The number of criminal cases filed against cheque defaulters has overwhelmed India’s judicial system. One obvious solution is to decriminalise what is often a civil dispute, but lawyers aren’t convinced that’s the answer. George W Russell reports

When the Bank of America announced in January that it had abolished bounced-cheque fees, businesspeople in India must have registered nothing short of shock. While insufficient funds are part and parcel of American life, in India, bouncing a cheque can have dire consequences for the drawer, drawee and the legal system in general.

Section 138 of the Negotiable Instruments Act, 1881, makes a bouncing cheque due to insufficient funds an offence. The legislation not only imposes monetary penalties for the dishonour of cheques, but also sets a term of imprisonment not exceeding two years or a fine that can extend to twice the amount of the cheque, or both.

However, the sheer number of criminal cases filed against cheque defaulters has overwhelmed the Indian judicial system. On Constitution Day in November 2021, Chief Justice NV Ramana sought to highlight how the legislature does not assess the impact of the laws it passes. He used the example of the cheque bouncing law, and said that section 138 only increased the workload of already overburdened magistrates.

The National Judicial Data Grid shows that in 2020, the country’s high courts disposed of fewer than half the number of cases they did in 2019. However, since the number of cases instituted fell only by one-third, the total of pending cases increased. By April 2021, there were about 3.5 million cheque bouncing cases pending under section 138, amounting to nearly 8% of the 45 million criminal cases before the courts.

Cheques and balances Amit Aggarwal

The coronavirus pandemic, while limiting the courts’ ability to dispose of cases, has only allowed the backlog to worsen. “It has led to a manifold increase in the number of instances of the dishonouring of cheques,” notes Amit Aggarwal, a partner at SNG Partners in New Delhi.

“The unfortunate aspect of the pandemic has been that it impacted adversely not only individuals, but also small and medium-sized businesses, as the liquidity dried up quite quickly and without access to either funds from lenders or payments from clients.”

Crime and punishment

For more than a century, the Negotiable Instruments Act was a purely civil matter, and there was no effective deterrent on people issuing cheques without sufficient funds in their accounts. But in 1988, the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, instituted criminal penalties to dissuade the writers of bad cheques.

“However, contrary to the legislative intent, it has failed to act as a deterrent,” said Shuva Mandal, a partner at Fox Mandal in Mumbai. “The criminalisation and strict liability imposed on cheque bounce cases has invariably led to an increase in the number of criminal cases pending before the court, since pursuing a criminal remedy is complex and time-consuming.”

Cheques and balances Ravitej Chilumuri

Moreover, some lawyers suspect plaintiffs pursue criminal penalties not to expedite resolution, but as a form of judicial theatre. “There are several instances where parties invoke the criminal jurisdiction under the Negotiable Instruments Act in a purely commercial contract breach, entirely with the view to exert pressure,” said Ravitej Chilumuri, a partner at Khaitan & Co in Mumbai. “The effect usually is that parties end up in a prolonged litigation.”

Still, some cheque bouncing cases have criminality at their core. “It may be that commercial disputes have criminal intent at the core of the failed transaction,” says G Kalyan Jhabak, a partner at Surana and Surana International Attorneys in Chennai. “It may be that there is the intent to defraud, so a civil liability would not be sufficient to penalise the defaulter.”

Under these circumstances, notes Jhabak , it is not an overreach, and the threshold of proof is higher in a criminal proceeding. “However, having two parallel processes can amount to harassment for its own sake,” he adds.

Cheques and balances G Kalyan Jhabak

Criminal v civil penalties

The burden on the judiciary caused by these cases has resulted in the courts repeatedly ruling that such offences should be resolved through mediation instead of criminal trials. But at the heart of the debate over reforming the Negotiable Instruments Act is whether to decriminalise cheque bouncing.

One argument in favour is the effect on the overall judicial system. “The district courts are inundated with so many criminal complaints that many special courts in each district in India have to be created only to handle these complaints,” Aggarwal points out.

“This has put an enormous additional burden on the Indian judicial system, which is already plagued with shortages of court infrastructure and staff.”

Cheques and balances Gautam Khurana

However, many lawyers argue that criminalisation remains an effective deterrent and a useful tool against fraud. “I would not recommend that criminalisation be taken away from the act,” insists Gautam Khurana, the managing partner at Indian Law Offices in New Delhi. “It will lose its teeth. The misuse has to stop.”

Dishonouring a cheque is a criminal liability in a manner similar to criminal breach of trust, argues Ravi Singhania, the managing partner of Singhania and Partners. “It is the fact that the person knowing there won’t be credit available for payment of the cheque yet issues the same.” A recent amendment, he notes, requires a person contesting his/her liability in a case for cheque dishonour to deposit 20% of the cheque’s value.

“Somehow, by decriminalising the bouncing of cheques, the confidence of creditors will be shaken, as an effective remedy to recover money has been taken away from them,” says Singhania. “While one may appreciate that the intent of the legislature could be to ease doing business, however, at the same time it’s important to ensure that the drawer of the cheque should remain responsible for his/her actions.”

Cheques and balances Ravi Singhania

Some firms say they are already looking beyond simple criminal prosecutions. “The matters comprising criminalisation of dishonoured cheques certainly form part of our legal offerings, and we have partners specialising in this practice area as well,” says Manoj Kumar, founder and managing partner of Hammurabi & Solomon Partners in New Delhi. “However, we have learnt to look beyond traditional processes to ensure that our clients attain the most effective remedies, and we have seen a gradual migration to more sophisticated legal recourses to derive and offer our clients the desired solutions.”

Reforming the legislation

Hasit Seth, an independent counsel at the Bombay High Court in Mumbai, says in some cases, particularly where corporates are debtors, they prefer to pay up instead of running the risk of their directors being dragged into a criminal case. “But for larger amounts, operational creditors are using the new Insolvency and Bankruptcy Code (IBC), 2016, whenever it applies,” he says. “IBC has become a preferred remedy over criminal remedies for cheque bouncing.”

Other reforms that have been suggested include a fast-track resolution process, a documents-only mode of settlement, or allowing courts the power to direct parties to mediation. “We see a lot of these cases being eventually settled – mostly with the party initiating the [section] 138 having the upper hand in such negotiations,” observes Chilumuri.

Kumar urges that technology be deployed, in search of speed. “We have seen technology providing some very efficient solutions,” he says. “A huge breakthrough was seen in the legal system during the past year with the adoption of technology owing to the pandemic. We have realised a considerably efficient manner of convening proceedings among other legal processes.”

As an example, Kumar points to the banking sector. The Reserve Bank of India rolled out the Positive Pay Mechanism, under which the drawer of a cheque can electronically confirm its details. “This ensures that instances of fraud or forgery that may lead to dishonouring of cheques are curbed,” he says.

Mandal agrees, urging that procedures need to be streamlined and simplified. “Integrating technology and artificial intelligence within the procedural and adjudicatory aspects of Negotiable Instruments Act disputes seems logical, considering the pioneering breakthroughs in the field of legal technology.”

Khurana urges reform of a system that allows blank and undated cheques. “Establishing the identity of cheque – is it genuine – is one more problem,” he says. “Also, with blank cheques and undated cheques, we need to ensure that those are not misused. An amendment would help clear up the haziness.”

He adds that cases involving all amounts go to the same system. “The offence is the same for INR20,000 (USD270) or INR1 million. We need a fast track to unclog the system.”

Restricting timelines is also suggested as a reform. “Many people used to issue a cheque as a guarantee, and then things would go south,” says Khurana. “Everybody wants to resolve through this process, and it escalates into a fully-fledged civil trial – anything from three to four months to more than two years. We need a clear deadline.”

While the cheque bouncing case backlog needs to be addressed, it is possible that technology will bring about an end to the use of cheques. The Reserve Bank of India and financial institutions are encouraging electronic payments, and cheques accounted for less than 3% of the value of all transactions by the end of 2018.

The annual reduction in the use of cheques has been shallower in India than every major economy except Turkey, despite its shortcomings. “The decline in cheque usage has, however, been slow,” the RBI acknowledged in a recent report. “Once a cheque is issued in your favour, it is very difficult to disown the liability,” says Khurana.

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