Recent Developments pertaining to Section 138 of the NI Act, 1881.
The following write up aims to deal with the 2018 Amendment relating to Section 138 of the Negotiable Instruments Act and also aims to discuss the proposal to Decriminalize S138 of the NI Act.
Section 138 of the NI Act:
Section 138 of the Negotiable Instrument Act, 1881, talks about the dishonour of
cheque for insufficiency of funds in the account. It also explains the ingredients,
exceptions, punishment and fine.
Rationale behind introduction of S138:
Chapter XVII containing Sections 138 to 142 was introduced to inculcate confidence in the efficacy of banking operations and build public confidence in negotiable instruments employed in business transactions.
The Negotiable Instruments (Amendment) Act, 2018:
Sections 143A and 148 were inserted in relation to cheque bouncing cases which
empower the trial court and the appellate court, to order payment of interim
compensation during the trial and deposit of certain minimum sum in an appeal by the drawer of cheque against conviction.
Rationale behind the Amendment:
In the Statement of Objects and Reasons appended to the Amendment Act, it was
stated that “injustice is caused to the payee of a dishonored cheque who has to spend considerable time and resources in court proceedings to realize the value of the cheque” on account of “delay tactics of unscrupulous drawers of dishonoured cheques due to easy filing of appeals and obtaining stay on proceedings.” The Amendment Act, thus, seeks to provide relief to payees of dishonoured cheques who get caught up in lengthy litigations and to discourage frivolous and unnecessary litigation.
Salient Features of the Amendment Act:
I. Section 143A:
By invoking section 143A in the Act, the trial Court is vested with the power to order
payment of interim compensation by the drawer of the cheque to the complainant. Such compensation can be ordered in both summary trial and a summons case where the accused drawer pleads not guilty to the charge made in the complaint. In the remaining cases, it can be ordered upon framing of charges.
Conditions stipulated for payment of compensation:
The interim compensation shall be upto 20% of the amount of the cheque.
The interim compensation is to be paid within 60 days from the date of the order of payment. Maximum extension of 30 days is permitted.
The interim compensation is to be recovered in accordance with section 421 of CrPC, which enlists two modes of recovery of fine- (a) attachment and sale of any movable property of the drawer, (b) recovery as arrears of land revenue from the movable or immovable property of the drawer by way of a warrant issued to the Collector of the concerned district.
If the drawer of the cheque is acquitted, the complainant shall be directed to repay to the drawer the amount of interim compensation along with interest at the bank rate. The repayment has to be made within 60 days of the date of order of acquittal, with a maximum extension of 30 days.
The intent behind this provision is to provide aid to the Complainant during the
pendency of the proceedings under Section 138 of the Act, where he is already
suffering the double-edged sword of loss of receivables by dishonor of the cheque
and the subsequent legal costs in pursuing the claim and offence.
Section 148 empowers the Appellate court to order the drawer to deposit such sum
which shall be a minimum of twenty per cent of the fine or compensation awarded by the trial Court. Such deposit is in addition to the interim compensation already paid pursuant to section 143 A. The deposit is to be made subject to the following procedure and conditions laid down in the section:
1. The amount is to be deposited within sixty days from the date of the order of payment. A further extension of maximum thirty days can be granted if the appellant shows sufficient cause.
The amount deposited may be directed to be released to the complainant at any time during the pendency of the appeal.
If the appellant is acquitted, the complainant shall be directed to repay to the drawer the amount of the deposit along with interest at the bank rate as published by the Reserve Bank of India, prevalent at the beginning of the relevant financial year. The repayment has to be made within sixty days of the date of order of acquittal subject to a further extension of not more than thirty days if the complainant shows sufficient cause for delay.
Under this provision, the Appellate Court orders to deposit a sum minimum 20
% of the compensation under the decision of the trial court. Such amount would
be in addition to any interim compensation paid under Section 143A of the Act.
This provision is a substantial aid to the Complainant who would suffer through
firstly a trial and then never ending appeals. Under this Section the Court is free
to determine the sum payable in the course of the appeal looking to the facts
and circumstances of each case.
Critical Analysis of the Amendment in toto:
Helps in tackling delay in the proceedings under the Act leading to quicker relief.
Apt discretion has been provided to the Court to assess whether under the facts and circumstances of the case, the imposition the compensation is called for and if so, to what extent. This prevents prejudicial treatment of the Drawer and equitable treatment of parties.
These provisions are Complainant centric and are aimed to safeguard their interests.
While proceedings and appeals are sub judice, it is the complainant who suffers substantial losses both in the form of loss of the cheque amount and the consequent legal costs of litigation.
Section 148 protects the Complainant from the endless appeals and stays.
These provisions create a framework of certainty and stringency, thus having a deterrent effect on those who seek to preclude the rights of others through dishonor of cheques and consequent illicit and evasive tactics.
These amendments would reduce pendency in courts because of the deterrent effect on the masses.
Section 148 operates in prejudice of the Accused as the imposition of such costs upon the Drawer without the final determination by the Court operates on a presumption of guilt against the Drawer.
The Act provides for unbridled discretion to the Court which will in turn lead to increased litigation and pendency of cases in the Courts.
Though the provisions stipulate that where the Drawer is Acquitted, the Court shall
order the Complainant to return the money sum received by him under Section 148, in practice, same provision would turn out to be very contentious in cases where the Complainant either refuses to or is unable to return the sum because of inability to do the same. This would give rise to further litigation.
Under the aforementioned provision for repayment of the sum by the Complainant to the Drawer, the Complainant must make a payment of interest along with the principal sum.
This provision can act in prejudice of the Complainant who might be wary to even
request the Court to order the Drawer to make payment of interim compensation or an amount under appeal as the cost of paying further interest upon the sum upon losing the bout before the court would act against the interest of the Complainant.
The changes brought forth by way of the 2018 amendment to the Negotiable
Instruments Act, 1881 are substantial in nature and focus heavily on upholding the
interests of the Complainants in such proceedings.
Yet, the aforementioned Sections operate essentially upon the discretion of the judge. This raises another challenge for the complainant to prove his cause before the Court towards getting such relief.
Nonetheless, these amendments are a positive step towards a more equitable and efficacious regime, and are welcomed as such.
Decriminalization of S.138: Debating Viability
On 8 June, 2020 the Ministry of Finance proposed decriminalizing various minor
offences “for improving business sentiment and unclogging court processes”, which also include Section 138 of Negotiable Instruments Act, 1881.
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. 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.
Arguments for Decriminalization:
1. To promote Ease of doing business and promote Atma Nirbhar Bharat as
envisioned by PM Modi.
2. To attract foreign investment.
3. It will reduce the burden of pendency of cases in the Indian Courts.
It is pertinent to note that as per the 213th report of Law Commission,
almost 20 percent of the pending litigation relate to cheque dishonor
disputes u/s 138 of the NI Act.
4. Public resources- taxpayer’s money is unduly used (since criminal
cases are always against the state.)
Arguments against Decriminalization:
1. Deterrent effect-The punishment introduced under the section helps in reducing
the risk of fraud and cheating.
2. Fear of imprisonment and litigation charges along with fine were the main factors
for timely payments of the cheques.
3. The credibility of the investors would be shaken if there will be no remedy against
4. If there would be no punishment the other person would be free and can take
any advantage of the situation. Decriminalizing section 138 would make the
creditor more insecure. There would be a cascading effect and the complete
system of negotiable instruments would turn futile.
5. The habitual nature of non-compliance can be checked upon only in cases of a
stringent punishment framework in place.
Like a coin has its two different sides, decriminalizing section 138 will also has pros and cons of its own. On one hand where there is an ease of doing business, on the other hand creditors will lose confidence in the system.
Decriminalizing is not the only option left for ease of doing business. Thus is not a good idea to decriminalize this section as the main intent of incorporation of this section was increasing the confidence of the creditors and also to increase the credibility in the cheque system.
Alternatives/ Way forward:
1. Arbitration: 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.
2. Civil Remedies: Similar to enforcement of a contract.