Banking and the law: India
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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
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
