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It is not surprising that the outbreak of Covid-19 negatively impacted not just the health of several people but also the economy of the country. While both the Centre and State Governments are struggling to resuscitate and revitalize both these crucial sectors, attempts to revive the economy are being made with great promptness by the Central Government. The government had, vide a Circular dated 08.06.2019 (the Circular), proposed the reclassification and decriminalisation of offences under various legislations with a view to improving business sentiment and unclogging of court processes. The Circular lists out 39 penal provisions under 19 different legislations, that the Government proposes to decriminalise.

The Ministry of Finance, vide the said Circular invited the comments of State Governments/ UT Administrations, Civil Society/ Non- Government Organisations, Academicians, Public and Private Sector Organisations, Multilateral Institutions and members of the public to submit their suggestions, regarding such decriminalisation, to the Department. The Circular also mentions that the following principles should be kept in mind when deciding on the reclassification of criminal offences to compoundable offences: (i) Decrease the burden on businesses and inspire confidence amongst investors; (ii) Focus on economic growth, public interest and national security should remain paramount; (iii) Mens rea (malafide/ criminal intent) plays an important role in the imposition of criminal liability, therefore, it is critical to evaluate nature of non-compliance, i.e. fraud as compared to negligence or inadvertent omission; and (iv) The habitual nature of non-compliance.

Decriminalisation and Condonation: In Vogue

Before we go further into the Circular, it is to be noted that such a move by the Government is not surprising and it is only a consequence of a stratagem that the Indian Government had already adopted. By an amendment in 2019, sixteen offences in the Companies Act, 2013 were recategorized to civil defaults. The Companies (Amendment) Bill, 2020 decriminalises several sections of the Companies Act, 2013. The Ministry of Corporate Affairs also came up with the ‘Companies Fresh Start Scheme 2020’to enable companies to make good of any filing-related defaults, irrespective of the duration of default, and make a fresh start as a fully compliant entity.

The Scheme, apart from giving longer timelines for corporates to comply with various filing requirements under the Companies Act 2013, significantly reduced the related financial burden on them, especially for those with long-standing defaults, thereby giving them an opportunity to make a “fresh start”. The Scheme provided for immunity from penal proceedings, including against imposition of penalties for late submissions and also provides additional time for filing appeals before the concerned Regional Directors against the imposition of penalties, if already imposed. The Government has also proposed to decriminalise certain offences under the Limited Liability Partnership Act, 2008.

Offences sought to be decriminalised

The sections that are proposed to be decriminalised can be found at:

https://financialservices.gov.in/sites/default/files/Decriminalisation%20-%20Public%20Comments.pdf

The offences that the above Circular seeks to decriminalise are those that penalize Contravention of mandated regulations, Non-compliances, wilful furnishing of false statements and other minor offences, spread across Insurance Act, 1938, SARFAESI Act, 2002, PFRDA Act, 2013, RBI Act, 1934, Payment and Settlement Systems Act, 2007, NABARD Act, 1981, NHB Act, 1987, State Financial Corporations Act, 1951 Credit Information Companies (Regulation) Act, 2005, Factoring Regulation Act, 2011, Actuaries Act, 2006, Banking Regulation Act, 1949, General Insurance Business (Nationalisation) Act, 1972, LIC Act, 1956, Banning of Unregulated Deposit Schemes Act, 2019, Chit Funds Act, 1982, DICGC Act, 1961, Negotiable Instruments Act, 1881, Prize Chits and Money Circulation Schemes (Banning) Act, 1978.

Now, looking at the sections in the light of the principles that the Circular advises to be kept in mind, it is observed that, some sections that penalize contraventions and non-compliances are offences that do not require “Mens rea”. These are merely provisions that criminalize procedural lapses and minor non-compliances. These provisions can even be burdensome for corporations to comply with. Such offences do not necessarily affect public interest or security and a penalty maybe a sufficient deterrent. Some of such sections form part of the Insurance Act 1938, The National Housing Bank Act 1987, The Banning of Unregulated Deposit Schemes Act 2019, etc. Another set of offences are those that penalize willful furnishing of false material particulars. These sections form part of legislations that govern Banking and Non-Banking Financial Corporations. These sections are in place to ensure the security of public interest. These legislations, such as the RBI Act, supervise the functioning of and submissions of financial statements by financial corporations.

Any false material wilfully made under the above Acts would attract punishments in the form of fine or imprisonment. Unlike the previous category of sections discussed above, the offences per these legislations would cause substantial harm and damage to the public interest and the economy. Therefore, a mere levy of the penalty may not be a deterrent sufficient to prevent the offences that the Acts aim to curtail. The offences under these sections clearly mirror the presence of mens rea, as they are committed wilfully. The existence of mens rea would be a matter of adjudication before an appropriate court of law. Having said the above, the reclassification of offences of the former or latter kinds mentioned above can majorly be decided on the factor mens rea, which is also a principle highlighted in the Circular of the Ministry of Finance.

Section 138 of the Negotiable Instruments Act, 1881

A section that has attracted the attention of several stakeholders is Section 138 of the NI Act, which penalizes the dishonour of a cheque. This section was introduced to give credibility to business, commerce and industry. The offence under Section 138 is quasi-criminal in nature and it is used only as a debt recovery mechanism. The punitive element of the section is only secondary, while section 138 has primarily been used only to recover money and the criminal sanction has only enabled the same.

Why the decriminalisation of Section 138 could be a welcome move?

The Hon’ble Supreme Court in Meters and Instruments Private Ltd. v. Kanchan Mehta observed Offence under Section 138 of the Act as primarily a civil wrong. The Supreme Court also referred to the 213th Report of the Law Commission and observed that cases under Section 138 constitute about 20% of the total number of cases filed in the Courts. Therefore, it can be argued that, decriminalising Section 138 may be a welcome move by the Government. Such a move would certainly reduce the burden on courts and it would not affect the businesses or investors, as creditors could still have a remedy before the civil court and if a dishonest intention is proved, it would also constitute an offence under Section 420 of IPC.

Considering the Government’s concerns as mentioned in the Circular, that “the risk of imprisonment for actions or omissions that aren’t necessarily fraudulent or the outcome of malafide intent is a big hurdle in attracting investments. The ensuing uncertainty in legal processes and the time taken for resolution in the courts hurt ease of doing business. Criminal penalties including imprisonment for minor offences act as deterrents, and this is perceived as one of the major reasons impacting business sentiment and hindering investments both from domestic and foreign investors. This becomes even more pertinent in the post COVID19 response strategy to help revive the economic growth and improve the justice system.”, where such decriminalisation would prove to be a good strategy. Such a move would make India a more appealing market for attracting foreign capital, especially in the existing circumstances.

Further, when the offence was criminalised in 1988, it was however never shown how it would impact the judicial system and as mentioned above, the Law Commission in 2008 estimated that over 38 lakh Section 138 cases were pending in courts across India. Such numbers are only a reason for worry among stakeholders and an overburdened judiciary is not able to deliver justice despite the best efforts of those in office. Also, most of these cases are pending merely due to the absence of the accused. Cases that are pending only owing to the fact that the accused are avoiding summons, show that the accused are willing to take a chance of avoiding the system in light of how unfavourable proceedings practically are to the complainants. The introduction of the offence has clearly not reduced the instances of dishonour of cheque nor is there anything to indicate that its decriminalisation would lead to an increase in the dishonour of the cheques.

It also cannot be denied that the number of cases that are pending in several courts across the country have cast a shadow on the credibility of trade and commerce. And the huge backlog of cases have paralyzed other serious cases which have undoubtedly resulted in the public losing faith in the judicial system.

Why decriminalisation of Section 138 could be opposed

It is reported that bankers resort to legal action under Section 138 as the fear, of criminal activity, including imprisonment for up to two years or fine, which may be twice the amount of the cheque or both, acts as a deterrent to such borrowers. The apprehension of criminal action and punishment with imprisonment and fine have in some cases proven as a factor for making timely payments by cheques. The intention behind introducing the section in 1988 was to enhance the acceptability of cheques in settlement of liabilities and to impose strict liability on the defaulters, to increase the debt recovery rates and to provide the rightful claimants with adequate relief. The purpose of issuance of a cheque is to make payment ultimately and if the drawer is given the comfort of knowing that no strict legal action can be taken against him, the cheque, as an instrument that guarantees payment, would lose its value. Also, it cannot be denied that, while cases under Section 138 have overburdened the courts, the exponential growth in the cases filed under Section 138 actually shows that the offence is rampant and penalization of the same is much of a necessity.

Conclusion

While decriminalising some offences can be fruitful to the economy, decriminalisation of serious offences may not help the Government achieve what it aims to, vide the Circular. The Government needs to differentiate among those offences that would affect the general interest of the public and those wouldn’t in the long run. Finally, the legislature would be expected to take cautious steps in its run towards progress and be conscious of the hurdles involved in the decriminalisation of offences.