Saturday, June 15, 2013

The saga of criminalising and then decriminalising cheque bouncing

by Shubho Roy.

The criminalisation of writing cheques without a sufficient balance was introduced in India in 1988. It was an addition to a much older British law called the Negotiable Instruments Act, made in 1881. The reason for the amendment was the endemic problem of cheques being dishonoured. This had made it difficult to do transactions where payment and delivery don't happen instantaneously. Mistrust of cheques was encouraging cash transactions, with consequent problems of counterfeiting, costs of storing and moving cash, and the law enforcement problems of an underground economy.

It has been estimated that about 30% of criminal cases in Indian courts are either cheque bouncing or traffic offences. The government has now proposed to amend the Negotiable Instruments Act (N.I. Act) to decriminalise the offence of bouncing cheques (called `138 N.I.' in legal circles) (See here). This move is aimed a decongesting the judicial system.

In 1988, when the amendment was brought in, no estimation was done of the additional burden on the criminal court system because of the law. This episode has taught all of us that every time legislation is enacted, careful calculations need to be made about the costs of enforcing the law and these costs should find their way into budgets.

The de-criminalisation of cheque bouncing is a good move. It will reduce the burden on criminal courts. However, the cheque bouncing cases are symptomatic of a deeper malaise: poor contract enforcement. While we may cheer the demise of a poorly thought out and draconian measure in 1988, there is a dark side to this as well.

Consequences for contract law


One of the best achievements of the World Bank is their `Doing business' database. India ranks poorly on many counts in the Doing Business 2013 report. Of the 10 indicators tracked by the report, India's rank is worst in Enforcing Contracts, where it is ranked 184th out of 185 countries:

  1. It takes 1,420 days to resolve a contract dispute.
  2. 39.6 percent of the contract value is lost, of which 30% is paid out as fees to lawyers.
  3. Even after getting a judgment in your favour, it takes 305 days to enforce the judgment.
Given the absence of good contract enforcement, after 1988, cheques were often used by the recipient of funds to create a deterrent against reneging. A common method of ensuring regular payment of rent is to use post-dated cheques. The landlord takes the entire year's rent in post-dated cheques. This allows the landlord to bypass the entire rent-controller and court system for evictions when rent is not paid on time. With the voucher from the bank (recording the dishonouring of the cheque), the landlord can file a criminal complaint against the tenant.

This is a bad system of contract enforcement! It is biased towards the party which expects payments and has no remedy to the party which is getting a service or good. As an example, if the tenant sets off some rent because of mandatory repairs which the landlord failed to carry out, the tenant is perfectly allowed to take a defence of `set-off' in a contractual relationship. However, underlying the NI act is a presumption of debt, which will let the criminal case continue till the tenant is able to establish that there had been a valid set-off.

On a similar note, while the existing Section 138 of the NI Act is a draconian idea and bad in many ways, it has interesting positive effects when placed in an environment of bad contract enforcement. Consider the penalties for bouncing a cheque:
  1. Imprisonment for up to 2 years, or,
  2. Fine up to twice the amount involved, or,
  3. Both of the above.
This is draconian, but there is considerable legal certainty. In contrast, when a contract is violated, there is no statutory method for calculating the amount of damages that the violator has to pay. Given the delays in contract resolution, and the legal and administrative costs, which are usually not awarded, the net receipt is generally much lower than the amount owed. Indian courts are not bound by a strict statutory requirement of calculating litigation costs and interest accrued is rarely granted from the date of dispute. For this reason, there was some method in the madness of S.138 of the N.I. Act.

Consequences for courts


The proposed withdrawal of 138 N.I. has not adequately been thought through, in terms of the implications for the judiciary and the legal system. It is being argued that for many cases, arbitration will be done. However:
  1. What about the increased civil court burden? As argued above, post-dated cheques were used as a substitute for contract enforcement services of civil courts. When this mechanism is no longer available, there will be a surge in contract disputes. This flow of cases will atleast partially counteract the de-bottlenecking of courts that will come from removing cases associated with S.138.
  2. Where will we get the increased number of arbitrators? There are very few arbitrators in India, and there is no institutional system of providing arbitration services outside the larger cities.
  3. Who will bear the costs? The costs of arbitration are very high in India. While it may be appropriate for large businesses to internalise their dispute resolution mechanisms, smaller businesses should have access to a court system.
  4. Will arbitration be faster? There is no standardised procedure in the arbitration system in India for cheque bouncing cases. Evidentiary and procedural variety will lead to more challenges in appeal and increase the burden of the judiciary where every appeal will have to be checked for procedural propriety.
  5. Does the judiciary have the bandwidth to cope with the case load that will appear for review? Orders of arbitrators will be appealed to the higher judiciary. In many cases the courts will have to intervene to appoint arbitrators.
  6. Will people write more bad cheques? The authority of the arbitration system is based on the efficiency of the court system. The rational violator knows that the arbitral award will go to the same over-burdened judiciary where penal costs are rarely imposed, so there will be little incentive to honour arbitration awards.

Conclusion


S. 138 of the N. I. Act is a reminder to us of the complexity of public administration reforms. When liberal democracy works well, it is a Rube Goldberg machine with immense complexity of many moving parts. Simplistic reasoning will almost always lead us astray with unintended consequences. Hurried changes of law (such as those produced through weekend drafting projects) will almost always go wrong. Well done law will almost always require enormous effort, will require sophisticated thinking about incentives in envisioning legal effects, and will involve a certain element of complexity.

Faced with a problem like S.138 of the N. I. Act, what is a thinker of government to do? There is a real opportunity in thinking outside the box. The solution to making payments lies not in making cheques work better but in fundamental change in technology: by moving to electronic payments. All these problems go away if you pay me on an electronic system, and within one second, I know whether I got the money or not. Our job is to dematerialise money, just as we have dematerialised shares. This will also require consequent changes in the Payments and Settlement Systems Act, which has mistakenly copied S.138 of the N. I. Act. This requires new thinking in financial policy so that India can get to a sensible payments system.

Electronic payments is of course no substitute for the public goods of contract enforcement. India desperately needs a good legal system, which comprises laws, lawyers and courts. But in this specific case, the storm of complexity associated with cheques is actually something that can be completely side-stepped. Amidst the debate around S.138 of the N. I. Act is a failure of imagination on policies about the payments system.

4 comments:

  1. I have gone through the sensible comments of yours and I also wish to add on few points.
    1.I am facing 138 ni cases from 2001 in different courts and different states of india and i am unfortunately i am the accused..
    2.in 99% of the cases the complainant have defaulted in the supply contract which i am not able to plead because it is civil and i am unable to express in the criminal court about the default .I am forced to beg , borrow pay the money for which i am not liable and due to harassment of facing the court i have paid money.
    3.the rules of 138 ni is different in different states of the so called india.In chennai there is no need for local surety but in mumbai,delhi the magistrate insist on local surety and also local advocate has to be engaged.In this surety issue the harassment was so huge that i had to pay a huge sum to the local advocates to arrange for sureties and i never know wheather they are genuine.
    4.The end result is have lost atleast 80 lacs,my age,and health underwent major heart surgery very recently.For my last hearing (i am from chennai) i had to pledge my wife's mangal sutra and spend for the case because advocates demand so much comforts.
    I personally beg to the law enforcing agencies to amend the law and pay way for alternate dispute resolution like arbitration is implemented on SOS otherwise very soon people aggreived like me will take decision like what farmers do in india.
    l.narayanan

    ReplyDelete
  2. dear sir,
    there is a lot of grammatical error in my previous reply kindly pardon me for the errors i believe that the message is conveyed. i also want to tell you that not a single case is over till date .The govt. should really do something to amend this law of 138 ni .

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  3. Dear Mr. Lakshmi Narayanan,
    I sympathise with you. I agree that there are many innocent people in this country who are harassed because of the failure to enforce contracts. However, please consider the other side too. There are many people who do not honour cheques and fool businesses too. Tenants who take advantage of the poor eviction laws. Each of us have our own personal problems.

    I would ask you to think about what is fair. We can decriminalise cheque bouncing, and face the evils of the dishonoured contract. Why dont you also join in the demand for better contract law enforcement. We all suffer from bad laws in the country. The public pressure builds up and another bad law is made. It is time to think about this calmly. We should decriminalise cheque bouncing, but what should it be replaced by?

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  4. Dear Sir,
    I need help, my case is that i had issued a rent cheque to my landlord, he had deposited it after 20 days of issued date. as my son was serious i had withdraw 3000 from bank,hoping to deposit next day and i did it also , but unfortunately that cheque got returned the same day. I had informed my landlord telephonically to re-deposit cheque, but he is all set file case against me. please guide me what should i do to get that cheque cleared. the amount was 7500.

    ReplyDelete

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