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Bounced Cheque: Jurisdiction?

Published on Sat, Jun 20,2015 | 09:43, Updated at Mon, Jun 22 at 23:06Source : CNBC-TV18 |   Watch Video :

Dishonouring a cheque is an offence and some 40 lakh pending cases in India are bounced cheque cases. The problem promised to worsen after the Supreme Court last year said if a cheque bounces, the case can only be tried in a court where the drawee bank is located. That meant if Mr. X in Chandigarh makes a cheque payment to Mr. Y in Mumbai and the cheque bounces, then Mr. Y must go to Chandigarh to file the case against Mr X. Recognising the difficulties this caused, the government attempted to amend the Negotiable Instruments Act 1881 and clarify the jurisdiction matter. But Rajya Sabha was adjourned before the bill could be passed. So, now an ordinance has been promulgated. Does it fix the problem? Or create new ones? To answer that question CNBC TV18’s Menaka Doshi is joined by Pramod Rao, General Counsel, Citi India and well known Criminal lawyer Aman Lekhi…


X ------------------------------------------------------------------------------------------ ->Y

Chandigarh      CHEQUE ABC Bank Chandigarh Branch                        Mumbai

Pramod Rao, General Counsel, Citi India
Aman Lekhi, Criminal lawyer
Below is the transcript of Pramod Rao’s and Aman Lekhi’s interview with CNBC-TV18’s Menaka Doshi.
Doshi: When we previously spoke to you on this matter that was late last year on the Dashrath Rathod case order was out by the Supreme Court, you had said in your response that the Bhaskaran case decision by the Supreme Court in 1999 left the field too wide open and that there needed to be a narrowing of the field but maybe the Dashrath Rathod case order was not quite the solution. Can you talk us through the history of this situation?

Supreme Court, 2014

Dashrath Rathod Case
If Drawee Bank returns cheque unpaid then the Court where this Bank is located and cheque is dishonoured will have jurisdiction
Lekhi: The occasion for Rathod was the confusion created by Bhaskaran. The reason for confusion by Bhaskaran was the way the judgement actually set out how a cause of action for bouncing of cheque would actually evolve giving as many as about five instances which required to be satisfied for the purpose of initiation of proceedings. That gave an option to the person to whom the cheque had been issued to actually file complaint in different jurisdictions which could amount to harassment of the person who had actually issued the cheque. It was this which actually moved the Supreme Court and Rathod to actually intervene for the purposes of undoing what it perceived to be a wrong enunciation of law in Bhaskaran.
Now what the Supreme Court did in Rathod however while addressing the problem of Bhaskaran was to create another problem because while it correctly identified that problem of Bhaskaran required to be remedied the solution which it provided was also not correct legally. Now I say the solution was not correct legally there were basically three reasons. One, insofar as the Supreme Court was concerned the Supreme Court was concerned the Supreme Court referred to a judgment in Ishwar Alloys case, which in my opinion was not relevant at all.
Two, the Supreme Court ignored 179 of the CRPC which was relevant for the issue and three, what the Supreme Court did not actually consider was, that insofar as the issue of the cheque is concerned the way in which it interpreted the proviso to section 130 was completely incorrect.
Now while it is absolutely imperative that there should be no confusion insofar the jurisdiction is concerned, the jurisdiction would be necessarily given by the provisions of CRPC which is actually the operating statute for the purpose of deciding where a complaint should be filed.
Now the way in which 138 is now drafted it is not simply the dishonour but the consequence of dishonour. The consequence of dishonour evidenced by the issuance of notice and failure to pay which completes a cause of action and because the consequence of dishonour is virtually part of the defence because the dishonour by itself would not necessarily lead to a prosecution the fact that there was dishonour and the consequences would necessarily arise where the payee in situated. So, keeping that in mind the appropriate forum while if the Supreme Court was right could not be five different months as was set in Bhaskar, the appropriate forums should have been where the payee actually presented that particular cheque, not necessarily the drawee bank that the Supreme Court had actually said in the Rathod case. So, while finding out the problem the solution which the Supreme Court gave actually compounded it.
Supreme, Court, 1999

Bhaskaran Case
Any court within whose jurisdiction any of these 5 acts are committed
- Drawing of the cheque
- Presentation of the cheque to the Bank
- Returning the cheque unpaid by Drawee Bank
- Giving notice in writing to the Drawer of the cheque demanding payment of the amount
- Failure of the Drawer to make payment within 15 days of receipt of such notice

Doshi: Would it be fair to say that from an institutional point of view the difficulties caused by Rathod are almost insurmountable and therefore an amendment or even an ordinance to that extent was urgently required?
Rao: I would think so. Indeed from the perspective of what Rathod had created was clearly going to hurt the people who were recipients of the cheques and indeed it needed to be rectified and that is what the ordinance is seeking to do while I agree that it is departed from what the bill had and undoubtedly it is because of the feedback both from the industry as well as the corporates who rely on such cheque payments, that the government probably mooted a change over from the bill to the ordinance.


2015 BILL: Court within whose local jurisdiction
- the Bank branch of the Payee, where the Payee presents the cheque for payment, is situated
2015 ORDINANCE: Court within whose local jurisdiction
- the Bank branch where Payee maintains the account is situated, or
- the branch of the Drawee Bank where the Drawer maintains the account is situated

Doshi: I just want to spell out for the viewers what the amendment bill intended to do and what the ordinance has ended up doing. So, the amendment bill which in fact was approved by Lok Sabha but couldn’t make it through Rajya Sabha said that, that court will try the case within whose local jurisdiction the bank branch of the payee or where the payee presents the cheque for payment is situated. Now, this is exactly what Mr Lekhi had suggested as the ideal solution in his previous response. But the ordinance does not stick to what the amendment bill suggests. It in fact says that the case can be filed in a court within whose local jurisdiction the bank branch where payee maintains the account is situated or the branch of the drawee bank where the drawer maintains the account is situated. Would you say that this departure from the amendment that the ordinance makes is in fact reverting us to the same position as Rathod left us in?
Rao: No, this has now given two options. One is to actually approach where the drawee bank is located or where the person who is recipient of the cheque is based. So, to my mind it is departure but it is not really going back to Bhaskaran in that sense.
Lekhi: There are two things I want to mention over here; one is on principle and the other insofar the ordinance. The ordinance is basically temporary law. The temporary law because the parliament is not in a session and urgency requires intervention. If that is so, in that event the executive while making the ordinance cannot disregard what the legislature has actually done. In this particular case admittedly there was a bill. Now the bill actually referred only to one single instance. Now that bill could not be passed because Rajya Sabha could not consider it. Now the Rajya Sabha could not consider it but the bill was there, the ordinance should not and ought not to have departed from the bill.
So for the ordinance when we actually make a change, of course it is not very significant as I will explain presently, was not in my opinion appropriate constitutionally. Insofar as the principle of good governance is concerned, I personally think this is inappropriate. That said insofar as the ordinance is concerned, to the extent to deal with the second clause, in fact what the operative part is that unless the cheque is presented through an account in that event only it will be the drawee bank, that means across the counter I presume the cheque is presented. In that event it will be the drawee bank because it was the payees concern the payee will be actually going to the drawee’s banks for the purposes of encashing the cheque, in that event alone it will be the drawee bank which will actually be relevant for the purposes of jurisdiction but the law would be basically what was in the bill, that insofar as the jurisdiction for the cheque which has been presented to an account, the appropriate forum would necessarily be where the payee bank is situated, which is in fact the correct position considering the requirement of the law the object of the act and the convenience of the complainant.
Doshi: I get the point you are making that while the departure in itself does not inconvenience the solution, the process is questionable and I want to add there the fear that after Rathod a bunch of cases were sought to be transferred based on what Rathod directed. Now we have an amendment bill and then we have an ordinance. If cases are transferred as per the ordinance back to let us say, the jurisdiction, let us say, where the payee’s bank account resides or is situated and for some reason, god forbid, the ordinance lapses and the act or the bill is not able to make through parliament for whatever reason we could have judicial confusion or am I exaggerating the problem?
Rao: I would actually go on to elaborate and say that it is not as if the ordinance is fully solving the problems on the ground. So, apart from all of the transfer and retransfer of cases that both Rathod and now the ordinance will sort of propel, there are two aspects where the law has not sort of not focussed on. One is that indeed in today’s era we operate on a cheque and truncated system, the CTS system and what it entails is that it is only images of the cheque that travels and not really the cheque itself and secondly it is coupled with what is the cash management services provided by banks to corporates.
So, really whether through correspondent bank or through their own branches or pick up locations which might not even be bank branches. So we are talking about where the current reality on the ground is not what the ordinance or the amendment bill really factored in. I am just hoping that this actually propels a debate around what is really required and what is not and to me ignoring both the CTS systems, its prevalence as well as the fact of CMS, cheque pick up etc which happens as the corporate service by banks, they all need to be factored in and then measured whether the statute or the ordinance has fully addressed that or not.

Doshi: What are your recommendations on that front?

Lekhi: The point is well taken in fact unfortunately we don't have a law like Netting and Settlement Act which is there in other jurisdictions, but that would not require amendment to Negotiable Instruments Act in this particular issue as far as 138 is concerned, that will require a holistic and a very comprehensive review which the RBI itself is recommending which will require a different statute, different content altogether.

Rao: I think the centricity of what the ordinance is doing is putting the jurisdiction basis the location of the bank branch. I think if it focused on where the person who received the cheque was, or where the person who issued the cheque was, that would have been a better basis and that would have made it opaque to whether we are using check truncation system or whether we are doing just images which are being transmitted. For instance, we have various banks in the country which might have a single branch but are offering Cash Management (CMS) services across the country. It will force corporates who are probably outside of that branch's location to have to come to that branch or to the jurisdiction of the court where that branch is. So to me, technically it is not solving the problem or may indeed cause issues for those who avail of all of the collections system or check pick up system and so on. So that is where one of the difficulty lies. To me as I said, I am hoping that the bill and the ordinance and the debate which will ensue will hopefully address all of these practical realities. So Lekhi's point, there is a Payment and Settlement Systems Act, there is a contemplation of netting and so on. I am not saying that the cheque system needs to migrate into that culture, that is quite independent and indeed works quite well. It is however the issue of checks itself which has created from 1988 onwards, this criminalisation of cheque bounce which is where I think we have been plagued with the Bhaskaran or now Rathod and now the ordinance not recognizing the technology in the service developments that have occurred in the sector.

Doshi: That is a fair point, in fact I wanted to list that as one of the question in my discussion as well saying that, it is an 1881 act and I do understand that it has been updated over time, but is it equipped to deal with the modern financial economy?

Lekhi: Absolutely. The penal code of 1861, the civil code in 1908. Merely because the statutes are old does not necessarily mean that they cannot apply to contemporary situations.

Doshi: I am not suggesting that because it is an old act, it should be junked or redone, I am just saying in the day and age of mobile money, do we need to redo this act from scratch?

Lekhi: What Mr Rao is saying, does require consideration, in fact these are things which should necessarily be spelt out and ideally any act should deal with it and deal with it with specificity because they are dealing with criminal prosecution, they are dealing with liabilities, they are dealing with imprisonment, dealing with penalties.

Doshi: I give you the last word because I know that you work in an industry that is plagued by this on an hourly or minute-by-minute basis, I understand that the ordinance needs to fix urgently what it needs to fix which is the situation emerging from the Rathod decision. But besides that, the recommendations that you have made, what would you prescribe in terms of the process that the government should go about that in rethinking this act altogether?

Rao: I will make two-three points if time permits. One is that for instance if you have seen the ordinance, there is a definition introduced of e-check. That is not even in contemplation in the current market situation. We do have, as I said, cheque imaging through cheque truncation system that is used, but nobody digitally signs the cheque. Digital signatures have not taken off at all and nor do we as banks propose introducing cheques on those formats. To me again it is a misconception at some level by the drafters who sort of thought that we are bringing in something that addresses what is the current environment. But I would go much more deeper than that. I think you mentioned at the start of the conversation that we had as many as 40 lakh cases pending under this particular provision. I would say that while you remarked about how old the legislation is, the criminalisation is as recent as 1988. It is at that time that 138 got introduced and the cheque bounce got criminalised. It was in an environment where people had lost confidence in the cheques that they received and it was to restore that confidence with the criminality that the parliament came back on that issue. I think again there have been several developments in the financial service sector -- the primary one of them is emergence of credit information companies or credit information bureaus, so ten years back we had the Credit Information Company's Act which was enacted. There are at least four or so bureaus which operate in this domain.

Negotiable Instruments Act, 1881

Section 138
Where a cheque drawn by a person on an account maintained by him with a bank is returned by the bank unpaid because of insufficient funds such person shall be deemed to have committed an offence

Imrisonment upto 2 years
Fine upto twice the amount of the cheque

To me, is it the right time to consider repeal of 138 to say that we will de-clog the justice system, we will drop or abate the 40 lakh odd cases and decongest the judiciary. The alternative is that all of the cheque bounces can start getting reported into the credit information bureaus and credit histories will start reflecting people whose cheques have bounced and people who are dealing with them can rely on the credit report to make the determination. Do they want to deal with them, do they want to demand pay orders or demand drafts or do they want to say okay, I am willing to take the risk of a cheque after all?

But I think the right time to initiate the debate on saying decriminalisation is probably necessary, it is a provision that has outlived its existence and I say this from both the progress of the cases that we are seeing 40 lakh cases, we are seeing in 2010, Supreme Court introducing the compounding scheme so when a person thinks the conviction is being reached, he can just get the case compounded. It defeats the entire object of wanting to prosecute somebopdy. So, clearly realisation is affected. There have been many courts which have remarked and said, you have made us into recovery agents for people who are the payees of these cheques. To me, all of these are mindets. We need to move away from criminalisation, we need to decongest the judiciary and we have a modicum of a cheque and balance which to m mind is the credit report.

Lekhi: With all due respect, Mr Rao, I completely disagree with him. So far as the decriminalisation is concerned, I am not in agreement at all. He mentioned two or three points I will deal with. First of all as far as compounding is concerned, the compounding is always part of the legal system. Now the compounding, implicit compounding is acknowledgement for wrong. Only question which compounding does not cause imprisonment. The purpose of negotiable instruments act is not to punish or to imprison. The purpose is basically to enhance credibility of a cheque and as credibility of cheques that ensures that the person who draws the cheque actually makes payment in terms of the cheque, which is actually being enforced.

Number two, the courts cannot say that they are becoming recovery agents, because the manner in which the statute is drafted, the purpose is to enhance the credibility of a cheque and in so far as the drawer of the cheque is concerned, once brought to court, it is obligated to pay, which is in fact the mandate of law and the initial obligation itself. The courts cannot possibly say the recovery agents because the courts are basically enforcing the law as it avails.

Number three, in so far as the credit agencies are concerned, this is, so far as theoretical basis it may seem very attractive, but it has got very little practical utility because the person who has, I am talking about individual cheque holders who want cheques, in fact who would be carrying cheques, basically not worth the paper they are written on would actually be wanting money and so far as the money is concerned, whatever the procedure or process is there, the process is actually availed for the purpose of ensuring that the payment is actually is received by them. So, while we have consider other aspects, we have to deal with the law to make it a more specific for the contemporary situation. Considering the existing reality, I personally feel that there is no occasion nor need for de-criminalisation of 138.


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