to decriminalise, the Micro, Small and Medium Enterprises, small businesses. Most of the citizens are concerned by the proposal to decriminalise Section 138 of Negotiable Instruments Act, 1881 primarily for bouncing of cheques, as this opens doors for great problems in recovery of legitimate business dues and various private loans and act as a strict deterrent to normal businesses instead of directly promoting it.

The Negotiable Instruments Act, 1881 provides an early mode of redressal wherein a cheque, for its discharge of debt or liability, is dishonoured due to lack of funds or where it exceeds initial arrangement. Section 138 therefore, mandates that “such a person shall be deemed to have committed an offence and shall, without prejudice to the other provisions of this Act, be punished with imprisonment for a term which may extend to two years, or with a fine which may extend to twice the amount of the cheque, or with both.”
There have been mixed response to this step by the citizens across the country- The Apex Court, which as of now, is hearing a writ petition on this issue, had asked the Union Government and respective State governments to respond to it. The next date of hearing falls in July. Mr. Shirish Deshpande who is the Chairman of the Mumbai Grahak Panchayat, a reputed consumer rights group, said, “The central government’s draft just says that it wants to decriminalise the offence of cheque bounce and make it a civil offence but it doesn’t give a specific proposal or it’s details – for example what would be the penalty for issuing a dud cheque.”

Adv. Yogesh Israni said, “There is an apparent stigma attached with a person who is appearing in a criminal court and duly applying for bail, and if this stigma goes, then people will freely start issuing dud cheques with impunity and without any apparent fear of law.”
Viren Shah, who is the President of the Federation of Retail Traders Welfare Association, said that, “This will put easily small businessmen who supply goods to big businesses in an unforeseen quandary. The only weapon a small businessman has against the big sharks was that he held a cheque issued by big businessmen and he knew in case od defaults he can drag them to the court but with this strength gone, big businesses can easily walk away by issuing mere dud cheques.”
Lastly, well-known developer and president of the Associated Chambers of Commerce and Industry, India, Mr. Niranjan Hiranandani, widely welcomed this step while stating , “There is no use in having a provision which is not used effectively in its practice. Kindly show me one single person who has been convicted under S. 138 of Negotiable Instruments Act.”

A drawer gets a buffer time of more days for arranging said funds in a case she could not arrange them in her account for any reason. Be it cash or online transaction, availability of funds is a pre-requisite for carrying on any business especially the one in regard. However, with a cheque, a small trader can easily place an instant order with her dealer for urgent supplies by issuing a cheque under her own signature. And then can arrange funds in a day or two. S.138 provides recognition to the ground realities of businesses. This flexibility which offered by S.138, without compromising on any guarantee of payment, is extremely useful for micro and medium level traders who may face issues in arranging funds.

This sense of security added with required flexibility provides a boom to the usage of cheques. Micro, Small and Medium Enterprises (MSMEs) are accustomed to rely heavily on cheques because they associate a sense of security and trust with this instrument and also find it easy to document in their books of accounts. More importantly, a cheque offers immense credible information about the drawer (such as the account number, name, signature etc.) to the payee in order to enable her to maintain faith in these transaction she willingly enters into. It also enables parties to undertake these charge-less transactions and also keeps them away from cyber frauds. In more practical terms, S.138 manages to take care of an indispensable segment of almost any business activity viz. payments and flow of money. This remedy may be said to add credibility to businesses and not to pose a threat to them in these challenging times.

There can be no right or wrong, best or worst in this scenario, given the sensitivity of the subject at hand, only the one who is directly affected can be the best judge. It depends more so on where does one stand the spectrum of business. Although, Through suitable modifications, this legislative policy should aim to definitely protect innocent businessmen in this immense hour of need and not to merely do away an effective tool like S.138.