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THE Bombay High Court judgement that the drawer of a bounced cheque cannot be prosecuted if the instrument was issued only as a security has thrown traders into a tizzy.

   Suppliers who were used to granting credit for series of transactions against a single cheque are now unsure of how good this security is. Debtors on their part while issuing the cheque are making it in the covering letter that the cheque is being issued as a security and not to meet any debt obligation.

   Rajesh Narain Gupta, managing partner of SN Gupta and Co —a legal firm —said that there was a lot of concern over this and the firm was being approached by both creditors and suppliers. “The debtors want us to draft a letter stating that the cheque is being issued as security while suppliers want to know what can they do under the circumstances,” said Mr Gupta.

   Lawyers feel that there is scope for misuse of the legislation from both sides. In the past, lenders have used this Act to initiate criminal prosecution against borrowers who have found it difficult to pay their instalments. Now debtors are taking shelter under the judgement on cheques issued as security.

   “Also, creditors at multiple levels, including banks and NBFCs, may be put to strict proof whether the cheque held by them is towards discharge of debt or held as a security. While on the other hand, the debtor or an issuer of cheque may abuse the process of law by building false defence taking shelter under the judgement,” said Mr Gupta.

   An amendment to the Negotiable Instrument Act of 1881 was introduced more than a decade ago, which made cheque bouncing a criminal offence. There was a requirement that the cheque should be issued to discharge a debt or obligation. This Act had given lenders immense clout with most of them insisting on a post-dated cheque for the full amount of the loan. In case of home and auto loans, lenders, in addition to seeking post-dated cheques for the monthly instalment, take a security cheque for the entire loan amount. This allows them to bank the cheque and initiate criminal proceedings if the borrower fails to meet his monthly obligations.

   Last month, the Bombay High Court held that the debtor cannot be prosecuted under the Negotiable Instruments Act if cheques, issued only as collateral security for loan, bounces. According to news reports, the judgement was issued by Justice PR Borkar on a petition filed by Ahmednagar-based Ramkrishna Urban Co-operative Credit Society against a debtor.

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