BANKING - Bouncing of Cheque and related matters

BANKING

Negotiable Instruments

Bill of Exchange

Where a creditor directed the debtor to pay the money to a named person or bearer.

[To A. Pay to C a sum of Rs. 1000. B (Signed)]

Promissory Note

Where a person promised to pay another or the bearer a certain sum of money.

[1.10.2014. Rs. 20,000. I promise to pay A or order at Calicut, three months after date the sum of Rs. 20,000. B(Signed)]

Cheque

A bill of exchange directing a bank to pay to a party.

As bank branches have got networked, a cheque drawn on any branch can be encashed from any location within a day. In this context, no person would agree to take a negotiated cheque. Thus, the negotiability of cheques has lost significance.

It is pertinent to note that a negotiable instrument is given as a part of another contract. 

With electronic banking, direct electronic transfer by the customer is reducing the significance of cheques.

However, cheques as a payment mechanism will continue to be of some significance.

To give sanctity to the payment mechanism, the dishonour of a cheque, if certain conditions are met, has been made a punishable offence.

As the punishment prescribed is imprisonment, there has been much litigation to avoid imprisonment. 

(40 lakh cheque-bounce cases choke the justice delivery system in the country – Data 07.02.2020)

BANKER 

One who, in the ordinary course of his business, honours cheques drawn upon him by persons from whom and for whom he receives money on current accounts.

CUSTOMER

Customer is not defined. 

A person who opens some sort of an account with a banker is called a customer. 

Mere casual acts of service do not create the relationship of banker & customer.

BANKING COMPANY

A company that transacts the business of banking.

BANKING 

Accepting for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdrawable by cheque, draft order or otherwise.

BANKER CUSTOMER RELATIONSHIP

The relationship between a banker and a customer is essentially contractual and is that of a debtor (banker) and creditor (the customer). This relationship is sometimes reversed. This happens when the banker lends money to the customer. The relationship also partakes many aspects of the relationship of agent and principal.

OBLIGATIONS OF A BANKER

• Honour cheques
• Keep proper record of transactions
• Abide by the instructions given by the customer
• Not to disclose the state of his customers' account or affairs

RIGHTS OF A BANKER

• General lien of banker
• Incidental charges and interest 
• Set off (debit balance against credit balance)

WHEN BANKER MUST REFUSE PAYMENT ON HIS CUSTOMER’S CHEQUES

• When customer countermands payment. (issuing instructions to a banker not to honour a particular cheque) 
• When the customer has died, or become insane or insolvent.
• When a garnishee order (prohibiting a banker from paying money from a customer’s account) has been received by the banker.
• When the customer has given notice of assigning the money in his account…..

WHEN BANKER MUST REFUSE PAYMENT ON HIS CUSTOMER’S CHEQUES

• When the banker has knowledge that the title of the holder of the cheque is defective. (eg. A thief)
• When the customer informs the banker that the cheque is lost.
• When the cheque is irregular. (Material alteration on the cheque or signature of the drawer does not tally with the specimen signature)
• When the customer closes his account.

WHEN BANKER MAY REFUSE PAYMENT ON HIS CUSTOMER’S CHEQUES

• When the cheque is post dated.
• When the cheque is out dated.
• When the funds in the customer’s account are insufficient. (& the customer has no overdraft arrangement with the bank)……..

BOUNCING OF A CHEQUE

A cheque is said to bounce or dishonoured by non-payment, when a banker defaults in its payment, even when he is required to pay. 

Section 138 of the Negotiable Instruments Act of 1881 (as amended from time to time) applies.

TO CONSTITUTE THE OFFENCE OF BOUNCING OF CHEQUE……

• The cheque should have been issued by the drawer to the payee in the discharge of, in whole or in part, any legally enforceable debt or other liability……..(it shall be presumed, unless the contrary is proved, that the holder of the cheque received the cheque, for the discharge, in whole or in part, of any debt, or other liability)

• The cheque should have been presented by the payee to the banker within the period of validity…. (The Reserve Bank of India has fixed three months to be the validity period for a cheque)

• The cheque should have been returned by the bank unpaid, because the amount of money standing to the credit of the account is insufficient or it exceeds the amount arranged to be paid from that account….

• The cheque has been returned unpaid by the bankers of the drawer on account of stop payment instructions having been issued by the drawer…..

• The cheque has been returned unpaid by the bankers of the drawer on the ground that the account of the drawer has been closed…..

• The payee (or any other holder) of the cheque should have demanded the payment of the amount of the cheque from the drawer, within 30 days of getting the information of dishonour by the banker…..

Once the bank has returned the cheque, i.e. the cheque has bounced, the payee (or any other holder) is required to send a letter (demand notice) within 30 days of such bouncing to the party who wrote the cheque (the drawer) threatening to initiate proceedings under the Negotiable Instruments Act in case the amount is not paid within 15 days.

• The drawer of the said cheque should have failed to make payment within 15 days of the receipt of the said notice given by the payee (or any other holder).

Note 
Section 138 can get attracted for dishonour due to any reason, including mismatch of signatures & stop payment of a post-dated cheque.

PROCEDURE……..

• The complaint has to be filed in the court by the holder of the cheque within 30 days from the date when the cause of action has arisen.

Jurisdiction of Court

• If cheque delivered for collection through an account

• If the cheque is delivered for collection through an account, the case will be tried by the court not inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class within whose local jurisdiction the branch of the bank where the payee or holder in due course, as the case may be, maintains the account is situated.

• If cheque presented for payment by payee or holder in due course otherwise through an account

• In such a situation, the case will be tried by the court not inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class within whose local jurisdiction the branch of the drawee bank where the drawer of the cheque maintains the account is situated.

PUNISHMENT & PENALTY

• The court, after receiving the complaint along with relevant documents, will start the case. If the drawer is found guilty, he/she will have to, as per Section 138 of the Negotiable Instruments Act, 1881, spend time in jail for up to two years and/or pay a penalty of amount twice the cheque amount. 

• In addition, the banks also have the right to close the guilty person’s account (on repeated bounce cheque offence) or stop their cheque book facility. The bank may also charge a penalty to both the drawer and the payee for the inconvenience, extra paperwork and wasting the bank’s time.

• The Negotiable Instruments (Amendment) Act, 2018 which came into effect from September 1, 2018, allows the Court trying an offence related to cheque bouncing, to direct the drawer to pay interim compensation not exceeding 20% of the cheque amount to the complainant within 60 days of the trial court's order to pay such compensation. 

• This interim compensation may be paid either in a summary trial or a summons case where the drawer pleads not guilty to the accusation made in the complaint or upon framing of charge in any other case. 

• Furthermore, the Amendment also empowers the Appellate Court, hearing appeals against conviction under s. 138, to direct the appellant to deposit a minimum of 20 % of the fine/compensation awarded, in addition to interim compensation.