Amidst the Covid-19 Pandemic, the Ministry of Finance, Department of Economic Affairs proposed[1] the decriminalization of minor economic offences, with the objective of boosting the economic revival process and doing business with ease in India. It has proposed to decriminalize 39 sections by amending 19 statutes and has invited suggestions from various stakeholders with regards to this. This step aims to improve business sentiments and might prove helpful in unclogging the court processes. This article focuses on the decriminalization of Section 138[2] of the Negotiable Instruments Act, 1881 (hereinafter “N.I. Act”).

Background and inclusion of Section 138:

With the advent of time, the use of cheques in trade and commerce, as a viable source,  has increased. With the growing use of cheques, the disputes involving them have also increased. In 1988, Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act[3], included the Chapter XVII, was provisioned to deal with thePenalties in case of Dishonouring of Cheques for Insufficiency of Funds in the Accounts. Section 138, in chapter XVII, deals with the criminal liability for dishonouring of cheques. The intent was to curb the situations where payors deliberately submitted cheques with an insufficient amount in their bank accounts, to delay the process of payment and flee from the responsibility. After the penalty for dishonoured cheque, the cheque became a credible source of the transaction between parties opening up the country’s economic prospects. However, in the present state of affairs, decriminalization of the very act might prove harmful for the economy, juxtaposing the very intent posited by the government.  

The present state of Affairs:

As per the National Crime Records Bureau (hereinafter, “NCRB”), there had been more than 1.6 lac economic offences in the year 2019[4]. Amidst this, the government of India proposed to decriminalize section 138 of the N.I. Act. According to the 213th Law Commission Report[5] of 2008, more than 38 lakh cheques bouncing/dishonouring cases are pending in various courts across the country. The proposal’s objective is primarily to improve the ease of doing business and unshackle the criminal liability of the offences. The Ministry of Finance has stated that the following principles were the key considerations to reclassify criminal offences to compoundable offences:

  • Decrease the burden on businesses and inspire confidence amongst the investors.
  • Focus on economic growth, public interest, and national security remains paramount.
  • The malafide/criminal intent plays an important role in the imposition of criminal liability. Therefore, it is important to evaluate the nature of non-compliance, i.e., fraud, as compared to negligence or inadvertent omission.
  • The habitual nature of non-compliance.

In KSL & Industries Ltd. v. Mannalal Khandelwal[6], Hon’ble Bombay High Court observed that under the N.I. Act, Section 138 was included so that greater credibility to the country’s businesses and economic growth would be of paramount. It can be deduced that these provisions would lead to greater international trade and commerce.

Similarly, in M/s Meters and Instruments Private Ltd and Anr. v. Kanchan Mehta[7] , the Apex Courtmade some key observations for dishonouring of cheque cases under Section 138 of N.I. Act. The Court noted that “Offences under Section 138 of the Act is primarily a civil wrong.” Court also issued directions for the speedy disposal of cases under the very Act. Courts have interpreted the Act and have established that the criminal liability should be veered towards civil wrong. Furthermore, in R. Vijayan v. Baby[8], Apex Court observed that the provision of Section 138 of N.I. Act is both, punitive and compensatory, and restitutive with respect to cheque bouncing cases.

Right from its inception, the exact criminal liability of the debtor is not provided in the N.I. Act. At many times, Courts have given their interpretation about the dischargement of the criminal liability to avoid imprisonment.

In, Rajeshbhai Muljibhai Patel and Others Etc. v. State of Gujarat[9], the Supreme Court held that “the Court has the power to quash the criminal complaint filed under Section 138 of the N.I. Act on the legal issues like limitation, etc.” Moreover, to substantiate the preceding claim, inDamodar S.Prabhu v. Sayed Babalal H[10], the Hon’ble Supreme Court decided that Court can reduce the costs and give rise to the compoundability to the offence committed. The specific facts and circumstances of a case would be kept in mind while providing reasons in writing for such variance. It was also noted that the bonafide litigants could contest the proceedings to their logical end. Under Article 142 of the Constitution, Court may use its power to provide justice in the absence of proper guidelines from the legislature. In its explication of the offense’s compoundability, the Supreme Court in O.P. Dholakia v. State of Haryana[11] allowed the compounding of the offence even though all three designated forums had upheld the petitioner’s conviction.


With the amendments in place, Section 138 of N.I. Act is becoming a debt recovery mechanism more than a criminal legal action for an offence committed. The apprehension of penal prosecution and punishment with imprisonment and fine under Section 138 of the N.I. Act were the factors helping to establish a deterrent effect for making Cheques a credible source of transaction in place of the vastly growing cash payments. Additionally, it also proved to make sure the timely payments of the cheques.

However, now that N.I. Act mentions both, punishment and fine without considering the presence of mens rea. The offences falling under the ambit of Section 138 of N.I. Act can be termed as quasi-criminal in nature. This makes the offences under Section 138 to be filed as civil suits as well. The preceding argument defies the proposed guidelines provided by the Court regarding the decriminalization of Section 138 of the N.I. Act. According to the National Judicial Data Grid (NJGD), there are more than 9 lakh civil cases pending across the courts in the nation

Decriminalization of section 138 may create a sense of uneasiness amongst the creditors, and it may be compounded because of the pandemic causing harm to the economy. Creditors rebuttal to give credit due to the lack of stringent punishment can be expected with the provisions in place. To help, the Court can lay down certain guidelines to resolve cases through the medium of arbitration and conciliation under Arbitration and Conciliation Act 1996[12]. Ministry of Finance will have to ensure that the creditors’ interest is secured and timely payment in terms of honoring the cheques is met.


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[1] Government of India, Department of Economic Affairs (12 June, 2020) <>

[2] Central Government Act, The Negotiable Instruments Act, 1881

[3] Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988

[4] National Crime Records Bureau, Government of India, Crimes in India Statistics, Volume II (2019) <>

[5] Law Commission, Fast Track Magisterial Courts for Dishonoured Cheque Cases (Nov. 2008), <>

[6] Ksl And Industries Ltd. vs Mannalal Khandelwal And The State [2005] (1) ALD Cri 45

[7] M/s Meters and Instruments Private Ltd and Anr. V. Kanchan Mehta [2018] <>

[8] R. Vijayan v. Baby [2012] 1 SCC 260

[9] Rajeshbhai Muljibhai Patel and Others Etc. v. State of Gujarat [2020] <,under%20Section%20138%20of%20N.I.&text=Respondent%2DYogeshbhai%20is%20represented%20through,another%20respondent%2DMahendrakumar%20Javaharbhai%20Patel>

[10] Damodar S.Prabhu Vs. Sayed Babalal H. [2010] INSC 333

[11] O.P. Dholakia v. State of Haryana & Another [1999] S.L.P. (Crl.) No. 2964 of 1999

[12] The Arbitration and Conciliation (Amendment) Act, 2019

Writtten by:

Vibhu Gautam

MNLU Mumbai, 1st year

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