De-criminalising dishonour of cheques

Decriminalising Section 138 Of Negotiable Instrument Act: An Economic Solution

by Omkar Upadhyay and Gaurangi Sharma

With havoc wreaked by COVID-19 in the individual lives as well as the economy, several economic activities have been brought to a standstill while financial pandemic has outpoured. The Government of India, assuming the role of Parenspatriae, has proposed notification by Ministry of Finance for seeking suggestions regarding the decriminalising of various sections spread across distinct Acts including Negotiable Instruments Act (Sec. 138), SARFAESI Act (Sec. 29), LIC Act (Sec. 12), Banking Regulation Act, Chit Funds Act (Sec. 4) etc for improving the ease of doing business in India and also for unclogging the court system.

This move is a part of a larger scheme of decriminalising various minor offences, but among all those enlisted, the offence of dishonour of cheque and attempt to decriminalise it has invited a myriad of opinions as well as backlashes. This article, thus, employs the perspective of ‘law and economics’ to gauge the viability of the proposed changes by analysing the move on the touchstone of the concept of ‘optimal deterrence’.

Nature of Offence under Section 138

Cheques become an inevitable necessity given the voluminous increase in trade and commercial activities. The Indian law associated with cheques can be well found in the Negotiable Instruments Act, 1881. Virtually, cheques as modes of payment obliterated the need to carry the bulk of cash in high transaction businesses. Section 138, prescribing the punishment for the dishonour of cheque, was thus intended to serve the twin purpose of compensating the acceptor of cheque and proscribing the defrauder. Such penal provisions dealt with dealing in credible cheques and could easily track the fluctuation in cases of bouncing of cheques. The provision currently deals with charges for criminal liability to be a punishment of imprisonment and fine, the intention of which is to prevent the unscrupulous issuers of cheques to be held by clutches of law in such cases. 

However, despite verbatim of provision suggesting criminal liability, as is also evinced by prescription for imprisonment, the judiciary has viewed it primarily as a civil wrong. It was noted in Damodar S. Prabhu v. Sayed Babalal that the primary focus of the provision should be its compensatory part and that of punitive aspect must be treated as secondary. Likewise, in Kaushalya Devi Massand v. Roopkishore Khore, the Court cautioned in its holding that the gravity of complaint under Section 138 cannot be equated with an offence as under Indian Penal Code and that an offence under Section 138 of the Act almost takes shape of civil wrong with a tan of criminal overtone.

Thus the debate of decriminalising this provision, being existent for a long time, reasons on the fact that while the legislature has intended it to be a provision deterring crime, the judicial trend has focused more on the compensatory part and treated it as a civil wrong.

Gauging the Economic Viability of Decriminalising: The Issue of Optimal Deterrence

The economic approach to crime primarily focuses on the deterrence level of punishment and analysing the costs and benefits associated with it, while ultimately thriving towards efficiency, a proxy for social welfare. A rational criminal resorts to crime when he sees that the expected gains resulting from the crime are greater than the harm he expects in the form of punishment. It is only when harm, that is the level of punishment, exceeds the gain that the criminal would be deterred.

The move to wholly decriminalise the provisions providing for a penalty in case of dishonour has to be carried out in such a manner that the objective of its inclusion in the first place, of preventing frequent bouncing of cheques and protecting the interest of honest drawers, is preserved. The current punishment includes two components; imprisonment (which may extend to two years) and fine (which may extend to twice the amount mentioned in the cheque). It is settled, that more the severity of punishment, lesser will be the incentive to commit a crime, and in this case, to defraud. However, imprisonment entails huge costs associated with it which are borne by society as a whole.

The costs are in the form of expenses incurred to maintain the prisoner, provision for salary to jail personnel, and the opportunity cost which includes the loss of income of the prisoner because of him being in the prison rather than the outer world where he could have been earning. In such a situation, fines, a monetary sanction, proves to be a viable penalty. Imposing fines entails little or no costs. Further, it has been noted that the same level of deterrence can be achieved through fines with an exponential reduction in costs.

However, imposing fines is not exclusive of its own flaws. The provision in the enactment provides for the imposition of a fine as high as twice the amount of cheque. This could lead to the economic problem wherein the defaulter would become ‘judgement proof’, that is, even after his whole wealth is used up for satisfying the fine amount, there still remains deficit. In such a situation, it becomes pertinent to apply non-monetary sanctions, like imprisonment.

Making Way For A Middle Path

As elucidated, crime(rational) can only be deterred when the punishment is optimal and where costs are minimised. However, the provision for imposing double amount as fine could be cumbersome, thus resorting to imprisonment turning inevitable. Nonetheless, a middle path could be adopted instead of decriminalising the offence where the offender can be sent to prison as a last resort and fine should be the primary penalty, which can potentially be a win-win situation. Following this, the victim would be compensated effectively and the social costs, those resulting from imprisonment would decline to lead to a situation of social welfare.

Moreover, decriminalising the provision in toto would not be viable, as, in absence of a deterrent, the number of bouncing of cases may increase as then the gains of the offence would always outweigh the harm. This would be particularly true in the case of hardened and incorrigible offenders who commit the offence with malice.  Thus the need of the hour is to economically move forward with the issue at hand and thus mould the law on the touchstone of the economic principle of optimal deterrence. Furthermore, compensation, instead of a punitive penalty, would not serve the legislative intent behind the enactment.


The need for decriminalising Section 138 has been a prominent matter of debate for several years now. Yet, the driving force withholding the need of the hour stems from the fact that courts in such cases emphasize on the offender and not the offence. Since decriminalising Section 138 may also take a ghastly turn for bona fide cheque holder who seeks penal action from a criminal court, a win-win situation can be adopted and treated as a middle path for balancing the proposal of government and to maintain the viability of the provision thereof. Since originally civil claims being tried as criminal claims in the guise of blurred legal distinctions poses a serious threat to a fair trial, therefore the urgent need of finding right path relating the legality of Section 138 of Negotiable Instruments Act holds an important place to imbibe viable economic solutions in this regard.

Views are personal.

Image credits: Provided by the author


Omkar Upadhyay and Gaurangi Sharma are currently pursuing law from Maharashtra National Law University Nagpur.

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