The connecting procedural aspects relating to the provisions related to the punishment of Dishonor of Cheque under Sections 138 to 148 of the Negotiable Instrument Act, 1881 ["the Act"] are highly contested in the changing economic and regulatory regimes. Recently, the Hon'ble Supreme Court in New Win Export and Anr. Vs. A. Subramaniam (July 11, 2024) has said, that the dishonoring of cheques will now be a 'regulatory offense', prioritizing the compensatory aspect of remedy over the punitive aspect considering the Reliability Issues and Public Interest. The Supreme Court has ordered the lower courts to encourage the compounding of offenses under the NI Act if parties are willing to do so.

This article is an attempt to evaluate the various alternative means and considerations of the parties in the cases of dishonor of cheques and the changing stance of the court to resolve its procedural dilemma of adjudication on various grounds inter alia consent of the parties and interpretation of the provision. It is recommended that the courts' uniformity in interpretation is essential for consistency in adjudication. Confusing provisions carve out Legal flexibility, alone is insufficient without clear judicial pronouncements delineating these distinctions.

The multilayered Procedural dilemma
The lawful functioning of Negotiable instruments is essential for effective economic and investment circles. Therefore, the governing laws were periodically tested on the verge of time. The offence was criminalised with the insertion of chapter XVII containing Sections 138-148 by The Banking, Public Financial Institutions, and Negotiable Instruments Laws (Amendment) Act, 1988, earlier the payee of a dishonoured cheque could only seek a remedy under civil law. The provision sought strict liability considering the right in rem at stake and rules out as offences against the state. Presently, in cases of dishonour of a cheque, the drawer of the cheque, who is the offender, can be punished with imprisonment for a term extending up to two years, or he can be fined to pay an amount equal to twice the amount of the cheque or with both. [1]

The civil remedy involves filing a suit for money recovery, while the criminal remedy is primarily governed by Section 138 of the Negotiable Instruments Act, 1881. Although Section 138 imposes criminal liability on the drawer for cheque dishonour, its primary aim appears to be compensatory rather than punitive.

Chapter XVII of the Act underscores this compensatory focus. For instance, Section 147 permits the offence of cheque dishonour to be compounded without court intervention, and Section 143 allows for summary trials, expediting the resolution process. The Act also provides the drawer an additional opportunity to settle the dues by allowing payment within fifteen days of receiving a notice from the payee (Section 138). Furthermore, the Act mandates that complaints be lodged by the payee within one month of the cause of action, a term typically associated with civil litigation.

The procedural aspects laid out in the Act deviate from standard criminal procedures. For instance, the service of summons and evidence production are tailored specifically for cheque dishonour cases, differing from the Code of Criminal Procedure, 1973. Additionally, unlike conventional criminal cases requiring proof of mens rea, cheque dishonour cases do not necessitate proving the accused's intent to defraud. Further, In such contractual relations, typically parties are not allowed to restrain legal proceedings as per Section 28 of the Indian Contract Act, 1872 but the act mandates compoundablity, thus are considered as an exception alike to arbitration proceedings.

Due to the same, substantive and Procedural pitfalls are coming up which is causing an adverse impact on the objective of criminalizing i.e. to enhance the acceptability of cheques in settlement of liabilities by making the drawer of the cheque liable in cases of bouncing cheques. In 2020, issued a public notice titled 'Decriminalisation Of Minor Offences For Improving Business Sentiment and Unclogging Court Processes' and sought public opinions on a proposal to decriminalize the dishonour of cheques.

The limitation of Law
The payee in cheque dishonour cases can pursue both civil and criminal remedies, resulting in multiple proceedings for the same issue. This dual approach adds to the judiciary's burden. The 213th Report of the Law Commission noted around 3.8 million pending Section 138 cases in criminal courts. The Supreme Court has also recognized this burden, noting that about 3.5 million cheque dishonor cases, accounting for 15% of all criminal cases, are pending in District Courts. "Pendency has become the tendency", delay leads to financial burden on both parties.

Territorial Jurisdiction is another impediment where court precedents are more confusing than clarity. In the case of Dashrath Rupsingh Rathod v. State of Maharashtra and Anr. (2014), the Supreme Court addressed the issue of territorial jurisdiction in cheque dishonor cases under Section 138, and held that the place where the cheque was dishonored determines the jurisdiction, not where the cheque was presented or where the notice was issued. This decision aimed to bring clarity but has also added complexity and confusion to the jurisdictional aspect of such cases.

Court's paving their paths
The Supreme Court has repeatedly acknowledged that cheque dishonour cases, though framed as criminal under Section 138 of the Negotiable Instruments Act, 1881, are fundamentally civil in nature. In P. Mohanraj v. Shah Brother Ispat Pvt. Ltd. (2021), the Court described these proceedings as a "civil sheep in criminal wolf's clothing," indicating their quasi-criminal character. The Act prioritizes compensating the payee over punishing the drawer, evident in its provisions for compounding offences, summary trials, and the absence of a mens rea requirement. Thus, Section 138 seeks to provide a civil remedy through the criminal justice system.

The recent judgment is yet another reiteration of the court's tryst to unburden their shoulders by having alternate arrangements with mutual consent between the parties outside the courts. Going to the legislative intent of the Act, the court asserted public interest will override the punitive aspects, and put it under the umbrella of Section 320 of the CrPC. Previously, in Raj Reddy Kallem Vs. The State of Haryana & Anr. (2024) by invoking its extraordinary power under Article 142, the suit was quashed on the same principle even though the complainant therein declined to give consent for compounding, observing that the accused has sufficiently compensated the complainant.

Jurisprudence furthers to supports the quasi-criminal nature of Section 138 proceedings by moving a way ahead from its stance in Meters and Instruments (P) Ltd. v. Kanchan Mehta (2017), where the Supreme Court permitted discharge of the accused with mutual consent, provided compensation was paid, despite the case not being compounded.

The ADR as a Way Forward
The Delhi High Court in Dayawati vs Yogesh Kumar Gosain (2017), was confronted with the question of Arbitrability in the cases of Dishonor and tried to find out the applicability of Mediation and Conciliation Rules, 2004 to replace the legal vacuum. Justice I.S. Mehta held that disputes under Section 138 of the Negotiable Instruments Act, 1881, are not inherently non-arbitrable.

The Court recognized that while the primary objective of Section 138 is to ensure the drawer compensates the payee, this compensatory nature aligns with the principles of mediation and conciliation. Therefore, the Court suggested that ADR mechanisms, including mediation and conciliation under the Mediation and Conciliation Rules, 2004, can be effectively utilized to resolve these disputes by reducing the procedural gaps, promoting quicker, more efficient dispute resolution while reducing the judiciary's workload.

This approach is akin to the references permitted under Section 89 of the Code of Civil Procedure, 1908. This flexibility not only alleviates the burden on the judiciary but also provides a more efficient and amicable resolution process, ensuring that the parties can achieve a fair settlement outside the traditional court system.

Recommendations
Through the periodic legislative intervention by recent amendments in 2018 and 2002, the act is more or less at par with the demands for the economic functionality of the domestic market. The importance of closer scrutiny of the offense through punishment is central to its unique procedural and substantive aspects, at the same time the rights of the payee are given priority towards achieving the goal of compensatory justice.

The court has been given the task of interpretation when such inconsistency arises owing to ambiguous legal declaration. But there are no inconsistencies in the judgments. Legal flexibility is not sufficient until the judicial pronouncement makes a clear line of distinction. Uniform interpretation by the courts of the rules of procedure is the need of the hour.

End Notes:

1. Negotiable Instruments Act, 1881, s 138 [inserted by the Negotiable Instruments (Amendment) Act, 2018 (20 of 2018)

Award Winning Article Is Written By: Mr.Anand Shankar

Authentication No: AG423112806016-18-0824