According to Negotiable Instrument Act 1881, as adopted by Bangladesh, a cheque is a bill of exchange drawn on a specified banker or not expressed to be payable other than on demand. That is, a cheque is a bill of exchange drawn on a bank and payable on demand. A cheque is valid with anti-dated or post-dated. What differentiates a real cheque from a simple 'I owe you (IOU)' is the guarantee that the amount of money specified is available, upon request, from a bank or some other established institutions.
Earlier, there was no mandatory provision of payment against cheque. Subsequently Chapter XVII was introduced in the Negotiable Instrument (NI) Act in 1988 to encourage all major transactions, including commercial or business transactions, through cheques and to enforce credibility and acceptability of cheques in settlement of liability in general.
The advanced world is in the process of introduction of cashless transaction and encourages payment by cheques/credit cards/debit cards. These methods bring transparency in transactions. The section 138 of the Negotiable Instruments Act makes dishonouring of a cheque a punishable offence. This has been done to give reliability, credibility and acceptability of negotiable instruments like cheques in daily life.
The bankers have taken the opportunity of section 138 to require security and guarantee of loans.
Bombay High Court in the verdict in Ramkrishna Urban Co-Operative Credit Society Ltd. vs Shri Rajendra Bhagchand Warma on February 16, 2010 explained the law as: "The section 138 will apply for dishonour of cheque for insufficiency, etc., of funds in the account. Where any cheque drawn by a person on an account maintained by Bank account holder for payment of any amount of money to another person from out of that account 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 that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both…"
Where a cheque is issued not for the purposes of discharge of any debt or other liability, the maker of the cheque is not liable for prosecution under section 138 of the NI Act. A cheque given as a gift or for any other reasons and not for the satisfaction of any debt or other liability, partly or wholly, even if it is returned unpaid will not meet the penal consequences.
The object of the law was "to encourage all major transactions, including commercial or business transactions through cheques, and to enforce credibility and acceptability of cheques in settlement of liability in general'', the Bombay High Court verdict said, adding: "The object was not to provide effective and speedy remedy for recovery of loans.''
Lawmakers must not have intended or imagined that money lenders or banks would obtain blank or post-dated cheques while sanctioning/disbursing loans as securities and would use them to make debtors/borrowers repay the loan under threat of prosecution and punishment under the cheque-bouncing provision of the NI Act.
If a 'blank' post-dated cheque is taken by the creditor from the debtor before or during the disbursement of loan, then it amounts to a measure of threatening the debtor for a criminal prosecution. So, in such cases, the right approach is not to allow the creditor to write an amount in the cheque on his own otherwise there is a high risk of harassment of debtor.
The goal is to ascertain applicability of Section 138 of the NI Act on such transactions, in other words, to determine whether prosecution can be initiated against the drawers in case of dishonour of cheques on such transactions when cheques are received or issued as security or collateral for a bank loan.
A cheque issued as collateral does not create liability under section 138 of the NI Act since this is not issued against payment of any liability at the time of issue of cheque. There is no criminal liability for dishonour of security cheques.
Bombay High Court in the February 16, 2010 verdict distinguished between 'liability' and 'security' and observed that both cannot be mixed or acted upon simultaneously. If the act of a person in discharge of liability is not done, then security comes in picture and if the act in discharge of a liability is performed then security would not have any legal force.
Both Bangladesh and India have same NI Act, with small subsequent amendments. But the basic principle of sec 138 has remained the same. The Bombay court said that the object of NI Act was not to provide effective and speedy remedy for recovery of bank loans. According to a report in the February 13, 2017 issue of the Financial Express, Bangladesh Bank has issued a notification to commercial banks which bars them from receiving blank cheques as security from their clients against loan or investment to check fraud and forgery. The Bangladesh Bank (BB) took the measure in the wake of a rising trend in fraud and forgery through use of the MICR cheque, according to the notification. One official of BB said, "Cheque can never be used as security against loan". Bankers are required to submit list of securities against loan while they file any case under the Artha Rin Adalat Act 2003. Filing a criminal case against a bounced cheque makes an Artha Rin suit defective and it is also an abuse of the process of the law and a fraud upon the court.
The writer is a legal economist.