Economic Analysis of Check Bounce Cases: India

INTRODUCTION Cheque is a negotiable instrument. Normally, cheques are issued either for the reason of statutory requirement or for the reason of securing proof of payment. Crossed and account payee cheques are not negotiable by any person other than the payee. It has to be deposited into his bank account. In legal parlance, author of the cheque is called ‘drawer’, the person in whose favour it is drawn is called ‘payee’ and the bank who is directed to pay the amount is called ‘drawee’. It is always safe to issue crossed “Account Payee Only” cheques in order to avoid its misuse. Blank cheques are not safe. It is better to date the cheque invariably. A cheque is valid for payment only for six months from the date mentioned in the cheque. After the period of six months, such a cheque is called ‘stale cheque’1. A check gets to be distinctly due for installment on the date specified on it. Before issuing a check creator of the check ought to guarantee that he has adequate supports in his record. Keeping in mind that, it would ricochet with comments 'lacking assets'. Bobbing in like manner speech is alluded to disrespect of checks. Bobbing of a ball is a fun yet skipping of a check is a criminal offense. The Negotiable Instruments Act, 1881 is appropriate for the instances of shame of check. This Act has been changed ordinarily since 1881 and I will talk about the arrangements of this Act the way things are today. Instantly upon shame the drawee bank issues a 'Check Return Memo' to the broker of the payee refering to the purpose behind non-installment. Thusly the payee's investor should handover the disrespected check and the reminder to the payee. The payee has an alternative open to him either to re-show the check if and when he supposes the check could be respected however inside six months from the date of the check or continue lawfully to indict the drawer. The payee may arraign the drawer for shame of check just if the sum said in the check is towards release of an obligation or whatever other lawful risk of the drawee towards payee. Insignificant issuance of a check say for the reasons for blessing, or towards loaning an advance or for unlawful purposes would not add up to lawful obligation and the drawer can't be indicted in such cases. In the event that he chooses to continue legitimately, then the drawer ought to be given a 1 Jehangir Sorabje Khergamvala, O. P. Faizi, Khergamvala on the Negotiable Instruments Act, LexisNexis Butterworths India, 2008, p 23 chance of making great the check sum promptly. Such an open door must be managed just by methods for a notice in composing. Under Section 138 of the Negotiable Instruments Act, 1881 as altered a la mode, the notice must be sent by the payee to the drawer in composing inside thirty days from the date of accepting Check Return Memo from the bank and request the check add up to be paid to him inside fifteen days from the date of receipt of such a notice by the drawer.Punishment endorsed for such an offense is fine which may reach out to double the measure of the check or detainment for a term which might be stretched out to two years or both. In the event that the drawer makes installment of the check sum inside fifteen days from the date of receipt of the notice, then drawer does not confer any offense. Something else, the payee may continue to document a grumbling in the court of the jurisdictional justice inside one month from the date of expiry of fifteen days endorsed in the notice. On the off chance that the payee neglects to document the objection inside thirty days, the protestation gets to be distinctly banned by confinement of time. The jurisdictional judge court may decline to engage such a remiss objection. Notwithstanding, if the payee has adequate motivations to legitimize delay in documenting the grumbling, he may make an application before the officer alongside the protest, to clarify the purposes behind deferral and look for overlooking of postponement. Insight of the dissension might be taken if the Court is fulfilled that the payee had adequate reason for not making the protest inside the endorsed period. The methodology of recording objection and arraigning the drawer in a court of officer includes certain better focuses like reason for action, arrangement of lawful notice and grievance as per legitimate necessities, methods of sending the composed lawful notice, administration of summons and non-bailable warrants, directing the criminal case and so forth. It is fitting to counsel a supporter who is knowledgeable and experienced around there of practice. The Indian Judicial framework has as of now about crores of cases pending, the same has different perspectives appended to the same. In spite of the fact that it isn't right to state that the Judges are itself to fault yet there are a considerable measure of externalities that exist and should be tended to through the span of time. The issue is an essential perspective for there welfare of our economy. As per Law Commission of India reports around 40% of the cases are Traffic Challans though around 7.8% of the cases are Check Bounce cases. For the Traffic Challans regulated system is being deal with by different State governments, for example, online installments and so forth. However, as for the framework of handling the issue of Check Bounce cases is not working and focus has even proposed for a correction for stricter fines/discipline for handling a similar issue, yet would the same be in a monetary sense proficient for the economy or have no change or would rather be tricky to the general public is the issue that we'll address in a similar paper. Unmistakably in Check Bounce cases there is some externality that is keeping the ideal result which the offended party anticipates that before giving purview will the court to decree the matter. Subsequently in this paper we would address the issue of such problematic result from the point of view of standards, for example, pareto effectiveness, diversion hypothesis and so on., to know where the actual holes exist for such a result. REPORT ON CHECK BOUNCE CASES If we see the above figure which is taken from Law Commission of India Report 245, it shows the overall pending cases in India, the Red Line indicates the rate of pending Check Bounce Cases in different States, although the Red portion might seem to a reader to be a very grey area, but 7.8% is a huge area which is about roughly between 4-5million cases that is covered and needs economic attention. Annexure 1 will show you the data in numerical form. Although States like Bihar and Sikkim have a low check bounce rate but the same but on a average these cases are high and is affecting the dispersal of justice2. PROCEDURE OF GETTING RELIEF 1. Complaint – to be filed under Section 138 of the NI Act before the Magistrate Court wherein the Payee/Complainant should be present in Court at the time of filing such a complaint. 2. Sworn Statement – This is an Affidavit which will be filed by the Complainant before Court 3. Summons – Issued to the Drawer/Defaulter through Court. 4. Bail – Once the Accused receives the summons, he/she will have to appear in Court on the date mentioned in the summons along with his/her Advocate who shall file Vakalath and bail application. When the Accused applies for bail, he/she will either have to give a personal bond for an amount which will be decided by the Court as Surety amount or he/she will have to be accompanied by any of his/her family or friend who will act as a Surety. In such a case, Surety application will be filed along with the bail application along with income certificate/land records (of the surety) and the person who is providing Surety will have to be present in Court along with the Accused. Since this offence is a bailable offence, the Court will immediately grant bail, provided the procedure has been carried out correctly3. 4. Plea – The judge will ask the Accused if he/she accepts the offence of having dishonoured the cheque. If the Accused accepts the offence, he/she will have to plead guilty. If he/she doesn’t, then he can plead not guilty and choose to raise a defence. 2 3 Law Commission of India Report 245 Ram Naresh Chaudhary, Law Relating to Cheques: New Horizons, Digital Signature, E-cheques, Dishonour of Cheques as Penal Offence, Deep and Deep Publications, 01-Jan-2009, p 383 5. Evidence by the Complainant – the Complainant will provide his/her evidence either orally or by way of an Affidavit and mark documents supporting the case. 6. Cross Examination of the Complainant – the Advocate representing the Accused will cross examine the Complainant 7. 313 Statement – The Judge will ask a couple of questions to the Accused and record his/her statement and will also ask him if he wants to lead any evidence 8. Evidence by the Accused, if any – The Accused may provide his/her evidence either orally or by way of an Affidavit and mark documents supporting his/her case, if any. 9. Cross Examination of the Accused – the Advocate representing the Complainant will cross examine the Accused. 10. Arguments to be addressed by the Complainant Advocate 11. Arguments to be addressed by the Accused Advocate and the Complainant Advocate will be given a chance to reply. 12. Judgment 13. Punishment & Penalty - If the offence is committed, the drawer/defaulter/Accused will be punished with imprisonment for a term which may extend to two (2) years, or with fine which may extend to twice the cheque amount or both.4 4 Ibid., p 384 CASE STUDY Assume a situation in which a plaintiff got a check of Rs 2,00,000/- from the defendant, which was dishonoured by the Bank, even after giving several notices, the amount was not paid by the Defendant to the Plaintiff, the Plaintiff decides to take legal recourse by the following: On an average a lawyer would take between 5000 to 15000 INR for his each appearance in the court of law. On the first day, a complaint would be filed, After that the procedure as discussed in the previous section would be followed, with the lawyer charging for each and every procedure. It is not that the same issue gets disposed immediately in a span of 14 or 15 days, it takes months gap between each procedure followed by adjournments due to certain factors as a result the least time that would be taken to dispose off the matter would be 2 years, but on an average it always extends more than 3 years. We would sum up the externalities: SR NO. EXTERNALITY COST 1 Fee of Appearance in the Court 5000 X 7 2 Fee of Argument 3 Fee for Leading Evidence 4 Fee for Legal Notice 5 Typing per Pge 6 Notary Attestation 500 7 Reply 5000 8 Transport 7000 10,000 5000 20 x 20 1000 - 1400 In fee of appearance we include: 1. Plea 2. Cross Examination 3. Evidence by Complainant 4. Argument of Accused 5. Judgement 6. Final Order Adding all the externalities together we get an average cost of Rs 32,000 (approximate), for a person to get a legal remedy in court, hence it would be beneficial for a person to approach the court only if the amount that is check bound is at least more than Rs 1,00,000/- otherwise the same remedy won’t make sense. On the other hand it would be incentivising for the wrongdoer or Defendant to do check bounce in amounts less than Rs 1,00,000/- as the plaintiff would be more inclined for settlement rather than court proceedings. Now we need to look at the costs the defendant has to pay so as to find out out of both the parties, which of the party would be more beneficial in the end. Hence we would look at the externalities from the perspective of the defendant which includes: SR NO. EXTERNALITY COSTS (INR) 1 Cost of Bail 25,000 2 Cost of Appearance 4000 X 7 3 Cost of Argument 7000 4 Fee of Reply 5000 5 Notary Attestation 500 6 Typing Per Page 20 x 10 7 Punishment 2,00,000 From the above externalities we find that, accused/defendant has to pay Rs 42,000(Approximately), and if found guilty, would have to pay an extra Rs 2,00,000/- hence it is incentivising for the plaintiff to go to court for remedy only if he is fully assured that he’ll win the case, if the same is for sure, he would get Rs 2,00,000/- as compensation, hence it would be beneficial for the Plaintiff to approach the court even if the same check bounce is for an amount less than Rs 1,00,000/-. BASIC THEORY OF LITIGATION A plaintiff’s reasoning from an economic perspective, if he wants to litigate or not depends upon: 1. Private Benefits from Pursuing 2. Private costs of Pursuit From the above factors one can argue that, a person would go for trial if : Expected Gross return from Litigation > Cost of Bringing the case to Trial (x) (Cp) The value of the suit and probability to win it would determine one’s Expected Gross return from Litigation (x). 1. V = Value of Judgement 2. p = Probability of judgement for plaintiff at trial If p would be equal for both the Plaintiff and the Defendant, and also v is same for both, then suits would never be filed in the first place. It is possible to consider the estimate of the probability for the plaintiff: Pp and the estimate of the probability for the defendant Pd 3. x = V Pp As a result you can have different outcomes and different probabilities for each It is then possible to use a decision tree to obtain an idea of x 4. If x > Cp then the plaintiff will file and sue; whereas a situation where x < Cp you will not pursue litigation. 5. Hence one can conclude from the above that, if Pp > Cp / V you have a credible threat to sue. 6. Cp are not exogenous but endogenous, hence the plaintiff must pre-decide how much time and effort he/she wants to invest in the lawsuit. Assuming that the litigation investments made by the plaintiff and defendant, Cp and Cd, respectively, affect the plaintiff’s future recovery at trial x(Cp, Cd). Hence a suit will be filed if: x(Cp, Cd) - Cp > 0 The private decisions of the plaintiff and the defendant to invest time and money in a lawsuit are not generally aligned with the interests of society as a whole. The plaintiff might litigate too often, of the benefit for bringing a suit is not too large, then the problematic situation is the same, in such a case it would be beneficial if x was lowered or Cp increased. SETTLEMENT THEORY The total cost of litigation Cp + Cd is a deadweight loss assuming that both the parties will have to pay for these costs and cannot recover them. The plaintiff and the defendant can typically avoid this loss through a private agreement to end the dispute before the litigation costs are incurred. The settlement must be compromised between (x - Cp) and (x + Cp) for a settlement to happen in which both the parties have a same estimated cost of litigation (x) is same for both the parties. 1. Maximum Defendant is willing to pay: MaxOffer = Pd V + Cd 2. Minimum Plaintiff is willing to Accept: MinAccept = Pp V - Cp > 0 3. Sufficient Condition for Litigation (No Bargaining Range): Minimum Plaintiff will accept > Defendant’s Maximum Offer (Pp - Pd)V > Cd + Cp Hence now we come to conclusion that if the estimate of the probability of winning is same for both the parties then although the parties won’t go for litigation but rather would end up in settlement NEGATIVE VALUE THEORY The threat to file a lawsuit is not reasonable if both the parties have the same level of information. If the defendant do not know whether the plaintiff would or would not be willing to go for trial, it may be rational to settle with the plaintiff because of the possibility of a lawsuit. If the defendant know that there are two types of plaintiff, one with positive value and the other with negative value suits, it will lower its settlement offers, which will increase the number of lawsuits. You can also have negative value suits if the defendant will have to spend money if he does not want to lose, it might be reasonable to settle in order to economize on defines costs. Negative value suit may be relevant if the only reason they are negative is because of the litigation costs: you know you will win, but too expensive regarding the litigation costs, hence you are not doing anything which is always efficient from a social point of view. CRIME AND DETERRENCE The anticipation of conviction and punishment reduces the loss from offences, thus increases social welfare by discouraging offenders. If social welfare is measured by income and if ‘effectiveness’ is defined as a ratio of the maximum feasible increase in income to the increase if all offences causing net damages were abolished by fiat. The maximum feasible increase is achieved by choosing optimal values of the probability of apprehension and conviction, p, and the size of punishments, f. Effectiveness so defined can vary between zero and unity and depends essentially on two behavioural relations: the costs of apprehension and conviction and the elasticity of response of offences to changes in p and f. The smaller these costs or the greater these elasticity, the smaller the cost of achieving any given reduction in offences and thus the greater the effectiveness. If compensation was stressed, the main purpose of legal proceedings would be levy fines equal to he harm inflicted on society by constraints of trade. In this case, assume that the Plaintiff (p) and Defendant (d), are in the state of nature, without any court or rule of law. In such a case the d’s dominant strategy would be no care or dishonouring the check always, as there is no law to regulate his actions, hence he’ll get a surplus of +10 always in the game. The dominant strategy for p is clearly to show due care, by doing a background check on the person with whom he’s taking a check, to see whether such dishonours of check were done even before, hence by taking legitimate due care, p only gets a surplus of +5 as the other 5 is the amount spend on doing strict background checks. Clearly the defendant wins in all the cases, hence in order to regulate him the Negotiable Instruments Act comes into picture. Now p if does not receive his due amount from d within a period of 6 months, he can go to the court of law by sending a notice to d. In a check bounce case, clearly it would take around 3 years or more for the judiciary to settle the dispute, as a result both the parties loose out on legal fees such that their surplus reduces. p now has a surplus of +7, whereas d has a surplus of +6, as d also had to pay for his bail in the court. As per the civil procedure code, both the parties have to compulsorily go for Arbitration. In Arbitration, extra fees are cut of both the parties, such that p has a surplus of +6 and d has a surplus of +5, in case of an arbitration always the defendant council would put the lowest value variable for settlement. Hence in case of a check bounce of Rs 2,00,000/-, the parties would offer a mere amount of Rs 1,00,000/-, if p accepts the amount then d surplus increases to +8, whereas p’s surplus reduces as he does not get the amount he was supposed to get, and d settled for a less amount. Hence from the above situation it is incentivising for the defendant to do a dishonour and settle for an amount less than the actual promised in the check. However if the plaintiff, denies the same settlement in arbitration and goes on for further proceeding in court, he has to wait for another 3 years to get a judgement, by including the lawyer’s fee and subsequent transport fees, the plaintiff can face a fee of around Rs 32,000, which is if certainty exists in his mind with respect to winning the case. Hence if the plaintiff is certain, then only he must for for further proceedings in court, otherwise must accept the arbitration amount. Suppose the Plaintiff is certain about his victory, then after 3 years he’ll get back Rs 2,00,000/along with another Rs 2,00,000/- as compensation (as the plaintiff gets double the amount as compensation, in case of dishonour under Section 138 of Negotiable Instrument Act) and hence the surplus of Defendant reduces to +2 only whereas the Plaintiff’s surplus increases to +10. But in case where the plaintiff looses the case, which also has some certainty in it, the defendant increases to +8, whereas the plaintiff gets a reduction in the same surplus to +2. Applying the certainty principle in mind, we find that both the parties, applying a traditional game theory situation would end up accepting the Arbitration amount such that Plaintiff is at although a big loss but in the end receives a certain amount in his hand, whereas the same becomes a dominant strategy of the Defendant as discussed before. Hence law must correct such outcome where the Plaintiff suffers a huge loss, through game theory we came to know the following loophole in the court process: 1. Time consuming process 2. Uncertainty of the result 3. Arbitration Certainty 4. Depletion of surplus by Lawyer’s fees All the above 4 externalities give incentives for the offender to commit check bounce, and in case of a company which already has well skilled and trained lawyers, a small or middle class person can never get his full money back, he’ll too end up in the trap of Arbitration, to settle for an illegitimate amount and the same would relieve the company of its burden from the litigation at a low cost. Hence the legislators must look at the above loopholes, as we find the reasons as to why so much of the Section 138 cases are pending in the court of law, and the main reasons as to why so many cases are pending and not get easily disposed off. A LEGAL SOLUTION TO THE PROBLEM Order 37 of the Civil procedure Code provides summary procedure in suits based on negotiable instruments or where the plaintiff seeks to recover debt or liquidated amount. The essence of summary suits is that the defendant is not, as in an ordinary suit, entitled as of right to defend the suit. He must apply for leave to defend within the stipulated period of ten days. Such leave will be granted only if the affidavit filed by the defendant discloses such facts as will make it incumbent upon the plaintiff to prove consideration or such other facts as the curt may deem sufficient. The provisions of Order 37 are merely rules of procedure. They do not alter the nature of the suit or jurisdiction of the court. Order 37 Rule 2 and Rule 3 provide the procedure of summary suits. Rule 2 provides that after the summons of the suit has been issued to the defendant, the defendant must appear and the plaintiff will serve a summons for judgement on the defendant. The defendant is not entitled to defend a suit unless he enters an appearance. In default this, the plaintiff will be entitled to a decree which will be executed forthwith. Rule 3 prescribes the mode of service of summons and leave to defend. The defendant must apply for leave to defend within 10 days from the date of service of summons upon him and such leave will be granted only if the affidavit filed by the defendant discloses such facts as may be deemed sufficient to entitle him to defend. Such leave may be granted to the defendant unconditionally upon such terms as may appear to the court or judge to be just. Leave to defend, however, should not be refused unless the court is satisfied that the facts disclosed by the defendant do not indicate that he has a substantial defence to raise or that the defence intended to be put by him is frivolous or vexatious. At the hearing of such summons for judgement, if the defendant does not apply for leave to defend or such leave is refused, the plaintiff is entitled to a decree forthwith. The court or judge may, for sufficient cause shown by the defendant, excuse the delay of the defendant in entering an appearance or in applying for the leave to defend the suit. In case of a summary suit the Court would summarily settle the suit by giving a presumption in favour of the plaintiff, without interference of the defendant and the same matter is settled in the less days as would have taken in an ordinary suit as the same is summarily disposed off. The same must be applied in Check Bounce cases, and presumption must be in favour of the plaintiff and he can get a relief in the court in less time, as time is the biggest barrier in the the same area, one can overcome the same through a summary suit. POSITIVE EXTERNALITY OF FAST TRACK COURTS Fast track courts have been set up on the recommendation of the Eleventh Finance Commision funded by the Ministry of Finance. These courts take up session cases pending for two years or more and the cases of undertrials in jails. It has almost become fashionable these days to have a separate tribunal for dealing with deferent category of case. The concept of fast track court for dealing with particular kinds of offence is also well established and believe that separate tribunals and fast track courts have an important role to play in the near future, but only as supplements to the ordinary judicial system. Thus, such tribunals and courts are useful when there is specific domain or industry knowledge required or where a particular category case/offence is deemed to require speedier resolution/trial for the moment. For other cases, our focus should be on improving and having recourse to the normal judicial system and we should not avoid the opportunity to transfer a the difficult categories of cases to special tribunals or fast track courts (because ordinary courts cannot cope)5 . 5 Sameer Kochhar, Growth and Governance: Essays in honour of Nandan Nilekani, Skoch Media Pvt Ltd, 2014, p 35 The graph above shows a marginal social benefit curve (MBsocial), a marginal private benefit curve (MBprivate), and a marginal social/private cost curve (MC). Since the total benefits derived by the society from positive externalities is greater than the benefit from derived by a sole individual, the MBsocial curve lies above MBprivate curve. Qmarket is the quantity produced in the transaction in question, while the added benefit derived by the society, which is greater than what is derived by a private consumer which is represented by the triangle formed between both the curves6. A socially efficient outcome is one, where ‘MC’ curve equals ‘MBsocial’ curve, hence Q efficient is the socially efficient is the socially efficient quantity which must be produced for efficient allocation of resources. Considering the same reflects the situation of positive externalities arising from fast track courts for check bounce cases, since the benefit derived by the society on a whole in totality from a case judicially administered is greater than the benefit derived by a sole individual, the marginal social benefit curve lies above the marginal private benefit curve. The same is so because the society on a whole shall be benefitted from such an externality in a greater quantum than an individual7. 6 Bimal N. Patel, Ranita Nagar, Hiteshkumar Thakkar, Law and Economics in India: Understanding and practice, Routledge, 22-Jul-2016, p 168 7 Ibid., p 169