Dishonored cheques

Dishonoured cheques
By Dhammika Ranasinghe - Partner Chambers Colombo 

This article will attempt to briefly highlight the Sri Lankan law governing Dishonored cheques, by looking at why cheques become dishonoured and what can be done when a cheques is returned. Targeted readers are businessmen and senior/junior executives and general public.

A cheque is an unconditional order in writing to a Licensed Commercial Bank by its customer, requesting the bank to pay a stated amount to a specified person or a business entity on or after the date of the cheque. If a customer has a current account in a Licensed Commercial Bank, he/she will be given a cheque book. A cheque can become invalid or stale if not presented to the bank within 6 months (unless the period is specifically stated) from the date of the cheque. If a cheque is refused at the issuer bank due to insufficient funds in the account of the issuer or for any other reasons, the cheque will be Dishonored.

During the first quarter of 2019, the volume of cheques returned was recorded to be 4.2%[1] that is an average of 8,616 cheques returned per day. The total value of returned cheques per day is substantial, amounting to 1,474.3 million. This begs the question as to why cheques, the most used business transaction medium in Sri Lanka gets dishonored so frequently.

Dishonored cheques question the dependability of a cheque, in other words it questions the credibility of drawer. This is one of the biggest concerns in the business community as it could lead to the failure of a business as well as damage economy.

A cheque can be returned by a paying bank for a number of reasons which includes:

1. Insufficient funds in the current account of the issuer. Issuing a cheque, knowing that there are no sufficient funds in his/her account, is an offence punishable under; a- Section 25 and Section 25A of the Debt Recovery (Special Provisions)Act No. 2 of 1990 and b- Sections 400 and 403 of the Penal Code. Those who issue cheques without adequate funds will have to pay deterrent charges imposed by their banks. The banks as well as businesses will lose confidence of the cheque payment process if cheques are not honored on time. Similarly the businesses will be reluctant to accept cheques from customers having a history of frequent cheque returns. Therefore, the drawer has to play a critical role in reducing cheque returns by maintaining sufficient funds in his/her account.

2. Canceled the cheque by the issuer.

3. Due to a technical reason such as not signed, or with incorrect date, or with incorrect amount or with incorrect crossing etc.

4. The payment is stopped by a legal order.

5. Presenting or issuing lost, stolen or counterfeit cheques (with false signature) to the bank or third party.

6. Using unauthorized business/company cheque.

7. Notice of the customer’s death.

8. Notice of a presentation of a bankruptcy petition against the customer or where the bank makes a bankruptcy order against the customer.

9. When unauthorized alterations are made.

How to minimize cheque returns? The most blatant answer would be to select business partners with good credibility. Educating the community as to what is required in a cheque and what to check when a cheque is received in order to ensure that the cheque is correctly presented as well as the imposing penalties would further reduce the number of dishounred cheques prevailing in our community today. The Credit Information Bureau (CRIB) as a part of its mandate has initiated strict deterrents to discourage people from engaging in dishonorable and illegal means. CRIB now includes the details of cheques returned by commercial banks due to insufficient funds in the respective credit reports since January 2010. Banks will be able to use such cheque return details in screening customers at the point of opening current accounts. Such measures will help to develop a culture among cheque issuers to ensure the issue of valid cheques, drawees to accept only valid cheques and banks to accommodate trustworthy customers.

What can be done when a cheques is returned? If a cheque is returned due to a mistake, the receiver of the cheques may talk to the issuer and rectify the same. The receiver may instead opt to take legal action against the issuer of the cheque. The Bills of Exchange Ordinance No. 25 of 1927, which was entirely based on the English Bills of Exchange Act of 1882, is the governing legislation on Sri Lanka’s negotiable instruments today. As per Section 47 of the Ordinance, when a cheque is dishonored by non-payment the holder of such cheque derives a right of action against the drawer of the cheque. However, such holder is required to give “notice of dishonor” to the drawer of the cheque.[3] Any drawer to whom notice of the dishonor is not given is discharged from liability in respect of such cheques. The beneficiary of the cheque has an option to bring about proceedings by way of either criminal or civil action.

A. Criminal Action * A criminal action may be brought under the Penal Code or the Debt Recovery (Special Provisions) Act No. 02 of 1990. Both legislations stipulate that issuing a cheque without funds in the account is a criminal offense punishable with remand, followed by jail term. However, there is no provision to include an order to pay the compensation. Thus, the receiver might not get any financial benefit or recover the money. * Section 398 of the Penal Code provides that whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person, or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation, or property, or damage or loss to the Government, is said to ” cheat”. This section could be interpreted to cover cheques which have been fraudulently or dishonestly drawn. Liability under this Section would amount to an imprisonment for a term which may extend to one year, or a fine, or both.

The provisions under the Debt Recovery (Special Provisions) Act does not provide for the payment of compensation. It has created a criminal offence punishable with a jail term and a fine. The maximum jail term is one year and the maximum fine is Rs. 10,000.00 or 10% of the value whichever is higher. These are economic crimes and the commercial issues of the parties were left to the Civil Court by the legislature and the criminal offence was created to prevent using bills or cheque without adequate funds.

B- Civil Action While a criminal action is less time consuming, this option carries the risk of not being able to recover the money and has no financial benefit as seen above. In order to obtain a financial benefit, one may attempt to bring about a civil action under Money Recovery Action (Contract) or Liquid Claim Procedure. * Section 9 of the Civil Procedure Code (CPC) provides that action may be instituted where the cause of action arose (the cause of action in a cheque return case arises upon dishonor, that is, the place where the cheque was dishonored) or the place of residence of the defendant. If the payments are in respect of a contract, the place in which the contract was entered into, if clear from the circumstances, may give rise to jurisdiction. If the cheque is in respect of land then it is the place in which the land is situated. Where a claim is brought under the Liquid Claims Procedure (Chapter 53 CPC) or a Money Summary Action (Chapter 24 CPC) an action maybe instituted in the place in which the bank branch from which the drawer has issued the cheque is situated as it is the place in which the cheque return originates.

When claiming a Money Recovery Action, the receiver must prove that there was a contract with documentary evidence (such as the dishonored cheques or the electronic image of the cheque) and/or witnesses. The advantage of this method is that the litigation is for the contract and the beneficiary can recover the money which is not covered by the cheque but due for the contract. However, this method can be highly time consuming and gives the drawer a better chance at disputing the terms of the contract.

* One may instead choose to sue under Summary Procedure for Liquid Claims as provided in Chapter 53 of the Civil Procedure Code which is less time consuming as this method solely focuses on recovering the money related to the dishonored cheque. Where the amount of claim has been agreed by the parties or mentioned in the instrument upon which the action is instituted, it is a liquid claim. As the amount of the claim is present on the face of the cheque, the dishonored cheques (or the electronic image of the same) is sufficient to proceed with legal action.[6] To obtain summary procedure or enforcement on a dishonored cheque is very useful because the defendant cannot normally defend the action without first depositing the value of the cheques.

* Section 34 of the Payment and Settlement Systems Act of 2005 says that a cheque that has been dishonored by non-payment under the new system can either be returned to the depositor or the depositor can be issued what is called an Image Return Document (IRD) as prescribed by the Central Bank of Sri Lanka. Under this procedure: · The dishonored cheque should be a duly completed when received, without any alterations or differences. · The beneficiary must duly present the cheque to the bank on or after the date mentioned on the cheques but not exceeding 6 months from the said date. [7] · The payee must obtain the original CRN (Cheque Return Notification). · The payee must immediately give notice to the issuer that the cheque was dishonored (Notice of dishonor). Notice of dishonor is a condition precedent to a right of action and therefore, without delay the “Notice of dishonor” should be sent by either registered post or some other provable manner. Then alternate means of collecting cash or the value for the returned cheque should be looked into before proceeding with legal action. Legal action would include considering facts such as, the amount of the cheque, financial status of the customer, weighing the cost of litigation, time that may be wasted.

As set out in section 703 of the Civil Procedure Code, action under special summary procedure on liquid claims could be instituted upon a cheques. Under the special summary procedure, holder can institute action by presenting a Plaint in the form prescribed by the Civil Procedure Code supported by an affidavit[8] to the effect that the sum which he claims is “justly due to him” from the defendant. Defendant will have to deposit the money before he can answer the plaint unless special leave is obtained to answer. Holder must produce the cheque together with the plaint. (Under the electronic presentment of cheques for clearance by banks under the Payment and Settlement System Act No. 28 of 2005, you will get a copy of an electronic image of the cheques which is valid for filing with the plaint as it is considered as the original cheque for litigation purposes. Therefore, it is important to keep the copy of the electronic image of the returned cheque for litigation.) It is a statutory requirement that the summons on an action under summary procedure, must be in Form 19 in the 1st schedule to the Code. This is a requisite specifically prescribed for actions under summary procedure on liquid claims. The difference between ordinary Form 16 under regular procedure and special Form 19 under summary procedure on liquid claims is that while the ordinary summons requires the Defendant to file his answer on the date prescribed in the summons, the special Form 19 requires the Defendant to obtain leave from Court within a period of time mentioned therein, and to appear and defend the action. Under the procedure, the Defendant cannot file answer as in the case of a regular action, without obtaining leave to defend the action. Only when the plaint and summons are in such forms as are prescribed for summary procedure on liquid claims, Section 704 (1) of the Civil Procedure Code permits a Plaintiff, if the Defendant fails to appear and defend the action within the time stipulated in the summons, to move for a judgment in his favour for a sum not exceeding the amount mentioned in the summons. In the ordinary case under regular procedure he must move for an ex-parte trial against the Defendant.

* Section 19 of the Debt Recovery (Special Provisions) Act provides that in any matter or question of procedure not provided for in the Act, the procedure laid down in the Civil Procedure Code (as discussed below) should be followed by the court if it is not inconsistent with this Act. Action may be instituted presenting a plaint to the District Court within the local limits of whose jurisdiction the defendant resides or cause of action arises. No action shall be instituted for the recovery of debt where the default is less than one hundred and fifty thousand rupees. An affidavit, instrument, agreement, documents, stamps and nisi order shall be presented with the plaint. On being satisfied of the contents of the affidavit the court shall enter the decree nisi which shall be served on the defendant by registered post or through a process officer. Where the defendant fails to appear, the court shall make the decree nisi absolute.[10] Where the court has given the defendant leave to appear, the trial should be held in accordance with the summary procedure laid down by the Civil Procedure Code.

In The Officer in Charge, CID v. A. C. Soris (2005) it was held to be an offence to draw a cheque without funds or with insufficient funds and that the nature of the person in whose favour the cheque is drawn is immaterial for a presentation under Section 25 of Debt Recovery Act. The “person” may either be a lending institution or even a natural person. Where the claim is brought as a criminal action following the criminal procedure in Section 136(1) (a) of Criminal Procedure Code with charges under Section 25(1) (a) or (b) of Debt Recovery (Special Provisions) Act No.02 of 1990 as the main charge along with Penal Code charges of Cheating and Misappropriation then the cause of action is where the drawee received the cheques. Conclusion While the use of cheques is declining due to the modern alternatives methods of transferring funds, the use of cheques is still a vital part of today’s business community. Thus, it is important to take steps to reduce the number of cheques being dishonored daily. Educating the public could be said to be key in this regard not only as to draw a cheque correctly but also the legal action and consequences that may arise. It is further evident that the beneficiary of the dishonored cheque has civil and criminal actions available to him against the issuer of the cheques, of which the civil actions enable the beneficiary to recover his funds. [1] [2] Nugawela V George (1929) [3] De Silva V Ranasinghe (1966) [4] Sec. 400 of the Penal Code [5] Nirosh Amantha Amadoru v AG [6] Mudalihamy v Punchi Banda (1912) [7] Sec. 50 of the Civil Procedure Code [8] Anamalay v Allien [9] Tennakoon v Seemitha Nuwara Eliya District Sakasuruwam and Naya Ganudenu Samupakara Samithiya [10] Ramanayake v Sampath Bank

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