Decriminalisation of Section 138: A Half-Baked Remedy

[Srihari Gopal and Vedant Malpani are fifth year students at Gujarat National Law University, Gandhinagar]

On June 8, 2020, the Ministry of Finance released a notification inviting comments on a proposal to decriminalise 39 minor offences. The proposal comes in a long line of measures initiated by the government to revive businesses and ‘unburden’ the courts in light of the Covid-19 related economic recession. Among the most significant changes suggested is the proposal to decriminalise dishonour of cheques under the Negotiable Instruments Act, 1881 (“Act”). The intent behind the recommendation has been appreciated by experts due to the excessive backlog of ‘check-bouncing’ cases pending at various levels of the judiciary. Further, multiple courts and law commission reports have pointed out the need for decriminalisation. However, the proposal is not without loopholes, and poses significant challenges to bona-fide cheque-holders, especially those with large sums.

Through this post, we seek to understand the existing framework for dishonour of cheques under the Act, and also analyse the nature of remedies in other jurisdictions. We would also be looking at an alternative framework of partial decriminalisation of dishonour cases for smaller amounts. Lastly, we would also like to propose the introduction of alternate dispute resolution methods to deal with dishonour of cheque in smaller amounts.

Dishonour of cheques under the Negotiable Instruments Act

Dishonour of cheque entails a criminal penalty under section 138 of the Act. Under this provision, a dishonour is punishable with imprisonment, which may extend to two years or a fine which may extend to twice the amount of the cheque or both. Dishonour of cheque was first made a criminal offence by the Banking, Public, Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (“Amendment”).  Prior to the introduction of section 138 by the Amendment, all issues relating to dishonour of cheques were resolved by the civil courts. Due to the absence of an express provision which made the drawer of the cheque criminally liable, the payee would have to seek relief under section 420 r/w section 415 of the Indian Penal Code, 1960 (“Code”) which deals with cheating and dishonestly inducing delivery of a property. Thus, to act as a deterrent to use cheques as a tool of dishonest dealings in commercial transactions, the Amendment was introduced.

Though the Amendment was intended to protect bona fide cheque-holders and promote business, it overburdened the already clogged judicial system. As per the 213th Law Commission Report, about 40 lakh cases or 20% of the cases pending in courts were that of dishonour of cheques. The Supreme Court over the years therefore made a conscious effort to prevent the misuse of section 138. The Court in the case of Damodar S. Prabhu v. Sayed Babalal H held that the compensatory aspect of the remedy should be given priority over the punitive aspect and stated that litigants should choose the method of compromise to resolve their dispute instead of going for litigation. Further in the cases of Meters and Instruments Private Limited v. Kanchan Mehta and Kaushalya Devi Massand v. Roopkishore Khore held that the offence under section 138 is a civil wrong which has been given criminal overtones, and the gravity of offence cannot be equated with a criminal offence.  Most recently, the Supreme Court in the case of Makwana Mangaldas Tulsidas v. State of Gujarat  recommended decriminalisation of dishonour of small value cheques. In light of these recommendations, we would now look at the international framework for dishonour of cheques, and understand the nature of penalties imposed in other countries.

Cheque bouncing laws around the world – civil, criminal and administrative penalties

The penalties for cheques around the world can be classified into three types, i.e. civil, criminal and administrative penalties. Contrary to popular opinion, many countries have retained criminal penalties along with civil penalties for cheque bouncing, for higher amounts, repeat offences and fraudulent intent. The existence of parallel remedies is best exemplified by the dishonour of cheque laws in different states in the United States. For example, a cheque bouncing litigation in South Dakota will incur a penalty of ‘not less than one hundred dollars but not more than two hundred dollars‘ unless the defaulting party pays the full amount with interest before the initiation of litigation. However, South Dakota provides for a separate offence of ‘theft by insufficient funds’ with the degree of charge proportional to the amount.  The degree varies from class 2 misdemeanour for a cheque of up-to four hundred dollars and a class 4 felony for a cheque of more than thousand dollars, which entails imprisonment. North Carolina too provides for a different civil and criminal (felony) charge, as do many other states in the US. On the other hand, countries such as UK, Singapore and Australia provide exclusively for civil penalties. Under the UK Bills of Exchange Act 1882 (which is reflected in the Singapore Bills of Exchange Act as well), a dishonour would entitle the  holder of a cheque to claim the amount of the bill, and interest from the payment of the bill payable on demand, or from maturity of the bill in any other case. Similar measures are also provided for in Australia, where according to the Australia Cheques Act of 1986, a holder of a dishonoured cheque published in Australia can recover the sum to be paid by the cheque and interest accrued. If the cheque is published outside Australia, the amount of re-exchange of cheque and interest accrued on that amount can be recovered. The damages recoverable here are deemed to be liquidated damages.

Lastly, there is another category of punishments known as administrative penalties, which are imposed as a deterrent to future offenders. These may include measures such as freezing of accounts or an embargo on cheque transactions for a period of time. Turkey recently decriminalised its cheque laws through law no. 6273 of 2012 for reasons similar to those raised in India. It has also empowered the prosecutor to impose a prohibition on opening of any cheque account or issuing new cheques for offenders. Japan too has been following a similar system, where banks are empowered to suspend the account for two years if the account owner defaults two cheques in a period of six months. However, in light of Covid-19, the bank association has suspended this penalty for a certain period of time.


The decriminalisation in its current form seems like a half-baked move which does not account for long term consequences for cheque-holders. It deprives bona-fide cheque holders of an opportunity to initiate criminal prosecution against bogus high-value cheques. Therefore, it would be ideal to amend the Code to include a section on theft by insufficient funds, similar to the US in order to account for high value fraudulent offences. Further, a definite guideline needs to be provided in the Act chalking out the exact civil remedy available to a cheque holder, and demarcate the damages that they would be entitled for. The legislature could also recommend inserting certain administrative penalties such as an embargo on issue of cheques for a limited period of time.

Mediation could also be suggested as a remedy for smaller amounts. The Delhi High Court in the decision of Dayawati v. Yogesh Kumar Gosain had already suggested the use of ‘Arbitration, Mediation and Conciliation’ in cases of dishonour of cheques to ease the backlog of cases. The legislature should therefore consider introducing guidelines to this effect as a part of the Act. This would not only reduce the number of pending cases, but also ensure quicker remedies for holders.

– Srihari Gopal & Vedant Malpani

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1 comment

  • The paper is well-researched and well presented. In India, the Civil procedure takes a long time to conclude. As such, the decriminalization of return of cheque would delay recovery process for the holder-in-due course. A large number of Bank officials would get involved as witnesses in the Civil procedure and this would seriously affect the normal functioning of Banks, as productive time would be consumed in Civil Courts.

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