Banking and the law: India

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Bank guarantees

Bank guarantee can save property from attachment

The Times of India, Mar 02 2016

Lubna Kably

If there's a dispute over taxes, there's now a way for a company to prevent its property being attached. It can give a bank guarantee to the tax officer to prevent property, such as a factory, from being attached during the course of a tax assessment.

The Budget proposals provide that a tax official can revoke an order for provisional attachment of the property if the taxpayer furnishes a bank guarantee equal to the fair market value of the property, or of an amount sufficient to protect the interests of the revenue authorities. Within 15 days of receipt of the bank guarantee, or within 45 days if the case has been referred to a valuation officer, the order for attaching the property is to be revoked. This proposal will come in force from June 1, 2016.

Business entities operating in India, often find that their property, such as an office or a factory building, is attached by the tax authorities during the course of assessment. For instance, operations froze at Nokia's manufacturing facility near Chennai after it was attached by tax authorities in 2013. More recently, when Vodafone received a fresh tax demand of Rs 14,200 crore, the notice also said that Vodafone's assets in India could be seized if the disputed demand was not paid.

A high-level committee led by Justice Easwar had pointed out that tax officials have the power to provisionally attach a taxpayer's assets, with the permission of higher level authorities, if it was necessary to protect the interests of the tax de partment. Such attachment is supposed to be temporary -six to 24 months. However, in many cases, the taxpayer files a writ, or approaches the Authority for Advance Ruling and obtains a stay on regular assessment. This prolongs the duration of the assessment and the property remains attached causing disruption in business operations.The Budget proposals have taken the recommendations of this committee into consideration.

“The move enabling taxpayers to furnish a bank guarantee will help business houses to continue with their operations. It is a businessfriendly proposal,“ says Gautam Nayak, tax partner, CNK & Associates.

Cheques

Bounced cheques

India Today, January 20, 2016

In India, cheque bounce cases are the most common financial offences and carry a big penalty for the issuer. But with the government's new norms, there's a bit of relief for victims. Let's look at a few points on cheque-bouncing norms and things to follow that can help you. New norms for bounced cheques

The government has notified the Negotiable Instruments (Amendment) Bill, 2015, which will allow cheque bounce cases at a place where the cheque was presented for clearance and not the place of issue. Parliament passed the Negotiable Instrument (Amendment) Bill in 2015. According to the law, a case of bounced cheque can be filed only in a court in whose jurisdiction the bank branch of the payee lies. The new law may help in ensuring a fair trial. The legislation also mandates centralisation of cases against the same drawer. Once a cheque is dishonored, the bank of the drawee gives the banker of the drawer a 'Cheque Return Memo' with reason for the non-payment. Within 30 days of the receipt of the memo, a legal notice is to be sent to the defaulter with all relevant details of the transaction. After the receipt of notice, the drawer of the cheque is bound to make a payment within 30 days of receiving the notice. In the event of failure to do so, the drawee of the cheque can file a criminal complaint at a magistrate's court within a period of 30 days of the expiry of the notice period.

Key points to know about cheques

1. Dishonour of cheque is a criminal offence under the Indian Penal Code as well as the Indian Negotiable Instruments Act.

2. Under Sec 417 and 420 of IPC 1960: the drawer of the cheque can be prosecuted and appropriate punishment may be handed out.

3. To apply Sec 417 and 420 of the IPC, a case of cheating has to be proven.

4. A criminal liability can be established under Section 138 of Negotiable Instruments Act, 1881 too.

5. Under Sec 138, the drawer of a dishonoured cheque may be jailed for 2 years or fined double the amount of the cheque or both.

6. There should always be a minimum balance in your account even after the cheque is encashed.

7. One has to pay heavy penalty due to insufficient funds by the respective banks of the defaulter and the payee.

8. Under RBI guidelines, a bank can stop issuing cheque book facility to a customer who repeats a bounce offence more than four times; valued at over Rs 1 crore .

9. A bounced cheque affects your CIBIL score.

Banks cannot prosecute if collateral cheque bounces

From the archives of The Times of India 2010

Banks can’t prosecute if collateral cheque bounces: Bombay HC

Shibu Thomas | TNN

Mumbai: Bombay HC has ruled banks cannot prosecute borrowers under the stringent anti-cheque bouncing laws if blank post-dated cheques issued by them as collateral security are dishonoured.

‘‘It is doubtful if the provisions of Section 138 of the Negotiable Instruments Act can apply to a case in which a blank or post-dated cheque is obtained by a bank or money lender before or while sanctioning or disbursing loan amounts as security for the loan,’’ said Justice P R Borkar. The order is likely to come as a huge setback to lending agencies who ask borrowers to deposit blank post-dated cheques as security. ‘‘Law-makers must not have intended or imagined that money lenders or banks would obtain blank or post-dated cheques while sanctioning/disbursing loans as securities and would use them to make debtors/borrowers repay the loan under threat of prosecution and punishment (under the cheque-bouncing law),’’ added the judge.

The court upheld the acquittal of Ahmednagar resident Rajendra Warma, who was prosecuted after a blank cheque issued by him for a loan was dishonoured. Ramkrishna Urban Cooperative Credit Society (RUCCS) had given a loan of Rs 2 lakh to Warma in 2000. Warma had issued 10 blank post-dated cheques at that time as security. One of these cheques, dated January 2008, bounced, following which RUCCS lodged a criminal complaint against Warma.

The magistrate’s court held that Warma was not guilty under the Negotiable Instruments Act and acquitted him. It also held that while Warma had receipts to prove that he had repaid the entire loan amount in 2005, the bank failed to produce records after 2003.

Cheque bounce: Directors get relief

From the archives of The Times of India 2010

Only Those Responsible For Conduct Of Business At Time Of Offence Liable: SC

TIMES NEWS NETWORK

New Delhi: The Supreme Court on Monday significantly narrowed down the liability of directors, who have been hounded under the Negotiable Instruments Act for dishonour of a cheque issued by the company.

Upholding the quashing of summons and case against a director initiated by National Small Industries Corporation, a bench comprising Justices P Sathasivam and Justice H L Dattu said not all directors were liable under Section 141 of the NI Act.

“Only those persons who were in-charge of and responsible for the conduct of the business of the company at the time of commission of an offence will be liable for criminal action,” said the bench.

“It follows from the fact that if a director of a company who was not in-charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable for a criminal offence under the provisions,” said Justice Sathasivam, who wrote the judgment for the Supreme Court bench.

After discussing the vicarious liability of the managing director and other directors in cheque bouncing cases, the bench laid down guidelines, the broad contours of which are:

It is a complainant’s responsibility to explain how a director was vicariously liable. There is no presumption that every director knows about the issuance of the cheque that bounced.

Under Section 141, criminal liability can be fastened only on those directors who, at the time of the commission of the offence, were in charge of and responsible for the conduct of the business of the company.

Vicarious liability on the part of a person must be pleaded and proved and not inferred. If the accused is managing director or joint managing director, then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with.

What if a cheque bounces? Here's a guide to the legal recourse available to you

By Sakina Babwani, ET Bureau | 24 Jun, 2013

The Economic Times

Bounced cheques are one of the most common offences plaguing the financial world. According to the Supreme Court, there are over 40 lakh such pending cases in the country. A cheque can be dishonoured for various reasons, the most common being insufficient funds in the account of the person drawing the cheque, and a mismatch of signatures with the bank records. But what do you do if you land a bad cheque? Here's a step-by-step guide to the legal recourse that is available to you.

Filing a criminal complaint

When a cheque bounces the first time, the bank issues a 'cheque return memo', stating the reasons for non-payment. The holder can resubmit the cheque to the bank within three months of the date on it, if he believes it will be honoured the second time.

The other option would be to prosecute the defaulter legally. The first step is to send a legal notice to the defaulter within 30 days of receiving the cheque return memo. All the relevant facts of the case, including the nature of transaction, amount, date of depositing the instrument in the bank, and subsequent date of dishonouring, should be clearly mentioned in the notice. If the cheque issuer fails to make a fresh payment within 30 days of receiving the notice, the payee has the right to file a criminal complaint under Section 138 of the Negotiable Instruments Act.

However, the complaint should be registered in a magistrate's court within a month of the expiry of the notice period. If you fail to file the complaint within this period, your suit will become time-barred and, hence, not be entertained by the court unless you show sufficient and reasonable cause for the delay. On receiving the complaint, along with an affidavit and relevant paper trail, the court will issue summons and hear the matter. If found guilty, the defaulter can be punished with a prison term of two years and/or a fine, which can be as high as twice the cheque amount.

However, the defaulter can appeal to the sessions court within one month of the date of judgement of the lower court. If a prolonged court battle is not acceptable to both the parties, an out-of-court settlement can be attempted at any point. "You can also file a case of cheating under Section 420 of the Indian Penal Code, but the above recourse is preferred as it is faster and specially dedicated to this particular offence (bounced cheques)," says Ravi Goenka, advocate, Goenka Law Associates.

Filing a civil suit

While the above-mentioned process is helpful in taking a defaulter to task, it may not always result in recovery of the pending dues. Hence, one can file a separate civil suit for recovery of the cheque amount, along with the cost borne and the lost interest.

A summary suit under Order 37 of the Code of Civil Procedure (1908)

This is where a summary suit under Order 37 of the Code of Civil Procedure (1908) comes in. A summary suit is different from an ordinary suit as it does not give the accused the right to defend himself. Instead, the defendant has to procure permission from the court to do so. However, remember that summary suits can be availed of only in recovery matters, be it promissory notes, bills of exchange or cheques. "Since a summary suit is a civil proceeding that does not have the force of a criminal charge, the chances of imprisonment are remote in such matters," says Goenka.

Exceptions

These legal remedies are available only where pending debt or liability can be clearly established. Hence, if a bounced cheque was issued as a donation or as a gift, the holder cannot legally sue the defaulter.

RISK FACED BY DEFAULTERS

A jail term or heavy penalty isn’t the only consequence faced by the issuer of a dishonoured cheque. The bank has the right to stop the chequebook facility and close the account for repeat offences of bounced cheques. However, the RBI clearly states that such action can be taken only if the default has taken place at least four times on cheques valued at over 1 crore. Says Aakanksha Joshi, senior associate, Economic Laws Practice: “If the bounced cheque was for repayment of loans, banks also have the collateral offered as security. They are bound to issue a notice before they auction such a property to recover the money.”

CHANGES IN THE PIPELINE (2013)

The option of dragging an offender to court under Section 138 of the Negotiable Instru ments Act may not be available for long. If the amendment proposed by an inter-ministerial group is accepted, all cases of dishonoured cheques will have to be decided only through arbitration, conciliation or settlement by lok adalats. If the matter is referred to an arbitrator, the latter will hear both the parties and pass an award binding on both. This can only be appealed on grounds that it is invalid or the defendant was not given adequate time to present the case, or was not given notice about the arbitrator’s appointment.

If the matter is referred for conciliation, a third person has to help the parties come to a settlement. Lok adalats function on similar lines. If the disputing parties are unable to settle, the matter can be taken to court again. Banks, however, are not happy with these develop ments. “This is a backward step in terms of recovery mechanism,” says Meenakshi A, head, operations, ING Vysya Bank

2018: Negotiable Instruments Act amended to cut litigation

LS OKs bill to cut litigation over bounced cheques, July 24, 2018: The Times of India


Bill To Amend Insolvency Law Introduced Too

Lok Sabha on Monday approved a bill which seeks to offer faster prosecution in cases linked to dishonoured cheques as well as compensation to a complainant.

The Negotiable Instruments (Amendment) Bill, which aims to cut down unnecessary litigation over bounced cheques, was passed by a voice vote. It allows a court trying a cheque bounce offence to direct the person who wrote the cheque to pay an interim compensation to the complainant. The bill amends the Negotiable Instruments Act, 1881.

Junior finance minister Shiv Pratap Shukla while moving the bill said it would bring down litigation and provide credibility to cheques and cut down delays in cheque bounce cases. “Banks will be helped by these amendments,” Shukla said an urged members to support the bill. Congress leader Shashi Tharoor said it was an important legislation and called for a provision for “trial in absentia”. He also urged the government to set up fast track courts to deal with cases of bounced cheques.

Another bill, which amends the insolvency law and empowers homebuyers to be recognised as financial creditors, was introduced in Lok Sabha. Finance minister Piyush Goyal introduced the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018. It replaces the ordinance approved by the cabinet in May.

BJD member Bhartruhari Mahtab said some amendments in the bill were aimed at favouring a particular industry, a charge which was rejected by Goyal who said the law was prospective and was “not intended to benefit anyone”.

The amendments will enable representatives of homebuyers to be part of the committee of creditors, which finally approves a resolution plan based on a bidding process and is meant to ensure that bankers do not secure their interests while the most aggrieved players get a raw deal.

Difference in signature

Can invite penal action: Delhi HC

Abhinav Garg TNN

The Times of India, Sep 21, 2011

In an important ruling, Delhi high court has held that difference in the drawer’s signature can also invite penal action and a magistrate can take cognizance of a complaint highlighting the offence. Justice Pradeep Nandrajog said if the receiver of the cheque decides to initiate criminal proceedings against the drawer, the latter has to prove his innocence in court — that the difference in signature was a genuine mistake, not a deliberate one, done to prolong the actual payment of money.

“Prima facie, an offence of cheating would also be made out and the magistrate can even take cognizance of the same,” Justice Nandrajog noted while rejecting the plea of one Santosh Gupta. Gupta rushed to HC challenging the decision of the magistrate to summon him for the cheque dishonour case slapped by Religare Securities. Religare informed HC that Gupta owed them money. But when two cheques of Rs 5 lakh each issued by him were presented before the bank they were returned with the remark “drawer’s signature different” and “funds insufficient”. That’s when the company slapped complaints against Gupta before a magistrate.

Gupta blamed the company for presenting the cheque for clearance, claiming he had asked them to return the cheques so that he can issue a fresh one. HC rejected these contentions, imposing a punitive fine of Rs 25,000 on Gupta.

Lockers

‘Not simply a landlord and tenant relationship’

Atanu Biswas and Bimal Roy, Security of my bank locker: Here are simple geometric solutions to protect valuables or confidential information, November 28, 2017: The Times of India


In response to a recent RTI, the RBI and 19 PSU banks explained that “the relationship they have with customers with regard to lockers is that of lessee (tenant) and lessor (landlord)”, and no compensation will be given for theft or burglary of valuables in safe deposit boxes of public sector banks as the locker hiring agreement absolves them of all liability.

On one side of the coin, it might be true; the bank does not even know which valuables are kept in one’s locker. However, in a similar case in 2000, judging a revised petition on the ruling of the National Consumer Disputes Redressal Commission, the National Commission held that “the depositors had taken the lockers on rent only because of the security provided by the bank and it is not simply a landlord and tenant relationship”.

Consider the security concern of my valuables deposited in a bank locker. Can anyone give a guarantee of no foul play? There are two keys of a locker, and a depositor cannot access the locker with his key D without the help of the bank because one key B is retained by the bank, and unless both keys are used the depositor cannot open the locker. We are certain that neither D nor B can alone unlock the locker, and D+B can certainly unlock it. But, is there any guarantee that D cannot be reproduced, or there does not exist any other key X which alone or B+X can unlock the locker?

As a generalisation of the locker security issue, we argue that nobody alone should have access to any confidential information of any kind. Here we discuss some simple geometric solutions. Let us consider acase where N persons have keys to some confidential information and at least two persons should collude to access that information. From simple geometry, we know that two points can uniquely determine a straight line, and we would use this to find the keys.

Let us assume that the intercept of the straight line is used to access the information. Suppose each of the N persons is given a random point on the straight line. If any two among them come together, they can easily construct the straight line and find the intercept, which can be used to open the locker or the confidential file. If we want to guarantee that M out of N persons are needed to collude for accessing the confidential information, we might think of a polynomial of degree M-1 instead (a straight line is a polynomial of degree 1). All the N individuals will then be given a randomly chosen point on the polynomial.

If M persons collude, they will be able to construct the polynomial by their M points. No less than M persons will be able to reconstruct the key (for example, for M=2, there are infinitely many straight lines passing through a single point). Such an elegant geometric solution to this problem was given by Adi Shamir, a famous cryptologist from Israel.

Towards further generalisation, we may think of a situation where the manager together with M out of N assistant managers of an organisation, or U assistant managers in the absence of the manager, are eligible to access some confidential information. It is possible to develop suitable keys for such problems.

In another bank-locker problem, the bank may retain one key, and both the husband and wife will have one key each. Either husband or wife, along with the bank key, is eligible to unlock the locker. We may treat the random key B, which is in possession of the bank, as the centre of a circle with prefixed radius, and two randomly chosen points on the circumference of the circle will be the two keys for the husband and the wife. The distance between two points, the bank-key and the key with the husband, would yield the radius of the circle. Same would happen for the key with the wife along with the bank-key. This security feature can be generalised for more than two users as well.

There should be a law to safeguard customer’s right to safety and security, or a convention of secret sharing for confidential information of high importance among more than one person. Of course, the appropriate authority might decide how a secret has to be shared bit by bit.

Personal guarantees

SC: Banks can invoke personal guarantees

Dhananjay Mahapatra, Agust 15, 2018: The Times of India


Scraps Order Of Company Law Tribunals

Spelling trouble for industrialists whose personal guarantees helped corporate entities owned by them get huge loans only to later default, the Supreme Court has ruled that banks can act against guarantors even as proceedings under the Insolvency and Bankruptcy Code are on.

A bench of Justices Rohinton F Nariman and Indu Malhotra allowed an appeal filed by the State Bank of India, which challenged concurrent findings of the National Company Law Tribunal and the National Company Law Appellate Tribunal withholding banks from moving against guarantors. The tribunals held that since the corporate entity was already facing insolvency proceedings, and enjoyed a moratorium under the resolution plan, banks could not move separately against the guarantor.

The NCLAT, which had upheld the order in favour of V Ramakrishnan, MD of Veeson Energy System, had given a broad interpretation of IBC Section 14, holding it barred action against sureties.


‘Liabilities of guarantor and debtor separate’

Challenging the NCLAT decision, SBI counsel Sanjay Kapoor and senior advocate C U Singh for Bharat Cooperative Bank (Mumbai) Ltd argued that a corporate debtor and a personal guarantor were separate entities. A corporate debtor undergoing insolvency proceedings under IBC did not mean a personal guarantor was also undergoing the same process and should enjoy immunity.

“As the guarantor’s liability is distinct and separate from that of the corporate debtor, a suit can be maintained against the surety, though the principal debtor has not been sued,” Kapoor said. Singh added that Section 14 spoke only of corporate debtors and not about guarantors.

Amicus curiae and senior advocate K V Vishwanathan said the idea behind Section 14 was that there be no stay of proceedings against the guarantor while the corporate debtor faced insolvency proceedings.

Writing the judgment for the bench, Justice Nariman said, “Section 14 refers to four matters that may be prohibited once the moratorium comes into effect.”

“A plain reading of the section leads to the conclusion the moratorium can have no manner of application to personal guarantors of a corporate debtor.”

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