On June 8, 2020, the Ministry of Finance promulgated a proposal to decriminalise and waive the criminal nature of thirty-nine economic offences. These minor offences include Section 138 of Negotiable Instrument Act, 1881 (further, ‘the Act’) which refers to the offence of dishonour of a cheque. As per Section 6 of the Act defined a cheque as, “a bill of exchange on a specified banker and not expressed to be payable otherwise than on-demand”. As such, a cheque that is dishonoured envisions a situation wherein the payment fails owing to lack of funds or other allied reasons. 

In such situations Section, 138 is invoked which imparts criminal liability on the defaulter with possible imprisonment up to 2 years or a fine or even both. The conditions to invoke the section includes (i) The impugned cheque ought to be issued to release a debt partly or in whole, (ii) the liability sought to be discharged should be legally valid, (iii) and the cheque should be dishonoured when presented to the bank. 

The object of this section was emphasised in the case of Modi Cements Ltd Kuchil Kumar Nandi, where the court held that the efficiency and credibility of negotiable instruments and banking functions ought to be preserved. As such, the impugned section was incorporated to further this cause by casting a strict liability on the defaulters. Further, the section included a wide scope of interpretation as ‘mens rea’ (intent to commit an unlawful act) is not an essential parameter to be proved, unlike other criminal offences. In summary, the section was intended to increase the validity and accountability of trade and commerce.

The primary justifications purported by the Government of India in decriminalising this section was based on the ill effects of the COVID-19 pandemic. The novel virus is causing rippling effects on all sectors of the economy around the globe, causing grave damage to economic trade. As a measure to mitigate these unprecedented damages, the proposal furthered the waiver of criminal obligations under the dishonour of cheque. The primary reasons include, (i) the relaxing of penal liabilities will aid in rebuilding the economy and improve its growth and development, (ii) it will increase the efficiency of justice systems by reducing the uncertainty in legal procedures and reduce legal expenditures, (iii) it will reduce the burden of courts and enable them to adjudicate on other important concerns, (iv) by waiving the criminal liability, individuals will be more attracted to investing in the economy without the fear of imprisonments or fine, thereby flourishing investment opportunities in the country. 

However, despite such measures proposed in good faith, the decriminalising of Section 138 may pave way for a plethora of repercussions which may hinder the credibility of trading practices. One pertinent consequence will be the increase of fraudulent transactions primarily within small-scale industries who deal with contracts containing smaller amounts. By waiving criminal liability, it will diminish the deterrence effect and fear of engaging in frivolous contracts and business activities. Further, even if the impugned section is decriminalised, the aggrieved party can continue to invoke Section 406 or 420 of the Indian Penal Code which incorporates criminal breach of trust and cheating respectively. These remedies are independent and exclusive of the course of action under Section 138 as held by the Apex Court in Sangeetaben Mahendrabhai Patel v State of Gujarat. Therefore, though the primary purpose of the proposal was to induce investment in the economy, the existence of other independent provisions, including the Indian Penal Code, will render the purpose of decriminalising Section 138 alone redundant. 

Conclusively, immediate decriminalisation of Section 138 will not accurately serve the intent behind the same. Rather, it might render a negative consequence in the investment market by increasing the quantum of frivolous transactions and contracts. Though the implementation of the proposal may increase the efficiency of the justice system and relax the penalties for minor offences, the overall objective of the proposal will fail. As such, the Government ought to consider alternative approaches including electronic transaction, or enforcing penalty as per the quantum and times of default by an individual rather than an absolute waiver of criminal liability for the dishonour of cheques.