By Pratiksha Navale, Advocate at Lex Credence on March 04, 2024


The law relating to negotiable instruments is not the law of one country or one nation, it is the law of the commercial world in general, for, it consists of “certain principles of equity and usages of trade which general convenience and common sense of justice had established to regulate the dealing of merchants and mariners in all the commercial countries of the civilized world.” A Negotiable Instrument is a written document that promises to pay a certain sum of money on demand or at a fixed time. Promissory notes, bills of exchange, and cheques are the three categories of negotiable instruments stated in the Indian Negotiable Instruments Act, of 1881(hereinafter referred to as “the Act”). When an instrument matures or is dishonored earlier due to non-acceptance or non-payment, its currency expires. It is considered that a bank has honored a cheque if it gives the payee the whole amount stated on it. Cheques are considered dishonored and are sent back to the sender if the bank disputes paying the amount on the cheque. 

Section 138 of the Act aims to prevent the drawer from engaging in improper behavior by preventing the drawer from drawing a cheque without sufficient funds in the account that the drawer manages at a bank and by forcing the payee to reply to the cheque properly. This article enlightens about the development and recognition of cheques as a negotiable instrument, the reasons attributed to the decriminalization of cheque dishonor, and the impact it might cause if decriminalization of dishonor of cheques happens.

Negotiable instrument in ancient times:

Since ancient times, the cheque has been an essential tool for conducting business daily. Due to the need for a more secure and effective way to transfer money, negotiable instruments were very important during the ancient and medieval periods. Merchants were able to avoid the dangers of carrying large sums of coins, such as theft and loss, by using negotiable instruments. The demands of business, the state of technology, and the legal regimes in different civilizations have all influenced the history, evolution, and development of negotiable instruments. 

For the Muhammadan sovereigns of Delhi in the early part of the 14th century, the word ‘hundi’, a generic term used to denote instruments of exchange in the vernacular is derived from the Sanskrit root ‘hund’ meaning ‘to collect’ and well expresses the purpose for which instruments were utilized in their origin. In Harsukhdas Balkissendas v. D Hirendra Nath Roy, the court has given the meaning of the word Hundi. It has been noted down by the court that apparently, there is no legal definition either statutory or otherwise of a hundi, though such documents are in common use. The meaning of a cheque has changed throughout time to now encompass electronic formats as well.

The advent of negotiable instruments:

The 3rd Indian Law Commission originally prepared draft legislation in 1866. Thereafter, the draft of the Negotiable Instrument Act was introduced in the Council in December 1867 and the Council referred it to a Select Committee. This draft legislation met with strong objections raised by the mercantile community on diverse aspects, including the aspect of certain deviations from English Law which this legislation contained. This led to the initial draft of the legislation being subjected to redrafting in 1877 to meet the objections and demands of the mercantile community. As such, the draft was put forth a fourth time, presented to the Council, and eventually became the Act.

The intent of introducing Section 138 to the law seems to be to promote trust in the reliability of banking operations and the legitimacy of business transactions involving negotiable instruments. The introduction of Section 138 of the Act is intended to protect the creditor’s confidence in the cheque drawer. The violation of Section 138 of the Act does not constitute a natural crime like assault or murder. It is a crime made up by a statute’s legal fiction. By way of an amendment to the Act, which was only put into effect in 1989, civil liability was turned into criminal liability under certain restrictions. Until then, the offenses referred to in Section 138 of the Act were solely punishable by civil liability.  Through Section 138 of the Act, cheque dishonoring became an offense in India. The existence of men rea in cheque dishonor is not a requirement of Section 138 of the Act. The accused person’s state of mind, knowledge, or reasonable beliefs are not requirements for an offense under Section 138 of the Act. The dishonor of cheques is now a statutory offense, and the drawer is now subject to fines and/or imprisonment. Cheque dishonoring was made an offense to safeguard the validity of the document and defend the payee’s rights. The criminal justice system has been impacted by the backlog in courts caused by the significant number of cases relating to cheque dishonor that are still pending. The fact that Section 138 of the Act cases have grown significantly over time indicates that it is more necessary than ever. To reduce the workload on the courts and ease corporate transactions, there have been proposals to decriminalize the dishonor of cheques. Despite the debate surrounding decriminalization, it is essential to remember that even when Section 138 is repealed, civil courts may continue here cases of cheque fraud under Section 420 of the Indian Penal Code (hereinafter referred to as “the IPC”) and other applicable laws. However, the aggrieved party might not receive enough remedy as a result, leading to a lengthy and expensive procedure.

Decriminalization of dishonor of cheques:

On June 8, 2020, the Department of Financial Services, part of the Ministry of Finance, Government of India, announced a notification recommending the decriminalization of 39 minor economic crimes to stimulate the nation’s economic growth. The government recommended decriminalization of certain economic offenses as a response strategy to boost the economy and for effective justice delivery. Section 138 of the Act, which specifies penalties for dishonoring cheques, is one of the many offenses that have been suggested for decriminalization. It has been up for discussion for some time whether dishonoring cheques should be made a crime in India. Some argue it should not constitute a crime, while others think it should. Cheque dishonoring is a compoundable offense and is punishable under Section 420 of the IPC. This makes it clear that the legislature wants to reduce the backlog of similar cases. 

Mixed responses have been given to the proposal. While some think that decriminalization is a good idea, others claim it would increase the number of cases. Section 219 of the Criminal Procedure Code permits the tactful disregarding of provisions. Every institution in India was impacted by the COVID-19 pandemic, including the judiciary, which has experienced a disturbing rise in the number of cases still pending. In general, there are strong reasons on both sides of the question of whether dishonoring cheques should be made a crime in India.

As per the 213th Report of the Law Commission of India, over 38 lakh cases of dishonor of cheques were pending in courts, and out of them over 7.6 lakh cases were pending in criminal courts in Delhi at the magistrate level alone. Actions taken for the decriminalization of minor offenses are expected to go a long way in improving the ease of doing business and helping unclog the court system and prisons. It would also be a significant step in the Government of India’s objective of achieving ‘Sabka Saath, Sabka Vikas, and Sabka Vishwas’. The 213th Law Commission Report stated and emphasized that many other cases that were more serious than the cases of cheque bounce and cheque dishonor were being sidelined, delayed, etc., and that this was overburdening the country’s judicial system. If this was considered from a different perspective, it could be argued that the aggrieved parties in such kinds of cases get protection through a punitive provision for cheating under Section 420 of the IPC, which can offer a fair and just remedy. Therefore, there was no need to create a new provision for the same act because doing so would only have increased the burden on and unnecessarily clogged the nation’s judicial system. Second, in addition to punitive clauses, the parties to such a dispute or injustice have the right to different civil remedies. The offense was compoundable under Section 147 and was punishable by Section 138 penalties. Therefore, it has been noticed recently that the line separating criminal law and civil law is becoming unclear due to the simultaneous existence and applicability of both sorts of remedies. Since the security and credibility of the instrument are removed, it would deflate the motivation of the honest parties to adopt or take on and consider cheques as an appropriate means of transaction and payment.

The current criminalization system has received a lot of criticism. It is claimed that the judicial system has been overburdened and overloaded as an effect of the criminalization of cheque bounce. Decriminalization supporters believe that the current legal system is unnecessarily strict and ignores the basic causes of cheque bounces. Decriminalization, according to them, would lighten the demand on the legal system, facilitate trade, and shield debtors from mistreatment. They support alternative dispute resolution processes including arbitration or specialized tribunals to settle issues involving returned cheques. The goal of decriminalizing will be defeated since there will be numerous legal disputes and an increasing number of cases.

In 1987, the Legal Services Act was introduced. Through this law, the legal system hoped to encourage Lok Adalats to settle cases of cheque dishonor through negotiation. A component like that would offer the speed needed in these situations. In 2012, the Supreme Court recognized that even if a particular case was a criminal one, awards made by the Lok Adalat’s on such a compromise may be regarded as a decree that the civil courts could enforce The Supreme Court most recently emphasized a more practical and reasonable approach to resolving these civil matters without the necessity for a criminal system in March 2020. Instead of filing a private lawsuit, the court offers a plan to resolve such cases in the first instance by settlement. When a settlement cannot be reached, it is time to consider filing a private case.


Determining an appropriate limit for the amount of the dishonored cheque to attract criminal prosecution would be a more sensible alternative than complete decriminalization. This would preserve the deterrence impact for larger transactions while allowing the legal system to concentrate on more important instances. For the legal system to be more effective overall, it is also critical to address the problem of judicial vacancies in the lower courts. Decriminalizing the dishonor of cheques in India should ultimately be decided after an in-depth study of the potential effects on the banking system, the legal system, and the general economy. Reaching a balance between lessening the burden on the courts and preserving the legitimacy and deterrent power of the current legal system is crucial.

The article represents the personal views of the author.


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