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Author: Govind Hari Lath

Faculty of Law , Delhi University


The Ministry of Finance, Government of India on June 8, 2020, issued a Notification of ‘Statement of Reasons’ seeking suggestions from various stakeholders, on its proposition of decriminalising numerous economic offences including the decriminalisation of Section 138 of the Negotiable Instruments (NI) Act, 1881, which holds the drawer of a cheque criminally liable, in the event the cheque gets dishonoured.

The proposal comes on the backdrop of an economic slowdown posed by the unprecedented challenges on account of Covid-19, which has caused a hard-hitting impact, resulting in huge unemployment and business losses. This move is aimed at encouraging businesses and trade by increasing the investment from both the domestic and foreign investors, thereby boosting and reviving the economy.

The Hon’ble Finance Minister hinted about this significant predevelopment in her February’s budget speech 2020-21, where she highlighted on introduction of changes in acts civil in nature, having criminal liability. However, the proposed amendment seems to contradict with the object and extent of Section 138 itself for which it was legislated.

This post discusses a brief background of framework of cheques, followed by the circumstances that are mulling the government to decriminalise it. The author has also discussed on the repercussions that decriminalisation may lead to and delves into the alternatives that can be taken into account by the government.


Cheque, which is a crucial component of the negotiable instruments have always been in use in the commercial world, as the most preferable and convenient mode of transferring money. However, with the increase in commercialisation, the disputes related to cheque bounce and thereafter the civil proceedings have also escalated. Consequently, to affirm its credibility, chapter XVII of the Act was introduced by the Banking, Public Financial Institutions and Negotiable Instruments Law (Amendment) Act, 1988, which comprised of Sections 138 to 142.

Section 138 imposes criminal liability on unscrupulous drawers of cheques, by punishing the defaulters with imprisonment for a maximum of two years, or with fine extending to twice the amount of the dishonoured cheque, or both. The imposition of criminal liability is exempted from the prerequisite of proving mens rea, which depicts that the Parliament intended to ensure financial commitments in dealings and promote strict vigilance to evade callous attitude in the discharge of debts, thereby ensuring smooth functioning of business transactions.

The Bombay High Court has also in Mayuri Pulse Mills v Union of India, iterated that legislature can institute an offence of absolute/strict liability, where mens rea is not necessary in matters, involving public interest and by doing so in Section 138, it has tried to implement the objective sought to be achieved by the section and put a check on instances of deliberately delaying the payment.

Similarly, the Hon’ble Supreme Court in Modi Cements Ltd v Kuchil Kumar Nandi, observed that the intention behind incorporating Section 138-142, is to boost the effectiveness of banking operations and ensure integrity in transacting businesses through cheques.


The grounds on which government has proposed decriminalisation are stated below briefly:

I. Ease of doing business: The criminal penalty including imprisonment for minor offences acts as a hindrance for creating an investor and business-friendly sentiment since the uncertainty and time consumed in resolving legal disputes in courts take ages.

II. Unclogging the Judiciary: The 1988 amendment was aimed at providing adequate safeguards to the cheque-holders, however, it ended up overburdening the already jam-packed judicial system. Going by the 213th Law Commission Report, the criminal courts still has over 38 lakh pending cases of dishonour of cheques, which is almost 20% of the total pendency of criminal matters. Recently, the Supreme Court in Makwana Mangaldas Tulsidas v The State of Gujarat, pushed for decriminalising dishonour of cheques with smaller denominations.

III. Significance of Mens Rea and the need to re-classify offences: Mens rea is a decisive factor for determining criminal liability, and due to simple acts of non-compliance/omissions and minor lapses not amounting to malafide intention/fraudulent conduct, criminal proceedings increases the unwanted burden on businesses.

IV. Reviving Economy and Cash-less transactions: Decriminalising this offence would serve as a catalyst for the investors and also attract investment from foreign players, besides pushing forward the government’s goal for a cashless and digital economy.


I. Frustrate the intention of the enactment: The provision was promulgated to inculcate a fear of criminal prosecution and that the cheques are duly honoured. Decrimnalising will shrug off such fear and will take a hammering on the credibility of the transactions made through cheques. Ultimately, the objective sought by the government of ease of doing business may instead have a cascading effect.

II. Impetus to circumvent taxation: Since the cheques would lose its legal sanctity on account of increase in instances of dishonour, another goal of the government of cash-less economy will take a back-seat, as there will be a surge in cash transactions and unaccounted money, which would amplify the spirits of the traders to evade the taxation process.

III. Multiplication in filling of civil cases: Since the criminal prosecution will cease to operate, filling of civil proceedings will increase, which itself is more time-consuming and costly as compared to criminal proceedings. Thus, indirectly there will be a relocation of cases from criminal to the civil side.

IV. Present law safeguards honest drawers: The present provision under Section 138 affords enough protection to the drawers in terms of the time-frame provided to them from receipt of the notice for payment till the date on which the matter is filled in the court.

Further, Section 147 of the Negotiable Instruments Act, establishes the offences under the said act as compoundable which enables the parties to settle at any stage of proceedings and the drawer can escape from further prosecution. In this light, it is pertinent to refer to the order made by the Himachal Pradesh High Court in Inder Singh v Sesu, where the order of conviction passed against the drawer was quashed by the High Court using its inherent powers u/s 482 of Crpc, as the matter was compromised between the parties.


I. Degrading the CIBIL Score of the drawer: CIBIL Score, which reflects the creditworthiness, based on an individual’s borrowing and repayment history, is a determinant factor in getting the loan sanctioned from banks. The higher one scores, better are the chances of getting the loan approved. Matters of cheque bounce can be included herewith, thereby decreasing the defaulter’s score to discourage the cases of dishonour.

II. Adopting a blanket penalty imposition without Court’s intervention: Amendment should be brought in order to adoptsimilar laws as prevalent in UAE, where the defaulters for cheques with AED 200,000 or less can be penalised directly by the Dubai Public Prosecution without referring the matter to courts. Only penalty is imposed and there is no detention.

III. Lok Adalats and Alternative dispute resolution (ADR): A hassle-free resolution could be achieved by resorting to Lok Adalats emanated under Legal Services Authority Act, 1987, as has been observed by Indian Courts from time-to-time that, an award given by Lok Adalats in Section 138 matters, settled out by compromise has to be treated on par with a decree capable of execution by a civil court. Similarly, arbitration and mediation could also serve as an effective remedy. Recently, the Delhi High Court in Dayawati v Yogesh Kumar Gosain, held legal the adaptation of this model in the adjudication of Section 138 disputes, as Section 89 of the CPC also recognises it.

IV. Maintaining an internal database for blacklisting: An Internal database and vigilance committee can be set up within the banking system so that the habitual offenders, who are bent on abusing the instrument, with a malafide intent can be blacklisted for a certain number of years from utilising the banking services. In Japan, an almost similar practice is adopted, where if an account holder has two bounced cheques in six months, such account will be suspended for a period of two years.


In the present scenario of global economic slowdown, it is imminent that the government is experimenting numerous financial measures to stimulate the economy, however along with open policy-making, keeping a pace with legal reforms is also desirable.

Taking note of the repercussions of the proposed amendment, the author recommends not to decriminalise the particular section, as it may have an adverse impact and suggests the government to adopt a systematic procedure to look for striking a balance by discharging the businesses from the burdensome and time-consuming lawsuits and ensuring the guarantee of payments simultaneously.

The elimination of criminal prosecution and imprisonment, which is a crystal factor involved in receiving timely payments, will badly impact the business, banking sector, non-banking finance companies and financial institutions.

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