Decriminalising Section 138 of Negotiable Instruments Act

By | July 3, 2020
Decriminalising Section 138

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Decriminalising Section 138 of the Negotiable Instruments Act is the need of the hour as it would decrease the burden on businesses and facilitate economic growth.

Decriminalising Section 138 of the Negotiable Instruments Act

Chapter XVII of the Negotiable Instruments Act containing Section 138-142 was incorporated to make sure that the drawer fulfils his obligation, and people develop confidence in the credibility of negotiable instruments. Section 138 to 142 discusses the penalty in the case of dishonour of cheque due to insufficient funds in the account of drawer. The said provisions also discuss pre-conditions for instituting suit and the penalty in case of failure to pay the required amount.  The defaulter can either be punished for a term which may extend to 2 years or with twice the amount of the cheque, or with both.[1]

Time and again, several petitions were filed questioning the constitutionality of Section 138 and criticising the provision that criminalises a civil wrong. The jurisprudence of civil wrong only talks about restitution for wrongdoing by imposing a financial penalty.

Recently, the government too realised that penalising this provision is a hurdle on smooth conduction of businesses and has an impact on the ease of doing business. [2] In this article, the arguments supporting the decriminalisation of Section 138 are being discussed in detail.

It is just a Civil wrong

The primary and foremost important issue with Section 138 is that it criminalises a civil wrong. The purpose of civil wrong is restitution for breach of contractual obligation and time and again notable judgements have held that the purpose of Section 138 is primarily compensatory.[3]

The insertion of criminal punishment in a civil wrong provision is diluting the purpose of making a clear demarcation between criminal law proceedings and civil law proceedings. Article 11 of the International Covenants on Civil and Political Rights states that no one shall be imprisoned merely on the ground on the inability to fulfil a contractual obligation.[4] Thus, a civil proceeding giving rise to imprisonment can entirely defeat the purpose of the protection afforded to the defaulter.

Same concern was reiterated in the government notification too, where it says:

“Criminalizing procedural lapses and minor non-compliances increases the burden on businesses and it is essential that one should re-look at provisions which are merely procedural in nature and do not impact national security or public interest at large.”[5]

In the case of Kaushalya Devi Massand vs Roopkishore Khore[6], it was held that “an offence under Section 138  is almost in the nature of a civil wrong which has been given criminal overtones and the gravity of such an offence cannot be equated with an offence under the provision of IPC or other criminal offence.[7] The Supreme Court also ruled that the object of provision is primarily compensatory and the offence under Section 138 is primarily a civil wrong.[8]

Section 138 is ultra vires the constitution

Various petitions were filed questioning constitutionality of Section 138 due to its penal nature. As we have already discussed, the demarcation between civil and criminal law is due to the difference between the subject matter of both the crimes and thus,  bringing civil wrong under the purview of criminal law is unjustified and unreasonable.

Article 14 protects equality before the law and provides that the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.[9] In the case of Section 138 violation of Article 14 has been alleged only on the ground that the Negotiable Instruments Act speaks of promissory notes, bills of exchange and cheques, but Section 138 makes punishable certain acts committed in respect of cheques only.[10]

The law creates a distinction between debts and the punishment that the defaulter may attract. For example, in the case of bankruptcy, the defaulter is only liable to pay back the creditor by selling the assets. Similarly, in case of breach of contract, the Indian Contract Act only imposes monetary compensation,  thus imposing criminal liability only in case of non-payment of cheque amount is discriminatory in nature.

Also, major countries discourage debtors’ prisons. The UK has decriminalized the law related to failure to repay the debt in 1869. Similarly, the US banned the debtors’ prisons in 1833. India is a party to International Covenant on Civil and Political Rights, and it also forbids imprisonment of people for failing to discharge their contractual obligations.[11]

Article 21 of the Constitution is in conformity with the inherent dignity of the human person in the light of Article 11 of the International Covenants on Civil and Political Rights.[12] In the case of Jolly George Verghese v. Bank of Cochin[13], the Supreme Court struck down the provision allowing for civil imprisonment as unconstitutional for being violative of India’s international obligations. Thus, giving place to such a law under the Negotiable Instruments Act is clearly violative of Article 14 and Article 21.

Mens Rea: Important ingredient for imposing criminal liability

It is evident that mens rea (guilty mind) is an important ingredient to constitute a criminal act. But in the case of Section 138, the legislature removed the requirement of mens rea and thus bringing this provision under the purview of Strict liability. Thus, the drawer of the cheque is liable under Section 138,  even when he was unaware of the fact that there was insufficient balance in his bank account. Negotiable Instruments act does not consider that the drawer acted in good faith and, thus it imposes an unreasonable burden on the defaulter.

A defence of an accused in a prosecution for an offence under Section 138 that the drawer had reason to believe when he issued the cheque may not be dishonoured on presentment is reasonable defence and section 140 of the n.i. act which provides that such defence shall not be a defence in a prosecution for an offence under Section1 38 of the n.i. act is arbitrary and most unreasonable and therefore, cannot be allowed to stand and the same deserved to be struck down.

Mens rea is an important essential for constituting any crime, and the same has also been observed in government notification:

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.[14]

Overburdened judiciary: 213th Law Commission Report

It is quite evident that India’s judiciary is quite overburdened,  and it can take several years to decide a case. The 213th Law Commission report dealt with the same issue,  and it was stated that almost 20% of the pending cases related to cheque dishonor disputes.[15] In such a scenario, it would be in great to take a step to stop overburdening the judiciary. Switching to alternate disputes resolution would be in the best interest.

To date, there is no specific provision under Code of Criminal Procedure that allows a criminal court to refer the parties to move to a forum for alternate dispute resolution but once the said provision is decriminalized the matter would come under the jurisdiction of civil court and Code of Civil Procedure has provision for alternative remedies. Arbitration, Conciliation, judicial settlement, including settlement through Lok Adalat or mediation, find statutory recognition under Section 89 of the Code of Civil Procedure.[16]

Conclusion

The article has enlisted all the arguments that justify decriminalizing Section 138, and the government also realized that it is need of the hour because it would decrease the burden on businesses and facilitate economic growth. The judiciary is already overburdened with cheque bounce cases, and resorting to alternate dispute redressal is the best solution in such a scenario.

The Supreme Court also realized this and stated the same in various judgments. With time, it is essential to make changes in the law to meet the present demand of the society. Decriminalizing Section 138 is now needed more than ever because of slow economic growth.


By – Anjali Patel, Student (B.A.L.L.B)
National University of Study and Research in Law

[1] Negotiable Instruments Act, 1881, Section 138.

[2] Statement of Reason: Decriminalisation of Minor Offences For Improving Business Sentiment And Unclogging Court Processes, Ministry of Finance, Department of Financial Services, 8th June 2020, Available Here

[3] Alok Kumar v. State of Jharkhand

[4] International Covenant on Civil and Political Rights, 1996, Article11.

[5] Statement of Reason: Decriminalisation of Minor Offences For Improving Business Sentiment And Unclogging Court Processes, Ministry of Finance, Department of Financial Services, 8th June 2020, Available Here

[6]  (2011) 4 SCC 593

[7] Id

[8] Meters and Instruments Private Limited v. Kanchan Mehta, (2018) 1 SCC 560

[9] Indian Constitution, 1950, Article 14.

[10] Smt. Ramawati Sharma v. Union Of India And Ors., 1998 (2) ALD Cri 788.

[11] International Covenant on Civil and Political Rights, 1996, Article11.

[12] Rajinder Steels Ltd. And Others vs Union Of India & Another, 2000 CriLJ 625

[13] 1980 SCR (2) 913.

[14] Statement of Reason: Decriminalisation of Minor Offences For Improving Business Sentiment And Unclogging Court Processes, Ministry of Finance, Department of Financial Services, 8th June 2020, Available Here

[15] Report 213, Law Commission of India, Available Here

[16] Code of Civil Procedure, 1908, Section 89.


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