Last week?s Supreme Court judgement has gladdened the hearts of the financial services industry. If the Securitisation Bill has armed banks and financial institutions with the powers to force recalcitrant companies to pay up their dues or at least come to the negotiating table, then the recent Supreme Court ruling and the long-awaited amendment to the Negotiable Instruments Act has done the same for the financial services business.
Disposing off a large number of appeals against several High Court judgements, the apex court recently ruled, ?stopping the payment of a post-dated cheque, issued to discharge debt or liability, is a criminal offence under the Negotiable Instruments Act?.
In the 14 years since section 138 was inserted into the Negotiable Instruments Act, it been met with little success in preventing unscrupulous borrowers from reneging on payments. People confidently borrowed money and issued dozens of post-dated cheques, confident that they could simply stop payment when they were due to be encashed.
A large chunk of the cases under section 138 relate to credit card borrowers who issue worthless cheques, but not all. Individual depositors who put their hard-earned money into finance and leasing companies also comprise a significant segment of the victims. These hapless people found themselves stuck with worthless redemption and refund cheques.
But the Supreme Court bench comprising Justices M B Shah and Arun Kumar has said: ?Post-dated cheques will lose their credibility and acceptability if their payments can be stopped routinely?.
They said that the purpose of a post-dated cheque is to provide some accommodation to the drawer of the cheque and it was all the more necessary that the drawer of the cheque should not be allowed to abuse the accommodation given to him by a creditor. Additionally, the long delayed process of amending the law to tighten section 138 [through the Negotiable Instruments (Amendment and Miscellaneous Provisions) Bill, 2002] has been completed just a couple of weeks ago with the President giving his seal of approval.
As finance minister Jaswant Singh told the Rajya Sabha, the Negotiable Instruments Act of 1881 was first amended a 100 years later, to ?provide a penalty for the dishonour of cheques?. But the amendment failed to address the problem adequately. However, the amendment bill of 2002 is a big improvement. It doubles the provision for imprisonment for cheque bouncing, introduces summary trial for imposing fines of upto Rs 5,000 or imprisonment of one year, mandates that summons refused (by the simple trick of tipping the constable to report that the defaulter is not traceable) are to be deemed as having been issued; allows bank slips indicating cheque dishonoured to be treated as prima facie proof of bouncing; and empowers courts to take cognisance of offences even after a month.
Mahesh Thakker of the Association of Leasing and Financial Services (ALFS) admits that the judgement will provide huge relief to his members, since their business depends heavily on the acceptance of post-dated cheques. According to the ALFS, there are approximately six lakh cases filed under section 138 with regard to bounced cheques involving over Rs 10,000 crore. Many of these cases are pending for as much as a decade and are clogging up the courts and Thakker thinks that these will finally begin to clear up.
However, other victims are scared to be too optimistic ? they would rather wait and watch developments. Over the years, the judiciary has both helped and hurt the recovery process through section 138. One the one hand, the number of courts hearing bounced cheque cases have been increased and some dedicated courts were also set up hear these cases. On the other hand, various court rulings had aided in pointing and clarifying various loopholes for payment dodgers.
But there have been some curious contradictions as well. Although six lakh cases languished, some high profile indictments gave hope to creditors that recovery was not entirely a lost cause. For instance, Hiten Dalal, one of the main scam-accused of the 1992 securities scam was first imprisoned because three cheques issued by him to Standard Chartered Bank had bounced. Similarly, the glamorous and once powerful Rita Singh of Mesco Pharmaceuticals Ltd (MPL) spent time in jail when a Rs 5 lakh cheque to a garment export company was dishonoured in 1996. But other famous defaulters have got away after a burst of bad publicity. These include the publishers of Business India, Parvez Damania, Dinesh Dalmia of DSQ Software and Vinod Baid of the Prudential Group. The last two have scores of cases filed against them and a few arrest warrants as well.
Most of these defaulters incorrigibly found loopholes to the law or ingenious tricks to stall the recovery process. As a result, the tribe of cheque-bouncers increased rapidly. ALFS says that Mumbai alone has around 1,50,000 cheque bouncing cases involving approximately Rs 6,000 crore pending in various courts. The Cheque Victims Grievances Forum claims that approximately 15,000-20,000 new cases were added every year, while only 2 per cent were cleared through a court ruling. A stunning majority of cases are mutually settled with the creditor accepting almost anything that the defaulter is willing to pay immediately and barely 25 cases per year are resolved through the court.
This time the legal amendments combined with the Supreme Court judgement hold out real hope that cheque bouncing would reduce dramatically. But when the dodgers use dirty tricks such as deliberately signing wrongly on cheques, forgetting to attest alterations made on cheques, or not signing cheques at all, then stiff punishment is the only answer. In a discussion in the Rajya Sabha, Maharashtra MP, Prithviraj Chavan, said that he had received an Income Tax refund cheque without the signature of the Income Tax officer, and believes that it was done deliberately.
The next few months should expose the ingenuity of artful cheque dodgers and demonstrate whether the mountain of outstanding cases does begin to shrink.
The tightening of the law certainly addresses one aspect of the problem, but it is upto the courts to address the other part. Unless courts are determined to dispose bounced cheque cases swiftly, they will continue piling up. Otherwise, a few harsh and deterrent rulings could send the signal that dodging payments can be a dangerous and expensive business.
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