INTRODUCTION

What is a cheque?

Section 6 of negotiable Instruments act defines “cheque” as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. Section 138 of the Negotiable Instruments Act, 1881, is a crucial provision that deals with the offence of dishonour of a cheque for insufficiency of funds or if it exceeds the amount arranged to be paid by the drawer’s account. This section has been a subject of extensive debate and analysis, given its significance in the realm of commercial transactions and financial dealings. In this critical analysis, we will delve into the various aspects of Section 138, examining its historical background, legal implications, judicial interpretations, and its impact on the business and legal landscape.

HISTORICAL BACKGROUND

In the business sector, negotiable instruments have long been recognised as one of the most practical ways to send money. Prior to 1988, there was no strict legal mechanism to penalise those who wrote checks without having enough money in their account or any effective legal measure to prevent them from doing so. Naturally, there was a civil obligation for cheque dishonour. Dishonouring a check should be made a criminal felony in order to safeguard the check’s drawee. The Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 introduced Sections 138 to 142 for such reason. This was done by making the drawer liable for penalties in case of bouncing of the cheque due to insufficiency of funds with adequate safeguards to prevent harassment of the honest drawer.The object of this amendment Act was a) to regulate the growing business, trade, commerce and Industrial activities. b) To promote greater vigilance in financial matters. c) To safeguard the faith of creditors in drawer of cheque. The Hon’ble Supreme Court in the matter of Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249, observed that “The object of Chapter XVII, containing Sections 138 to 142, is to promote the efficacy of banking operations and to ensure credibility in transacting business through cheques.” The objective was to instill confidence in the business community and ensure the smooth functioning of negotiable instruments.

INGREDIENTS

The essential ingredients of the offence as contemplated under Sec.138 of the Act were pointed out by Supreme Court in the matter of Kusum Ingots and Alloys Ltd vs Pennar Peterson Securities Ltd, (2000) 2 SCC 745 which reads as follows:

1. Section 138 lays down specific elements that constitute the offense. The drawer’s cheque must be dishonored due to insufficient funds or if it exceeds the amount available in the drawer’s account. The drawer must be liable to pay the amount on the cheque at the time of its presentation.

2. That cheque has been presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity whichever is earlier;

3. The holder of the dishonored cheque is required to give notice in writing to the drawer within 30 days of receiving information about the dishonor. The drawer then has 15 days to make the payment. Failure to comply with this notice results in legal consequences.

4. Unlike other civil remedies, Section 138 imposes criminal liability on the drawer. The drawer can be punished with imprisonment or a fine or both. This criminalization aims to act as a deterrent against the issuance of cheques without adequate funds.

ANALYSIS OF THE PUNISHMENT UNDER SECTION 138 OF NI ACT

Section 138 stipulates that the maximum penalty for an offence is two years in prison, a fine that can be as much as double the fine, or both. The compensatory aspect of the provision is paramount to the punitive aspect of the provision, as was previously discussed in Section 138. This means that even though the statute calls for imprisonment in certain situations, the court’s first impulse will be to find suitable measures to compensate the complainant. The question of why we have the option of jail in the first place therefore becomes apparent. In Makwana Mangaldas Tulsidas v. State of Gujarat (2020), the issue of Section 138’s decriminalisation was initially raised by a division bench made up of then-Hon. Chief Justice S.A. Bobde and Hon. Justice L. Nageswara Rao. They noted that while Section 138 dealt with civil wrongs that were justified in 1989, the offences listed could be decriminalised at the same time. In the matter of Karmayogi Shankarraoji Patil and Ors. v. Ruia & Ruia Pvt. Ltd. and Ors. (2022), the Bombay High Court has also taken into consideration the subsequent ruling rendered by the Supreme Court. Furthermore, a division bench of the Supreme Court made up of Hon. Justice D.Y. Chandrachud and Hon. Justice B.V. Nagarathna noted in the Gimpex Private Ltd. v. Manoj Goel (2021) case that Section 138’s status as a criminal offence in India has negatively impacted the ease of doing business in the country and discouraged investors from making investments there. By highlighting this issue, the court has made its inclination towards decriminalising Section 138 more evident.

Is decriminalising section 138 of NI Act a correct approach?

The majority of the time, when such acts are committed, there is some element of deception that, should Section 138 be decriminalised, will remain unpunished, and it may even serve as an incentive for some dishonest individuals. Furthermore, Chapter XVII of the Negotiable Instrument Act, 1881, which accepts Post Dated Cheques (PDCs) as a security for extending trade credits, has been widely used in the mercantile community. This has made transactions more convenient and trustworthy, but it will have a severe impact on transactions where the deterrent of dishonouring checks plays a significant role. The primary aspect that needs to be taken into account is that, in accordance with Section 420 of the Indian Penal Code, 1860, which prohibits deceitfully coercing someone into delivering their property, the complainant is always entitled to file a formal complaint and begin criminal proceedings against the accused. The intention of decriminalising checks will be undermined, and the courts will be burdened even more. Decriminalisation will encourage cash transactions, take the nation one step closer to its cashless economy objective, and accelerate the flow of illicit funds into the economy.

What could be the middle way in such cases?

Legislation may establish a cap on the amount up to which there are no criminal penalties; but, if the cheque exceeds the cap, there may be criminal penalties. The drawer whose drawn check bounces can have his Credit Information Bureau (India) Limited score decreased to discourage him from dishonouring future checks. Promoting alternative conflict resolution procedures like conciliation and mediation can help to address the issue of case pending. In the jurisdiction of Scotland, an intriguing solution has been proposed, which is to attach the funds in the drawer’s bank until the bank receives the remaining funds from the drawer to honour the cheque, or until the payee provides a letter to the bank proving to the court that he no longer has any interest in the cheque.

SOME IMPORTANT CASE LAWS W.R.T SECTION 138

Section 138 of the Negotiable Instruments Act, 1881, deals with the offense of dishonor of a cheque for insufficiency of funds or if it exceeds the amount arranged to be paid by the drawer’s account. Here are some important case laws related to Section 138 of the Negotiable Instruments Act:

Dishan Kumar Agarwal v. Laxmi Steels (2016):

● In this case, the Supreme Court held that even in the absence of the words “account closed” or “payment stopped,” the drawer could still be held liable under Section 138 if it is proved that there were insufficient funds at the time of presentation of the cheque.

Laxmi Dyechem v. State of Gujarat (2012):

● The Supreme Court clarified that the drawer’s liability under Section 138 is a strict liability, and the drawer cannot escape liability by alleging that there was no intention to cheat or that the cheque was issued for some other purpose.

K. Bhaskaran v. Sankaran Vaidhyan Balan (1999):

● This landmark judgment laid down guidelines for the prosecution of offenses under Section 138. It introduced the concept of a notice to the drawer within 15 days of the dishonor of the cheque, allowing the drawer a 15-day period to make the payment.

M/s Meters and Instruments Private Limited v. Kanchan Mehta (2018):

● The Supreme Court emphasized that the territorial jurisdiction for filing a complaint under Section 138 is determined by the place where the cheque is dishonored. This judgment clarified the confusion regarding the appropriate jurisdiction for filing such cases.

Dashrath Rupsingh Rathod v. State of Maharashtra (2014):

● This case highlighted that the drawer can be held liable under Section 138 even if the cheque was issued to discharge a time-barred debt. The Supreme Court clarified that the limitation period for filing a complaint under Section 138 is one month from the date on which the cause of action arises.

IMPACT ON BUSINESS

1. Business Confidence:

Section 138 has played a significant role in enhancing business confidence by providing a legal mechanism to address the issue of dishonored cheques. The provision acts as a deterrent, discouraging individuals from issuing cheques without sufficient funds.

2. Legal Formalities:

The strict adherence to procedural formalities, especially in the service of notice, has been criticized for creating technical loopholes that could be exploited to escape liability. Some argue for a more balanced approach, ensuring that genuine disputes are not unnecessarily criminalized.

3. Efficiency in Commercial Transactions:

While Section 138 aims to streamline commercial transactions, concerns have been raised about the criminalization of what might be routine business disputes. This has led to a call for reforms to balance the interests of justice and the smooth functioning of commerce.

CRITIQUE AND SUGGESTIONS FOR REFORM

1. Procedural Rigidity:

The strict procedural requirements for notice have been criticized for being overly rigid. There is a need for a more flexible approach that takes into account the practicalities of business transactions while still ensuring the rights of the parties involved.

2. Threshold for Criminal Liability:

Some argue for a reevaluation of the threshold for criminal liability. There should be a distinction between cases involving willful default and those arising from genuine commercial disputes. Imposing criminal consequences in every case may lead to an undue burden on the legal system.

3. Alternate Dispute Resolution Mechanisms:

Encouraging the use of alternative dispute resolution mechanisms, such as mediation or arbitration, could provide a more expeditious and cost-effective resolution of disputes arising from dishonor of cheques.

4. Educating Stakeholders:

Efforts should be made to educate stakeholders, especially small and medium enterprises, about the legal implications of issuing post-dated or unfunded cheques. Awareness can contribute to a reduction in unintentional violations of Section 138.

CONCLUSION

Section 138 of the Negotiable Instruments Act, 1881, represents a crucial legal provision that addresses the issue of dishonored cheques in commercial transactions. While it has contributed to instilling confidence in business dealings, there are legitimate concerns about its procedural rigidity and the imposition of criminal liability in all cases. A balanced and nuanced approach, possibly through legislative reforms, is essential to ensure that the objectives of Section 138 are achieved without unduly burdening the legal system or causing unintended consequences for businesses. As commercial practices evolve, the law must also adapt to strike a fair balance between protecting the rights of the parties involved and promoting the efficiency of commercial transactions.