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Section 138 flyer – AM

Anant Merathia & Associates   →  Section 138 flyer – AM

Section 138 flyer – AM

DECRIMILISATION OF SECTION 138 OF NI ACT, 1881 – CHEQUE BOUNCE CASES – GOVT. CONSIDERING – CONCERNS

The Government of India via its Notification dated 08.06.2020 plans on decriminalising an array of economic offences, reclassifying them as civil offences under the law.

It is evident from the notification of the Government of India that their objective is to enhance the ease of doing business in the country especially in the present troubled times and also reduce the backlog of cases pending before courts. Further such decriminalisation will also lead to less a number of such cases being filed for procedural offences.

In light of the Covid-19 pandemic and the immense destruction it has caused to businesses, it is essential for the Government and the Ministry of Finance to bring forth necessary reclassifying of offences with the objective to elate confidence among investors, ensure stability of economic growth and reduce huge burdens being faced by businesses today.

The government at this point has only sought for public comments and views and will of course decide based on the feedback and possibly other factors as it may deem necessary.

Principles that are to be taken into consideration while reclassifying criminal offences:

  • Decrease the burden on businesses and inspire confidence among investor;
  • Focus on economic growth, public interest and national security should remain paramount.
  • Mens rea (malafile/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
  • The habitual nature of non-compliance

Intent of parties and the angle of habitual nature have to be critically looked into from the perspective of the creditor to whom such as cheque has been issued. Some of the concern areas and observations from our side are as below

OBSERVATIONS:

  • Section 138 was introduced as a criminal offence only in 1889 by way of an amendment to the Negotiable Instruments Act, 1881. The intent of the legislature was crystal clear in making such offences criminal in nature. However, given the current turmoil the economy is facing, maybe the Government deems fit that the same has no backing criminal sanction.
  • A statement was being made by the Ministry of Finance stating that provisions which are merely procedural in nature are to be re looked into. Whether the offence of the cheque bounce attracting section 138 can be seen as a procedural offence in nature will depend on the intent and several other circumstances around the transaction. Hence this requires critical scrutiny.
  • The concept of “Ease of doing business” is given heed in multiple occasions by the Government of India; reclassification of offences may not prove to be an attractive phenomenon for investors to invest their money in India. Criminal sanction for non-compliance is a colossal aspect to attract investments.
  •  The essence of filing of Section 138 cases under the Negotiable Instruments Act,1881 will be lost if the same is decriminalized and it will no longer be considered as a grave offence under law. The probability of committing such a grave offence shall become common practice with no penal provisions in place to prevent fraud and the likes.
  • Cheques as bills of exchange have always had a certain sanctity and value amongst businessmen in course of their transactions. If the proposal to decriminalize the offence under Section 138 goes through, then status of creditors under such a regime will be at a much lower pedestal than the issuer of the cheque who typically would be the debtor in a large number of transactions in the Indian business and finance ecosystem.
  • Banks, financial institutions as well as NBFC’s will be severely impacted by such an amendment and will always have to bear in mind the repercussions of their actions when it comes credit facilities being provided by them. This coupled with the need of funding in this recession/downfall along with several packages promising security free loans will make recoveries a serious challenge going forward.
  • Operational Creditors too will take a huge blow as accepting post dated cheques is their primary course of securing payments in the due course for supplies made on credit basis. As it is operational and trade creditors are at a lower pedestal even in laws such as IBC, 2016 apart from the fact that there are other legal remedies of civil nature are time consuming. In this background, decriminalising a cheque bounce offence will have a huge bearing on their businesses.

The proposed changes to remove the provisions of imprisonment eliminate the fear of criminal prosecution and litigation which is the main factor considered for making timely payments of cheques. While certainly there are cases where this could be negligence or a procedural lapse in which case certainly the person obligated to pay shall do the needful; but for habitual offenders this will be a huge relief and unfortunately encouraging them to continue the same.

Blanket decriminalization of Section 138 is certainly not a solution and if at all done has to be on a subjective case to case basis and factors such as the credit history, track record of the defaulter have to be factored in before a decision of imprisonment is made even if there is a decriminalisation attempt.