Decriminalization of Dishonor of Cheque a/u Section 138, Negotiable Instruments Act 1881: A Remedy Viable Enough?

  • Anurag Mohan Bhatnagar & Manvendra Shekhawat

Background:

Since 2014, there are almost 3.5 Crore cases pending in the courts across India. Recently, with a vision of improving the ease of doing business in India, to improve the growth of the economy of the country, and ultimately, reducing unnecessary burden on the Indian Courts, the Finance Ministry has asked for suggestions from the general public on decriminalization of certain offences under various acts which are minor in nature. Notably, one of the provisions that the Finance Ministry looks forward to decriminalize is Section 138 of the Negotiable Instruments Act, 1881 (hereinafter, NI Act) by which bouncing of cheque is an offence.

Apart from the provision of bouncing of cheque, the Finance Ministry has also asked for suggestions on Section 12 of the Insurance Act, 1938, “which criminalizes failure to annually audit balance sheet and other documents of insurers”; criminal sanction for contravention of provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act, 2002, and lastly, “criminal penalty for making false statement as under Section 58B(1) of the Reserve Bank of India Act, 1934.

There are 19 different economic legislations upon which the Government has asked for suggestions. However, in this article, we shall only discuss Section 138, NI Act and the repercussions of the same being decriminalized.

Status Quo:

With the increase in trade and commerce, the use of cheques, as well as related disputes, has also increased. The Parliament in 1988 introduced Sections 138-142 in the NI Act, 1881 to deal with the disputes related to the dishonor of cheques. The object of the same is “to encourage the efficiency of banking operations and to ensure credibility in transacting business through cheques”.

Section 138 of the NI Act makes a person criminally liable for fine or imprisonment or both to the person who has issued the cheque. The section imposes both criminal and civil liability. However, there are some situations where the drawer has no intention of doing such activities and for that, the prosecution can be done only when certain conditions are fulfilled stipulated under the proviso of Section 138.  The prosecution for the dishonoured cheque is only permitted when the notice of the same is envisaged to the drawer by the drawee to complete the required payment covered by the cheque and drawer fails to make the same within the stipulated time given under the Act.

The offence under Section 138 is a non-cognizable & bailable offence and the sentence can be punishment up to two years or fine which can be extended to twice the amount covered by the dishonoured cheque or both. This offence can also be made compoundable between the parties (consent of both the parties is required) and there is no requirement to attain formal permission from the court.  Even if there is no consent, the accused can be discharged if the court is of the discretion that the complainant has been duly compensated.

Analysis: Feasible Solutions

The intention behind imposing a criminal penalty on cases of cheque bouncing was to dissuade people from dishonouring cheques and to secure the credibility of the cheques. It is estimated that currently, 20% of the total cases present before the courts of India are related to dishonouring of cheques which would roughly amount to 4 million cases. Hence, in recollection criminalizing the act of cheque bouncing has not proved to be successful as far as the Indian legal system is concerned.

Here are some of the alternatives to criminalized cases of cheque bouncing apart from decimalizing the provision itself:

  1. Arbitration: The Government is considering an amendment to the NI Act that aims to make it compulsory for the parties to resolve any dispute through alternative dispute resolution. The usage of alternative dispute resolution along with Section 89 of the Code of Civil Procedure through conciliation, arbitration or judicial settlement can be made compulsory in the cases related to bouncing of cheques by making sufficient amendments to the NI Act. Thus, the Government can on one hand decriminalize Section 138, NI Act and on the other make it compulsory for the disputed parties to resolve their conflict via Alternate Dispute Resolution. However, there are only a few numbers of arbitrators who would take up ADR cases, and there is no institutional system of providing arbitral proceedings outside metropolitan cities.
  2. Civil Jurisdiction: the civil remedies were already available to the citizens before the amendment through which the provision was criminalized. This option would enable going back to the same legal system to enforce a contract. Enforcing a contract via judiciary is an excruciating effort as it involves 1420 days on an average to resolve a contractual dispute. As far as practical applications of this alternative are concerned it would not be sufficient. In addition to this, this would also defeat the whole purpose of the amendment. The punishment currently as under Section 138 is of two-year imprisonment and fine extending double the amount mentioned in the cheque. This alternative would however, provide for certainty to the holder and at the same time can prove to be deterrent for the drawer.

What if Cheques are Stunted?:

However, if we consider for one instance that what if, we do away with the whole cheque system itself? For many, it would be a viable option. But practically, it has its own repercussions. We shall discuss both the merits and demerits of the same.

Merits: if the cheque system is abolished, it would be replaced with E-transfer of funds, which is a very safe and fast process. The electronic transfer of funds would prove to be a very efficient way to transfer funds and the biggest advantage with it would be that, it would not be time-consuming and the creditor need not go to a bank to encash a cheque in order to get the money. However, this method has its consequences as well. For instance, if the transfer failed, then the creditor might not have sufficient proof to say that he did not receive the money at all.

Demerits: although physical cheques are widely followed in India, at the back end, they have been modified into ‘digital cheques’ since the banks have implemented the Cheque Truncation System (CTS). It was brought up by the RBI. This system provides banks with the freedom to circumvent transporting a physical cheque from the presenting bank to the drawee bank. Via CTS, an image of the cheque has to be sent to the drawee bank. Hence, the time required to clear the cheque is reduced.

It is quite possible that the onset of demonetization has increased the cheques since it stunted cash transactions. Cheques prove to be an expensive ordeal. If a ban happens, banks would not be affected since they have already shifted to CTS. It would not prove to be much impactful on retailers in the urban areas at least since; they can use UPI method to transfer money. Practically, it would not be feasible for the people residing in rural areas who still have cheques as the only medium to transfer money.

Comparison with the Legislation in other Countries:

Legislators can always come up with the solutions by penetrating in the legal system of other countries to find if they have dealt with those problems in a better way. For instance, one of the best practices for the dishonour of cheques is followed in France. After a cheque is dishonoured, the bank will charge an amount known as service charge from the defaulter. The banks also have the power to add a person who frequently defaults the payments in the central register called the Fichier Central de Chèque. The person can also be banned by the bank from issuing cheques for five years.

Another example is the USA where some of the states have the provisions which gave the power to banks to increase the penalty for successive cheque by a person. This type of provision can act as a deterrent for frequent defaulters.

There is no such law of banning the person from issuing of cheques in India and the service charge which is charged from the defaulters is so less that it is of no significance. Parliament can come up with a new law where the bank has the power to report the name of the frequent defaulters in a central database along with an increase in penalty irrespective of the value of the cheque. Banning the frequent defaulters from issuing cheques for a certain period is also an effective deterrent which can be replicated in India by keeping in mind the increasing cases.

Conclusion and Suggestive Remarks:

In conclusion, the move of Finance Ministry to decriminalize Section 138, NI Act is welcomed and we surely think that the move would definitely lessen the burden which currently the judiciary is facing in India. A major drawback with Section 138, NI Act is that it mentions both punishment and fine without considering the presence of intention. It would be highly helpful if the provision is done away with and only civil liability must remain i.e. only fine should be implemented which can be doubled or tripled depending upon the gravity of the offence.

The authors are 2nd Year students at NLU, Odisha

CCI’s probe into alleged anti-competitive practices, E-Commerce market report and need for a revamped mechanism

  • Ashhab Khan & Janhavi Singh

Introduction

E-commerce is indisputably the fastest evolving sector in India because of increased access to the internet and developing technology, both of which have led to an increase in consumer demand. It was further boosted with the relaxation in FDI norms due to which many international players entered the Indian markets and there was easy access to funding opportunities.

The year 2020 started with the Competition Commission of India (“CCI”) publishing the “Market Study on E-commerce in India” on 8th January. It is a report which encapsulates features of e-commerce and trends in the market, major competition issues, observations and findings. Further, on 13th January the commission ordered an investigation into Flipkart and Amazon for alleged anti-competitive activities.

The Indian Competition law regime is new to such developments in the E-Commerce sector and thus, the abovementioned report and case may provide a foundation for CCI to endorse competitive practices in the market. The authors, through a careful examination of the cases and the study, aim to highlight the need to check anti-competitive behaviour in the E-Commerce sector and its negative impact on the physical market.

Background of the Case

The order on the agenda is regarding the allegations made against Flipkart and Amazon, the two undisputed mammoths of the “Internet shopping era”. It first surfaced in the case of Delhi Vyaapar Mahasangh v. Amazon Seller Services Pvt. Ltd.(Amazon) and Flipkart Internet Services Pvt. Ltd.(Flipkart), where the informant alleged that sections 3 and 4 of the Competition Act, 2002 were said to have been violated by the defendants by possibly entering into vertical agreements with smartphone companies and manufactures based in China. Furthermore, the informants contended that the opposite party palpably enjoyed a dominant position in the market and was practising predatory pricing, which was apparently plausible owing to their exclusive tie-ups with the preferred companies. Through predatory pricing, the companies are able to set their market prices low and attract substantial consumer preference and consequently, several competitors face a threat of being thrown out of the business. It was also insinuated that this discriminatory practice undermined competition and in the long run, may prove to be detrimental to other sellers, therefore, affect the fair distribution of products.

The commission acknowledged the implications and noted that there is an incontestable potential to hamper competition and it may ultimately lead to Appreciable Adverse Effect on Competition (AAEC). While it was alleged that the companies practised collective dominance, the commission quashed it as the Competition Act, 2002 has no provision regarding the same. On account of such allegations and relevant evidence produced by the informant and available in the public domain, the director-general (DG) was instructed by the commission to look into the matter immediately and determine whether or not section 3(1) and section 4(1) of the were compromised by the defendants in the course of their business.

Later, Amazon India filed a writ petition in the Karnataka High Court to seek redressal. In its petition, the company submitted that CCI does not hold lawful jurisdiction over the matter and therefore cannot issue an investigation order into the adopted course of action of the company. It also pleaded against the absence of representatives from any relevant E-Commerce platforms during the hearing and CCI’s apparent ex-parte decision. Due to this, the petitioners said that there was a lack of opportunity extended to present a counter proposition to all the allegations hurled against them. The high court principally noted CCI’s diffidence in defining the relevant market in the present case as dominance cannot be established in isolation of the existence of a relevant market.

To substantiate its assertion, Amazon cited a similar case presented before CCI in November, 2018 where it had quashed All India Online Venders Association (AIOVA)’s postulation against Flipkart India stating that such companies do not enjoy dominant position in the market and thus, cannot violate section 4(3) of the Competition Act through their policies. Furthermore, the petitioner had shed light on the fact that CCI acted on a mere possibility that it “appears that the E-commerce companies are in exclusive agreements with smartphone brands”. Subsequently, Karnataka High Court on 14/02/20, issued an interim stay of four weeks on CCI’s investigation order. The High court later reiterated its decision in a writ petition filed by Flipkart India challenging the probe. Therefore, the high court’s stand in both cases presents a counter to CCI’s approach in disposing of issues emerging out of the expanding E-commerce market in India. It also raises a pertinent question regarding the need to adopt an effective mechanism helpful in timely determining whether or not E-commerce platforms are indulging in anti-competitive behaviour and are detrimental to the market.

Market Study conducted by CCI

The report “Market Study on E-commerce” released by CCI, aims to understand the modus operandi of the E-commerce market and identify emerging hindrances to competition and to ascertain CCI’s enforcement and advocacy priorities in light of the same. Since the revenue from the E-Commerce sector in India has been increasing at an annual rate of 51%, there are various challenges present in this sector in the competition sphere and this report is seen as a resource to overcome such challenges.

The study inspects the issue of platform neutrality and acknowledges that in both cases i.e. preferential sellers and private labels, there exists a lack of transparency mainly regarding search-ranking criteria, use of black-box algorithms and commercial terms offered by platforms, which may put other retailers on the platforms at a disadvantage. It concedes that there are limits to the data that can be unconcealed as it may raise the risk of businesses to game the systems. But this shouldn’t curb the platform to reduce the risk and hence should ensure ample transparency.

For exclusive agreements, it was observed that while it can increase prices and reduce choices, it can also increase efficiencies and competition among the brands of different manufacturers or service providers. Hence, it has to be analysed on a case-by-case basis and the commission can examine them u/s 3(4) of the Act in a ‘rule of reason framework’.

Deep discounts are significantly more than usual discount as there is a greater reduction in price as compared to the product’s original value. The CCI contemplated the requirement to recognize the schemes of discount used because the extensive deep discounts have a propensity to push costs below the price levels. While from the viewpoint of the consumers, so as to appeal to the demand, it’s vital to assimilate a moderate approach for discounting, as the same cannot be entirely done away with. Deep discounting raises apprehensions such as unfair conditions due to differential discounting structures, demotion in rankings, profitability erosion and loss of brand equity, etc. for retailers. The study further acknowledges that while deep discounts promoted customer on-boarding and increased network effects, no distinguishable cost-savings arose from it. Duly, it concludes that even though discounting for a short duration might be justifiable, longer periods would be put through a fact-intensive analysis. Thus, CCI has firmly emphasised to adopt a case-by-case review structure.

From the recapitulation of the study it is apparent that it envisages, the Commission’s intelligible intentions regarding online markets and transactions underneath their umbrella. This report shall be presenting a strict framework to closely monitor and initiate high-level investigations in this sphere. In the times of the widespread COVID-19, the consumers have moved to online platforms more than ever to purchase all kinds of goods ranging from essential supplies like groceries to electronics, kitchen appliances, clothes, toys & games etc. Hence, it is to be ensured that the practices adopted by such portals do not result in distorting the primary free-flowing market mechanisms of demand and supply.

Conclusion         

A heedful and detailed analysis of CCI’s venture into the functioning of E-commerce giants in India and the ensuing disapproval shown by the judiciary conveys vital insight into the complications faced by the commission in taking futuristic steps to dodge anti-competitive practices in the internet era. While the probe ordered by CCI to enable the DG to investigate into the purported defiance of provisions laid under the competition act by E-Commerce platform is essential, it becomes incontestable that the commission doesn’t make arbitrary assumptions or relies upon dubious assertions when it comes to establishing responsibility. Moreover, taking into consideration the contemporary consumer preferences, relaxed FDI norms and business avenues emerging out of it, it is undoubtedly agreed upon that brick and mortar stores or physical retail markets are taking a steady backseat and online shopping is hitting the roof.

 In such circumstances, the commission should adopt a more cautious strategy to efficiently deal with cases involving discrepancies as the one discussed above and penalize every anti-competitive practice taking place in the market impartially and irrespective of the players involved. This carefully moulded approach paired up with modifications in the Competition Act to sustain the physical market and sellers in the constantly evolving world of E-Commerce and its perceptible dominance is need of the hour.

The authors are 2nd Year students at NLIU, Bhopal

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