Remedial Measures

The most common form of cheque return in this country is the “bounced cheque” which is a cheque with the remark ‘Refer to Drawer’ (RD). Traditionally the words ‘Refer to Drawer’ in their ordinary meaning amount to a statement by the bank ‘we are not paying; go back to the drawer and ask why’ or else ‘ask him to pay’. But today writing a bad cheque is a crime in the US and other developed Nations and legally a punishable offence in Sri Lanka. One of the suggestions made is to strengthen the legal regime applicable to Credit Information Bureau (CRIB) by making it mandatory for the banks to report on the customers whose cheques are returned due to lack of funds. This will enable to stop ‘Account Hoppers’ opening accounts in various banks subsequent to their accounts being forcibly closed by the banks.

The other area to pursue is to bring legislation to amend the Debt Recovery (Special Provision) Act, No. 2 of 1990 -

Quote
Section 25 (1) Any person who –

(a)‘ draws a cheque knowing that there are no funds or not sufficient funds in the bank to honour such cheque; or ‘

(d) ‘having accepted on inland bill dishonours it by non-payment, shall be
      guilty of an offence under this Act and shall on conviction by a
      Magistrate after summary trial be liable to punishment with
      imprisonment of either description for a term which may extend to one
      year or with fine of ten thousand rupees or ten per centum of the full
      value of the cheque’

Unquote

 The requirement of knowledge referred to above has created a legal impediment since knowledge is a mental component and higher the requirement of mental component, higher the burden of proof. This should be removed from establishing the offence and the offence should be made a ‘strict liability’ (ie, Liability that does not depend on actual negligence or intent to harm, but that is based on the breach of an absolute duty to make something safe) offence. This would mean that irrespective of the nature of the mental component, the mere fact that a cheque has been returned due to want of funds will make the drawer liable to be prosecuted under the Act.

Furthermore, Chapter 53 of the Civil Procedure Code could be used to sue on a cheque under summary procedure for Liquid Claims.  Here again to obtain the summary procedure or enforcement on a dishonoured cheque cannot normally defend the action without producing and annexing the original of the dishonoured cheque to his plaint. These provisions should be amended to make the Cheque Return Notification (CRN) as a substitute of the original cheque.  In this regard to what extent the provisions of the Payment and Settlement Systems Act apply is yet to be clarified.

The other measure is in the CITS a cheque that is returned due to the reason ‘Refer to Drawer’ should not be permitted for re-presentment and make it Non-Re-presentable category. In certain countries ‘Refer to Drawer’ is suffixed by the term ‘Re-present’- Refer to Drawer Re-present. If it states ‘Refer to Drawer Re-present’ the Bank could re-present the cheque again for payment after sending it back to the customer. The Sri Lanka Banks’ Association (SLBA) should review this issue in consultation with the Central Bank of Sri Lanka and Lanka Clear (LCPL) the return codes and re-presentment policy.

The RD conceptually demonstrates a combination of a liquidity issue and an erratic payment culture. However it is not an index of capacity to make payment since most RD cheques are subsequently settled by the concerned parties. This is one reason that the banking community is tolerant of such customers.

In the past at the time of opening Current Accounts the customer was requested to sign a Current Account opening Mandate Form in which a provision had been there to the effect that the customer shall not draw cheques without providing sufficient funds to meet the cheque on presentation at the time of drawing the cheque. With the passage of time Bankers have dropped this requirement in the respective Mandate Form or in the Rules attached thereto. One proposal is to reintroduce this requirement to instill conscious awareness of this obligation.

With a view to overcome difficulties faced by the businessmen, an Industry Chamber made representations far back as year 2003 requesting to publish a Cheque Return Index. By publishing such an index the business community could select a bank with a less number of returns the Chamber maintained. Therefore it will create competitiveness among banks as well as minimize Cheque Returns. They also made representations to differentiate Personal and Business Accounts by implementing strict criteria when opening Business Accounts. I have my reservations regarding this proposal that computation of such an index is a complex operation and may lead to a statistical distortion of facts and realities.

When cheque books are issued Bankers normally insert cautionary notices in the inside of the cheque book flap. Here again Bankers could very clearly indicate  and quote in the cheque book flap Section 25 of the Debt Recovery Act “drawing a Cheque without funds is a punishable offence “.