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Originally published:
Aug-18-2011
 By Freddie Dawkins
Editor, ICTF Magazine
The problem of companies in India issuing bad cheques has been up for discussion by ICTF (The Association of International Credit and Trade Finance Professionals) members. Having consulted with legal experts in the market, Russell D’Souza, Director – Global Credit Risk Management, Hanesbrands, Inc. and Al Steinhart, Senior Vice President and General Manager, ABC Amega Inc. offer their expert opinions.
The following is a recent online exchange of information between ICTF members which focused on the challenge of non-sufficient funds (NSF) cheques in India. Several questions were posed and our experts gave their opinions.
Q. Are you aware of any statistics regarding businesses that write bad cheques in India?
RDS: This is difficult to get accurate data on because the culprits are not inclined to report it. Besides, if there is no action as a consequence of the act - like court action - then the occurrence is not documented.
The percentage for small companies may be as high as 25%-30%. For larger companies, it is a much smaller amount, like 5%.
AS: We do not have specific data, but a study conducted by the Indian Institute of Technology, Mumbai, released in September 2009, revealed that a transition is taking place to more modern electronic payments and that cheque usage has been on the decline.
Notwithstanding this fact, around 14,000 lakh (14bn) cheques were cleared in 2008. Considering that 1.5% of the cheques are returned, based on the data available on return cheque charges, the banking sector collects around Rs400 crore (€63m) every year as revenue on these cheques returned from their customers.
Q. Are there any penalties for writing bad cheques in India? Are there any laws that can be enforced regarding NSF cheques?
RDS: Yes. Writing bad cheques (“cheque bounce” as it is known in India) is a criminal offence under section 138 of the Negotiable Instruments Act 1881. Cheque bouncing was made a penal offence in 1989.
If an offence is committed by a company dishonouring a cheque, all those who were directors of the company, except those exempt by the law, are held responsible and punished with imprisonment for a term which may extend to one year or with a fine which may extend to twice the amount of the cheque, or with both.
In May 2010, the Supreme Court of India said that any delay in settling a cheque bouncing case will cost the defaulter up to 20% of the cheque amount, over and above the liability which he should have discharged with the instrument.
Also, since November 2010, some nationalised banks are taking action by closing the bank account of the person who has issued a cheque which has bounced.
However, there are over three million cheque bounce cases pending in the court. The entire process of getting settlement is a slow process, though legal systems are working hard to close all these cases.
AS: Bouncing of Cheques comes under 138 of the Negotiable Instruments Act. Under the Act, when any cheques drawn by a person, on an account maintained by him – for payment of any amount to another person for the discharge, in whole or in part, of any debt or other liability – is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or it exceeds the amount arranged to be paid from that account by agreement with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of the Act, be punished with imprisonment for “a term which may extend to two years”, or with a fine which may extend to twice the amount of the cheque, or with both.
Provided that nothing contained in this section shall apply unless:
- The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.
- The payee or the holder makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque “within thirty days” of the receipt of information by him, from the bank, regarding the return of the cheque as unpaid.
- The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder, in due course of the cheque, within fifteen days of the receipt of the said notice.
For the purpose of this section, “debt or other liability” means a legally enforceable debt or other liability.
The Negotiable Instruments Act of 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, Wherein a new Chapter XVII was incorporated for penalties in case of dishonour of cheques due to insufficient funds in the account of the drawer of the cheque.
These provisions were incorporated with a view to encourage the culture of use of cheques and enhance the credibility of the instrument.
The existing provisions in the Negotiable Instruments Act of 1881, namely, sections 138 to 142 in Chapter XVII, have been found deficient in dealing with dishonour of cheques. Not only has the punishment provided in the Act proved to be inadequate, the procedure prescribed for the courts to deal with such matters has been found to be cumbersome.
The courts are unable to dispose of such cases expeditiously in a time bound manner in view of the procedure contained in the Act.
Keeping in view the recommendations of the Standing Committee on Finance and other representations, it has been decided to bring out, inter alia, the following amendments in the Act, namely:
- To increase the punishment as prescribed under the Act from one year to two years.
- To increase the period for issue of notice by the payee to the drawer from 15 days to 30 days.
Q. What is the recourse available to the payee of a bad cheque?
RDS: There are multiple options available here. One can file a legal case – a criminal case - under section 138 of The Negotiable Instruments Act, 1881.
Also, the company can file a civil recovery suit for recovery of outstanding funds, which should have cleared by issue of the cheque.
Here also, based on an emergency situation – for example if we know that the payer is going to close the business or merge with other entity or has intentions of running away – a company can file a civil case attaching any property of the defaulter, by requesting an “adjournment before judgment” and getting the property attached, and then fight the case and close the matter after recovery.
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This article was originally published in the June 2011 issue of the ICTF (The Association of International Credit and Trade Finance Professionals) Magazine. We are re-publishing it here with the permission of ICTF.
To receive a complimentary copy of the ICTF Magazine, published in association with Credit, Collections and Risk World (CCR World), please contact ICTF at info@ictfworld.org or 1-410-522-5015.
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