Friday, September 29, 2023

Bouncing cheques: Dishonour of trust

The National Legal Services Authority has submitted a report on pre-litigation mediation for cheque bouncing cases. This is a very positive development for the expeditious disposal of such cases.

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By Sujit Bhar

Bounced” or dishonoured cheques are anathema to a business transaction. This historically repetitive occurrence has been met with scorn within the commerce ecosphere, and among ordinary folk, somewhat rightly so. Cheques that bounce for insufficiency of funds hit the trust that exists within a business transaction. Trust is the lubricant to any movement and friction is the last thing required here.

A cheque is a negotiable instrument, governed by The Negotiable Instruments Act, 1881. It is a financial instrument whose importance is underscored by Section 138 of the Act, making bouncing of a cheque a criminal offence. There are some checks and balances, such as if the payee decides to take legal action then he should give the drawer (issuer) a chance of repaying the due amount immediately, through a notice in writing. Penalty is imprisonment up to two years or monetary penalty or both.

The bank’s process is elaborate. When a cheque is dishonoured, the drawee bank is supposed to issue a “Cheque Return Memo” to the banker of the payee, mentioning the reason for non-payment. The payee’s banker then gives the dishonoured cheque and the memo to the payee. The payee can resubmit the cheque within three months of the date on it, if he thinks it will be honoured, and legal action can be taken thereafter.

The Supreme Court is now going through the hearings of a suo motu case for the expeditious disposal of cheque bouncing cases and has now directed the High Courts to submit a response within four weeks. Senior Advocate Sidharth Luthra, who has been appointed amicus curiae by the top court, reported to the Court that some High Courts were yet to file their responses on the issues. The apex court gave four weeks for the responses to be filed.

Meanwhile, an interesting situation has developed before the bench of Chief Justice of India (CJI) SA Bobde and Justices L Nageswara Rao and Vineet Saran. Advocate Luthra told the Court that the National Legal Services Authority (NALSA) had submitted a report on pre-litigation mediation for cheque bouncing cases. This is a very positive development, and can manage to contain a lot of bad blood that is created when such acrimonious issues reach the courts and become public. In short, in such cases, the only solution is legal, and business relationships are damaged beyond repair as trust evaporates. NALSA possibly thinks such arbitration can take care of this issue and keep the wheels of commerce moving even in these extremely stressed times of the pandemic.

A small problem of legal protocol seems to be standing in the way, though. Luthra pointed out to the Court: “… it (the reconciliation process) is not possible unless cognisance is taken of the case. Our submission is that it has to be done post cognisance and not pre-cognisance as NALSA suggests.” The CJI agreed to this suggestion, saying: “Negotiable Instruments Act does not lay down steps to be taken for dishonoured cheques. Therefore, it would not be advisable to consider for pre-litigation mediation. However, it may be possible to have it post cognisance taken by criminal court.” The Court has asked NALSA to modify its suggestions accordingly.

The mediation process is critical, because of the very nature of the problem. At the poor end of the scale lie cheques, issued to small traders and suppliers by larger organisations, where dishonoured cheques have multiplied through the years. This has become a massive problem during the pandemic, when the money in circulation dropped to such levels that keeping a bank account sufficiently stocked did become an issue. At the same time, essentials, such as electricity, raw material, wages, taxes and contingencies had to be addressed continuously.

It was a problem at both ends. There were firms that were using this as an excuse by fraudulently depriving creditors of their dues, while there were others who just could not pay. Within this, the option of legal redressal was only by means of a criminal case, leading to possible arrests and lifelong enmity and resultant loss of business. The NALSA suggestion was a critical mediation solution, though the small legal hurdle remained.

The general business practice is to provide a post-dated cheque, but leave advice that it should be deposited only after confirming with the issuer. The tide and ebb of funds in a current account is normal business practice. However, in the absence of this understanding, a cheque might end up being dishonoured, though the issuer may not really have intended to leave his/her account under-stocked. If the issuer fails to pay up even after the further chances available legally, the event could be termed a criminal act. Technically, a dishonoured cheque can be acknowledged in law as such if the bank memo, with the dishonoured cheque, is presented in a complaint. Which means a case is instituted. It is for this technicality that the case must be lodged.

Also Read: Madhya Pradesh HC stays any coercive action against Deputy Jail Superintendent of Sehore district till further orders

Thankfully, now, NALSA has provided an amicable settlement that will allow combatants to remain friends and possible business partners, even after an incident like a dishonoured cheque. Also, the Supreme Court has allowed a modification of the NALSA suggestion to further smoothen the issue.

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