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Crime and fitting punishment

Crime and fitting punishment

In cheque bounce cases, we need to find a balance so that malafide intent is punished while other, less serious offences are open to negotiation

Issuing of post-dated cheques or signing of irrevocable mandates to banks to debit the agreed  Equated Monthly Installment (EMI) on a fixed date every month is a common practice when loans or goods purchased on credit are repaid on a regular basis. If the cheque or automatic electronic debit is dishonoured by the bank for want of funds/mandate and the debtor fails to clear the dues within 15 days of a written notice by the bank (to be given within 30 days of dishonour), the creditor can file a criminal complaint. This is because  the debtor commits an offence punishable with up to two years in jail or fine up to two times the amount of the cheque issued or both. The criminal case can be dropped in case of a compromise or settlement. This is provided under Section 138 of the Negotiable Instruments Act, 1881. The objective of all this is to promote the efficiency of banking operations and to ensure credibility in transacting business through cheques. The 1881 Act was amended in 1989 to introduce a one-year jail term that was enhanced to two years in 2003. But the offence was made “compoundable”, meaning that the criminal proceedings can now be dropped if some compromise is reached between the two parties.

India, with its huge population, has problems that are unique to it and the overburdening of resources or institutions is one of them. So, it is not surprising then, that a total of 346 lakh court cases were pending in the country on October 29 this year. Out of this, there were over 251 lakh criminal and over 95 lakh civil cases, of which over 199 lakh criminal cases were more than a year old.  A Public Interest Litigation (PIL) filed by the Indian Banks’ Association (IBA) in 2013 had highlighted that out of the pending 270 lakh court cases, about 40 lakh were cheque bounce cases, involving about Rs 1,200 crore. These cases, estimated to be about 20 per cent of the total caseload (2018), are clogging the already overburdened criminal courts. Do we have enough jails and judges to convict every offender? Shouldn’t we have a hierarchy or priority list of offences to be targetted by the prosecution and adjudicating systems? Should the debtors, who have already mortgaged movable and immovable properties, be further subjected to criminal liability?

The Government is considering decriminalising cheque bounce cases and some other “civil wrongs.”  On June 8, the Finance Ministry sought stakeholder comments on its proposal to decriminalise 39 “minor economic offences” created under 19 Acts, including non-repayment of loans and dishonour of a cheque or automatic electronic debit for “improving the ease of doing business and helping unclog the court system and prisons.” However, the decriminalisation proposal has been opposed by the IBA, the Confederation of All-India Traders, the Finance Industry Development Council, the Federation of Industrial and Commercial Organisation and some Bar Councils.

The Bar Council of Delhi has highlighted the effect of the pandemic on lawyers in the country and how every advocate is facing a financial crisis.  The Bar Councils of Maharashtra and Goa, too, have opposed the proposal to decriminalise Section 138 of the Negotiable Instruments Act. They contended that the offence of cheque bounce should not be termed as a “minor” infraction by the Government in its bid to decriminalise the same. For lawyers, decriminalisation clearly means an adverse impact on their livelihoods. For traders selling on credit, there is a genuine problem of having no security against customer default. Instalment purchase of goods on EMI is supported by post-dated cheques, and no one will accept cheques if their bouncing is decriminalised. Trade will be left at the mercy of civil litigation that takes several years for justice to be delivered. Even after the current stringent Section 138, more than 20 per cent of all pendency of cases across the country is only pertaining to cheque bounce.

The bankers’ opposition to decriminalisation can also be understood for cheque bounce against unsecured loans. However, there is absolutely no justification for continuing with this additional protection in case of secured loans. While sanctioning EMI-based loans, banks insist on mortgage of immovable property or shares, debentures, fixed deposits and so on. Or they obtain guarantees from employers for deduction from the borrowers’ salary. In such cases, cheque bounce should be considered for decriminalisation to begin with. Borrowers — distressed by the Coronavirus pandemic — have been provided some relief by way of moratorium and deferral of fresh applications for insolvency proceedings but the criminal liability under the Negotiable Instruments Act, 1881, as amended in 1989, 2003 and 2018, remains. Normally, for criminal liability to be pinned to a person, presence of mens rea, malafide intention is a must. However, in cheque bounce cases, malafide intention may or may not be there and need not be proved. A strict liability has been created without going into a cheque issuer’s intentions as a measure to build trust and credibility in cheque transactions.

The objective of amending Section 138 of the Negotiable Instruments Act in 1989 was to add credibility in transacting business through cheques. Current realities are so very different from 1989 when cheque bounce was first criminalised.

Provision of criminal liability — prosecution and imprisonment — on strict liability basis, without the need to prove malafide intention, is an identified deterrent for attracting new investment. It is in larger public interest to declog our criminal courts and jails.

In Kaushalya Devi Massand vs Roopkishore Khore case, the Supreme Court held that the offence committed under Section 138 of the Negotiable Instruments  Act cloaks a civil wrong as a criminal act and the gravity of offence under Section 138 of the Act cannot be equated with a crime under the provisions of the Indian Penal Code or other criminal offences.

In Makwana Mangaldas Tulsidas vs. State of Gujarat and others case, the Supreme Court recently favoured decriminalisation of dishonour of small value cheques. The court suggested various ways to deal with the situation of overflowing cheque bounce cases pending adjudication across the country. The apex court suggested developing a mechanism for pre-litigation settlement in these cases.

The Centre, while decriminalising some defaults, has to balance the interests of lawyers, the business community and the welfare of the public at large, especially those who are not wilful defaulters. In cheque bounce cases, we need to find a balance so that malafide intent is punished while other, less serious offences are compounded. As the working of the SARFESAI Act (The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act) and the Insolvency and Bankruptcy Code (IBC) have shown, the cases of wilful defaults are very few and such offenders continue to dodge the law while a large number of non-wilful defaulters continue to suffer harassment in courts. Public policy is all about balancing conflicting requirements and expectations. Creditors would want to have as many solutions as possible and pursue all those remedies simultaneously. However, such an approach has a deleterious effect on business sentiment. It may end up having a chilling effect on potential borrowers and consumer demand. If fear of imprisonment and litigation charges along with a fine truly had a deterrent effect and resulted in  timely payment of cheques, the courts would not have such a big pending caseload. And it is this huge backlog of cheque bounce cases that delays the trial of more serious crimes and at the same time erodes public faith in the judicial system.

Hence, decriminalisation of bounced cheques should be seriously pursued. Secured creditors have remedies available under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 and the IBC, 2016. Cases involving secured lenders should be decriminalised except for borrowers declared “wilful defaulters” or “fugitive economic offenders.” Even in cases involving unsecured creditors, the criminal cases should be continued against repeat offenders and a more lenient view may be taken of first-time defaults and offenders. There should be very clear articulation of legislative intent as to its retrospective or prospective operation. To eliminate a large pendency of court cases, retrospective application based on a differentiating criterion like secured/unsecured creditor and wilful/non-wilful defaulters would be necessary and desirable.

(The writer is former Special Secretary, Ministry of Commerce and Industry)

Crime and fitting punishment

Crime and fitting punishment

In cheque bounce cases, we need to find a balance so that malafide intent is punished while other, less serious offences are open to negotiation

Issuing of post-dated cheques or signing of irrevocable mandates to banks to debit the agreed  Equated Monthly Installment (EMI) on a fixed date every month is a common practice when loans or goods purchased on credit are repaid on a regular basis. If the cheque or automatic electronic debit is dishonoured by the bank for want of funds/mandate and the debtor fails to clear the dues within 15 days of a written notice by the bank (to be given within 30 days of dishonour), the creditor can file a criminal complaint. This is because  the debtor commits an offence punishable with up to two years in jail or fine up to two times the amount of the cheque issued or both. The criminal case can be dropped in case of a compromise or settlement. This is provided under Section 138 of the Negotiable Instruments Act, 1881. The objective of all this is to promote the efficiency of banking operations and to ensure credibility in transacting business through cheques. The 1881 Act was amended in 1989 to introduce a one-year jail term that was enhanced to two years in 2003. But the offence was made “compoundable”, meaning that the criminal proceedings can now be dropped if some compromise is reached between the two parties.

India, with its huge population, has problems that are unique to it and the overburdening of resources or institutions is one of them. So, it is not surprising then, that a total of 346 lakh court cases were pending in the country on October 29 this year. Out of this, there were over 251 lakh criminal and over 95 lakh civil cases, of which over 199 lakh criminal cases were more than a year old.  A Public Interest Litigation (PIL) filed by the Indian Banks’ Association (IBA) in 2013 had highlighted that out of the pending 270 lakh court cases, about 40 lakh were cheque bounce cases, involving about Rs 1,200 crore. These cases, estimated to be about 20 per cent of the total caseload (2018), are clogging the already overburdened criminal courts. Do we have enough jails and judges to convict every offender? Shouldn’t we have a hierarchy or priority list of offences to be targetted by the prosecution and adjudicating systems? Should the debtors, who have already mortgaged movable and immovable properties, be further subjected to criminal liability?

The Government is considering decriminalising cheque bounce cases and some other “civil wrongs.”  On June 8, the Finance Ministry sought stakeholder comments on its proposal to decriminalise 39 “minor economic offences” created under 19 Acts, including non-repayment of loans and dishonour of a cheque or automatic electronic debit for “improving the ease of doing business and helping unclog the court system and prisons.” However, the decriminalisation proposal has been opposed by the IBA, the Confederation of All-India Traders, the Finance Industry Development Council, the Federation of Industrial and Commercial Organisation and some Bar Councils.

The Bar Council of Delhi has highlighted the effect of the pandemic on lawyers in the country and how every advocate is facing a financial crisis.  The Bar Councils of Maharashtra and Goa, too, have opposed the proposal to decriminalise Section 138 of the Negotiable Instruments Act. They contended that the offence of cheque bounce should not be termed as a “minor” infraction by the Government in its bid to decriminalise the same. For lawyers, decriminalisation clearly means an adverse impact on their livelihoods. For traders selling on credit, there is a genuine problem of having no security against customer default. Instalment purchase of goods on EMI is supported by post-dated cheques, and no one will accept cheques if their bouncing is decriminalised. Trade will be left at the mercy of civil litigation that takes several years for justice to be delivered. Even after the current stringent Section 138, more than 20 per cent of all pendency of cases across the country is only pertaining to cheque bounce.

The bankers’ opposition to decriminalisation can also be understood for cheque bounce against unsecured loans. However, there is absolutely no justification for continuing with this additional protection in case of secured loans. While sanctioning EMI-based loans, banks insist on mortgage of immovable property or shares, debentures, fixed deposits and so on. Or they obtain guarantees from employers for deduction from the borrowers’ salary. In such cases, cheque bounce should be considered for decriminalisation to begin with. Borrowers — distressed by the Coronavirus pandemic — have been provided some relief by way of moratorium and deferral of fresh applications for insolvency proceedings but the criminal liability under the Negotiable Instruments Act, 1881, as amended in 1989, 2003 and 2018, remains. Normally, for criminal liability to be pinned to a person, presence of mens rea, malafide intention is a must. However, in cheque bounce cases, malafide intention may or may not be there and need not be proved. A strict liability has been created without going into a cheque issuer’s intentions as a measure to build trust and credibility in cheque transactions.

The objective of amending Section 138 of the Negotiable Instruments Act in 1989 was to add credibility in transacting business through cheques. Current realities are so very different from 1989 when cheque bounce was first criminalised.

Provision of criminal liability — prosecution and imprisonment — on strict liability basis, without the need to prove malafide intention, is an identified deterrent for attracting new investment. It is in larger public interest to declog our criminal courts and jails.

In Kaushalya Devi Massand vs Roopkishore Khore case, the Supreme Court held that the offence committed under Section 138 of the Negotiable Instruments  Act cloaks a civil wrong as a criminal act and the gravity of offence under Section 138 of the Act cannot be equated with a crime under the provisions of the Indian Penal Code or other criminal offences.

In Makwana Mangaldas Tulsidas vs. State of Gujarat and others case, the Supreme Court recently favoured decriminalisation of dishonour of small value cheques. The court suggested various ways to deal with the situation of overflowing cheque bounce cases pending adjudication across the country. The apex court suggested developing a mechanism for pre-litigation settlement in these cases.

The Centre, while decriminalising some defaults, has to balance the interests of lawyers, the business community and the welfare of the public at large, especially those who are not wilful defaulters. In cheque bounce cases, we need to find a balance so that malafide intent is punished while other, less serious offences are compounded. As the working of the SARFESAI Act (The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act) and the Insolvency and Bankruptcy Code (IBC) have shown, the cases of wilful defaults are very few and such offenders continue to dodge the law while a large number of non-wilful defaulters continue to suffer harassment in courts. Public policy is all about balancing conflicting requirements and expectations. Creditors would want to have as many solutions as possible and pursue all those remedies simultaneously. However, such an approach has a deleterious effect on business sentiment. It may end up having a chilling effect on potential borrowers and consumer demand. If fear of imprisonment and litigation charges along with a fine truly had a deterrent effect and resulted in  timely payment of cheques, the courts would not have such a big pending caseload. And it is this huge backlog of cheque bounce cases that delays the trial of more serious crimes and at the same time erodes public faith in the judicial system.

Hence, decriminalisation of bounced cheques should be seriously pursued. Secured creditors have remedies available under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 and the IBC, 2016. Cases involving secured lenders should be decriminalised except for borrowers declared “wilful defaulters” or “fugitive economic offenders.” Even in cases involving unsecured creditors, the criminal cases should be continued against repeat offenders and a more lenient view may be taken of first-time defaults and offenders. There should be very clear articulation of legislative intent as to its retrospective or prospective operation. To eliminate a large pendency of court cases, retrospective application based on a differentiating criterion like secured/unsecured creditor and wilful/non-wilful defaulters would be necessary and desirable.

(The writer is former Special Secretary, Ministry of Commerce and Industry)

Crime and fitting punishment

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