Are you aware that any failure to honour the payment commitments resulting in to the bouncing of a cheque or the ECS mandate is a criminal offence?
The idiom ‘cut the cloth to suit the purse’ or ‘cut your coat according to your cloth’ is timeless. Whether one is borrowing for buying a house or for business, or obtains credit card facilities or signs up for Electronic Clearance System (ECS) for the services one receives regularly should be aware that any failure to honour the payment commitments resulting in to the bouncing of a cheque or the ECS mandate is a criminal offence.
Section 138 of the Negotiable Instrument Act deals with the bouncing of cheque. Section 25 of the Payment and Settlement Systems Act, 2007 accords the same rights and remedies to the payee (beneficiary) against the dishonour of electronic funds transfer instruction as are available to the payee under the Negotiable Instruments Act.
Consequently, whether one issues cheques or signs up for the ECS mandate, the obligations are similar and accordingly if the funds transfer initiated by a person from an account maintained by him cannot be executed on the ground that the amount of money standing to the credit of that account is insufficient to honour the transfer instruction or that it exceeds the amount arranged to be paid from that account by an agreement made with a bank, such person shall be deemed to have committed an offence. Therefore, the person shall without prejudice to any other provisions of this Act be punished with imprisonment for a term which may be extend to two years, or with fine which may extend to twice the amount of the cheque/ electronic funds transfer, or with both.
If for any reason, the individuals/ entities who have issued cheques (current dated or post dated) or given the ECS mandate and expect that the instrument will get dishonoured should approach the lender/ service or goods provider in time and seek further time or resolution. Closing one’s eyes thinking that it will take years before any legal action will be taken are sadly mistaken.
It is also important that if you are a partner or director of the entity, one is careful that sufficient fund arrangements are made before cheques are issued or the ECS mandate is given. The obligation under law will transverse both on the entity and the person who has signed the cheque. The payee (beneficiary) will also attempt to cover other partners / directors who though have not signed the instrument but in their opinion are equally liable.
In effect, it is essential that proper legal advice is sought if there are going to be dishonouring of obligations.
Similarly for payee/ beneficiary (lender or provider of service/goods), timely action is required as any lapses in commencing proceedings in time or filing of the proceedings under wrong jurisdiction or commencing proceedings against the person against whom the action should not have been taken can make the recovery proceedings lengthy and giving the opportunity to the borrower to take legal shelter.
It is essential that both the parties are fully aware of the legal obligations provided by the law. Failure of one party in honouring its obligation can result in a chain reaction as the receiving party in turn can also face a similar situation for want of adequate funds.
(By Sandeep Shah, Partner, N. A. Shah Associates LLP)