Cheque Bouncing: Join The League Of ‘Civil’ised Nations

Society has nothing to gain by imprisoning a person who cannot pay their debts even after all of their assets have been attached.

A local resident shows a cheque received from the Metro Rail Corporation, in Kolkata, on Sept. 7, 2019. (Photograph: PTI)
A local resident shows a cheque received from the Metro Rail Corporation, in Kolkata, on Sept. 7, 2019. (Photograph: PTI)

India must repeal the cheque bouncing criminal offence.

A recent proposal by the Government of India, to decriminalise ‘cheque bouncing’ cases, has come in for a torrent of criticism from bankers and lawyers. But, the government must be congratulated for proposing the removal of this medieval offence from the statute book.

Section 138 of the Negotiable Instruments Act, which criminalises cheque bouncing is notoriously popular with bankers and the legal profession. The Law Commission, in 2008 estimated—without providing a source for its figures—that there were 38 lakh pending cases before criminal courts under Section 138 with Delhi alone, accounting for 7.66 lakh cases.

A more recent examination, by the author of this piece, of the pending cases under Section 138 before the metropolitan magistrates in Delhi and Bombay reveals that a total of 256,129 and 82,205 cases are pending each city, respectively.

The Law, In The West And India

Section 138 is an embarrassment to the Indian legal system because most of the civilised world has done away with the idea of sending people to prison due to their inability to discharge their contractual debts. The United Kingdom prohibited imprisoning people for their failure to repay their debts as far back as 1869 when it enacted the Debtor’s Act. The United States banned debtors’ prisons as far back as 1833. International treaties, like the International Covenant on Civil and Political Rights (Article 11) to which India is a party, forbid the imprisonment of people for failing to discharge their contractual obligations and this includes debt.

The simple idea behind abolishing debtors’ prisons is that society has nothing to gain by imprisoning a person who cannot pay their debts even after all of their assets have been attached and possessed by their creditors.

It is better for such persons to engage in productive activity in society and pay back their debts to their creditors.

On the other hand, in India, Section 138 of the Negotiable Instruments Act, 1881 was introduced into the law as late as 1988. This criminalisation of ‘cheque bouncing’ took place through the Banking, Public Financial Institutions and Negotiable Instruments Law (Amendment) Act, 1988 i.e. more than a hundred years after the law was first enacted in 1881. The Finance Minister at the time, SB Chavan, justified the criminalisation of the offence in Parliament on the grounds that there were “persistent and widespread demands from various trade and industry associations to make bouncing of cheques a penal offence”. As if criminalisation was not enough, the amendment put the offence on par with the most dreaded offences by doing away with any requirement of proving mens rea or criminal intention, which otherwise is a basic ingredient of almost every criminal offence.

The Civil Course Of Action

Over the years, Section 138 has come to be used primarily by bankers and landlords to threaten common people with criminal liabilities for breach of contracts. Typically, banking companies will take post-dated repayment cheques at the time of giving out loans, while landlords in many Indian cities take post-dated cheques for the entire year in advance after signing the lease deed. Farmers are very often at the receiving end of such cases filed under Section 138 and often end up in jail. In the absence of Section 138, these cases would be treated as civil cases involving a breach of contract.

The difference between the civil proceedings and criminal proceedings is that the latter creates unfair pressure on defendants. This is because debtors know they are going to jail directly for two years in addition to paying double the disputed amount, if they do not discharge the debt guaranteed by the cheque. No excuses regarding poor health or medical expenses can be entertained by the court because the law does not require looking into the mens rea of the defendant.

On the other hand, in a breach of contract case before a civil court, the judge can only order the payment of damages to compensate the banker or landlord for damages they have suffered. Indian civil law does not recognize punitive damages so there is no question of paying twice the disputed amount. Once judgment is entered against the defendant in a civil case, he has an option to pay the damages or if he lacks the money to make the repayment, the court can attach the property of the debtor and auction it to pay off the creditor. In case, the attached property is not sufficient to discharge the debt, the debtor can still be jailed under the Code of Civil Procedure in the debtor’s prison. The Supreme Court declined to strike down the provision allowing for civil imprisonment as unconstitutional for being violative of India’s international obligations in the case of Jolly George Verghese v. Bank of Cochin.

Despite both criminal and civil routes leading to prison, the entire process under the Code of Civil Procedure is much more just and fair because it offers some breathing room to the debtor and this is perhaps one of the reasons that it is time-consuming and unpopular with both bankers and the legal profession. But then again, due-process and procedural justice which underpins the justice systems to civilized countries has always been more time consuming.

Three Reasons For Repeal

Apart from being in violation of both international law and the basic norms of civilised countries, there are strong policy reasons to oppose Section 138.

To begin with, Section 138 represents the gross inequalities of how the law treats different kinds of debt. For example, if a billion-dollar company were to go bankrupt in India, the Insolvency and Bankruptcy Code would only allow the creditors to seize the company. The directors on the company’s board are not sent to jail for taking the company into bankruptcy. This is because policymakers tried balancing the needs of the creditors and the inevitable risks of running a business.

Why then should individuals who default on cheques be threatened with jail time for what is essentially the same offence?

A second reason for opposing Section 138 and this is the reason the government is even thinking of the amendment, is that the provision seriously makes doing business difficult in India for bigger companies. Almost inevitably, directors of companies who are not associated with the daily running of the company are made parties to these cheque bouncing cases. Several of them manage to wiggle their way out of the cases eventually but after a lot of heartburn and litigation before High Courts.

A third reason to repeal Section 138 is the fact that the provision completely upends civil contract law. For example, if a person signs a lease agreement with a landlord for a house and the landlord in addition to the lease agreement requires 12 post-dated cheques for each month’s rent, it makes it impossible for the person to terminate the contract unilaterally even if the contract has a clause allowing them to terminate the contract with one month’s notice because there is always the risk of the landlord filing a criminal case for cheque bouncing. This could also happen in the case of collateral-free loans given out by banking companies for the purchase of cars etc. In the absence of Section 138, the bank at most can repossess the car if the person defaults on repayments.But if post-dated cheques are involved, criminal proceedings can be started and this can happen in another city making it extremely difficult for debtors to contest proceedings.

These are only some of the reasons justifying the repeal of Section 138. There are other reasons like the amendment in 2018 where the government proposed a mandatory deposit of up to 20% of the amount due even before the case was tried!

To deprive a person of his property even before conducting a trial is a preposterous assault on the property rights of a person and smacks of arbitrariness that goes against the fundamental tenets of the rule of law.

For far too long, the attitude of the central government and the bureaucracy has been to tighten the screws so hard that the common man has no escape from the debt collectors, while at the same time allowing public sector banks to take haircuts under the IBC. It is therefore a welcome sight to see the government talking about repealing Section 138, even if the move is inspired by the urge to ease business, rather than protecting rights. Perhaps that is too much to expect from a suit-boot ki sarkar.

T Prashant Reddy is a Bengaluru-based advocate.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.