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

  • Anurag Mohan Bhatnagar & Manvendra Shekhawat


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