[Pratik Sahai and Manjri Singh are IV year students at NALSAR University of Law, Hyderabad]
Amidst the economic slowdown as a consequence of the Covid-19 pandemic, there is an intention on the part of the Government to bring about much-awaited reforms to the corporate regulatory regime. The Ministry of Finance released a proposal on decriminalization of minor economic offences on 8 June 2020, and invited stakeholder comments. This post examines how this proposal fits into the overall policy outlook of the Government, and evaluates the proposal with a special emphasis on section 138 of the Negotiable Instruments Act, 1881 (the “NI Act”). The opinions expressed, however, are largely true for all offences.
The current proposal lists as many as 39 offences contained across several legislation that are sought to be reconsidered, including section 138 of the NI Act, which imposes punishment for dishonour of cheques due to insufficient funds. The proposal aims primarily to improve business sentiment, as offences that are not on account of mala fide intention are seen as an obstacle to the ease of doing business and attracting investment. The move is also intended to bring relief to the already over-burdened court system. The Ministry of Finance has stated that the following principles were the key considerations behind the proposal: (i) decreasing the burden on businesses and inspiring confidence among investors; (ii) focus on economic growth, public interest and national security being paramount; (iii) mens rea playing an important role in the imposition of criminal liability, thereby making the re-evaluation of the nature of non-compliance imperative; and (iv) the habitual nature of non-compliance.
In terms of the larger policy direction, this move is unsurprising both in time and substance. Businesses have been significantly affected by the pandemic, and the onerous regulatory regime has been sought to be eased in its wake. For example, the Ministry of Finance had introduced the Fresh Start Scheme providing for condonation of delay for filings of regulatory nature and to provide immunity where investigations or penal proceedings for the delays had already been initiated by the Registrar of Companies. On a similar note, compliance requirements under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 were relaxed for rights offerings.
Even beyond the Covid-19 situation, an overhaul of the regulatory framework, as currently being proposed, is only the second of such initiatives. Sixteen offences in the Companies Act, 2013 were recategorized to civil defaults by a 2019 amendment. The Government then introduced the Companies (Amendment) Bill, 2020 that further recategorized 54 compoundable offences similarly. The passage of this Bill was affected by the adjournment of Parliament due to the pandemic. These were based on the recommendations of a Company Law Committee Report (“CLC Report”) chaired by Mr. Injeti Srinivas, the then Secretary of the Ministry of Corporate Affairs.
It may be possible to draw parallels with the offences listed in this proposal to those in the Companies (Amendment) Bill, 2020. The connecting thread is that the offences seek to penalise procedural and technical defaults, the evaluation of which is objective in nature. Due to this, these offences are also unlikely to affect public interest. These offences are, therefore, more suitable to be recategorized as civil wrongs.
This move is welcome for many reasons. As early as 2010, the Supreme Court has observed that the remedy under Section 138, NI Act is a means for ensuring recovery of money, with the criminal sanction only being a method to achieve this. This observation has been reiterated often, for instance in Meters and Instruments Private Ltd. v. Kanchan Mehta, where the Supreme Court observed that section 138 is primarily a civil wrong, with the object of the provision being primarily compensatory, with the punitive element being only secondary. In this context, the Supreme Court has also noted that there is excessive litigation in this regard, with most cases being compounded only at much later stages, as the accused allow for litigation resources and efforts to be expended before settling. In Makwana Mangaldas Tulsidas v. State of Gujarat, the Supreme Court observed that a major factor behind the pendency of cases under section 138 was the delay in ensuring the presence of the accused, which resulted in lengthy proceedings. Due to this, the larger aim to ensure credibility in transacting business and banking operations was defeated.
In light of these problems, courts have fashioned different remedies. The Supreme Court has held that the nature of these cases are necessarily summary trials as a rule, and summons only as an exception. It has also been observed that different means of summons such as email and assistance of a police officers may be taken. The Court has directed that if email addresses are available with banks, then they should be required to furnish those addresses and other details to the complainant on presentation of the cheque. It has also been recommended that the Reserve Bank of India develop a pro forma of cheques to facilitate the adjudication of these issues. A mechanism for pre-trial settlement to be developed by the National Legal Services Authority was also suggested. The High Courts have also been directed to contemplate setting up of special courts to deal with these matters.
The move to decriminalize the offence under section 138 is evaluated in this context. Decriminalization will affect the pendency of the cases, and the length of the process. The initiation of a summary trial of civil nature may also reduce the impact of delaying tactics employed by the accused. However, in terms of relief to the complainant, there may still be a need to implement different remedies such as using alternative dispute resolution mechanisms and emphasising on pre-trial settlements, which will pave the way for effective enforcement of liabilities as has been noted by the Supreme Court.
This is similar to the recommendation of the CLC Report referred to above. The Report contemplated the introduction of an In-House Adjudication Mechanism. This was enacted under section 454 of the Companies Act by the 2019 amendment. It substitutes the process of adjudication before the National Company Law Tribunal with an online platform administered by the Ministry of Corporate Affairs, to deal with procedural lapses and defaults, and does away with the requirement of physical presence almost entirely. A variation of this model may be appropriate to deal with section 138 actions.
This proposed change in the nature of sanction for these various offences from a criminal fine to a civil penalty must also be contextualized in the theory behind both these sanctions. While the object of civil sanction is the safeguarding of revenue and compensating the state or parties involved for any loss, criminal sanctions aim to deter future violations. Further, it is a settled principle of criminal law that criminal penalties, being punitive, do not survive the deceased and the pending recovery in those cases has to necessarily be carried out through a civil recovery suit. However, on changing the nature of the sanctions here, this stage can be avoided and recovery can directly be made from the estate of the accused. Additionally, the social costs of imposing criminal punishment are far higher than imposing fines on corporates.
On a broader level, it is a good strategy to liberate the regime and make India a more appealing jurisdiction in comparison to foreign markets, attracting the much-needed foreign capital to boost the economy at a time when investors are reconsidering their investments on a global level. Decriminalisation may also yield ancillary benefits such as protecting the company’s goodwill from the latent costs associated with the permanent nature of criminal sanctions. Further still, the requirement of mens rea and higher standard of proof is removed benefitting both companies and regulators. The Supreme Court has observed this in Director of Enforcement v. MCTM Corporation, noting that mens rea is not a requirement for imposing civil liability for blameworthy conduct. However, there remains the possibility that the reforms have the impact of incentivising firms to act in a less transparent, and irregular manner, a concern that has also been expressed by the Bar Council of Delhi.
– Pratik Sahai & Manjri Singh