Sri Lanka: 'Cheque Mate': How to effectively fight cheque frauds

Last Updated: 17 October 2012
Article by Dinesh Munasinha

Businesses continue to value cheques as the most convenient non cash payment instrument and an easily reconciled payment method for commercial transactions. However, dishonoured cheques are one of the biggest concerns which affect smooth business operations. Many business entities in Sri Lanka are currently trying to understand how to take effective legal action against dishonoured cheques. Unfortunately most of them are not aware as to the correct procedure to follow in the event they receive a cheque which is dishonoured.

Under Sri Lankan Law if a cheque is returned due to a fault of the Drawer it is criminally punishable under the Debt Recovery Act of 1990 of Sri Lanka and section 398 of the Penal Code of Sri Lanka. Most parties presser to take criminal action and create a deterrence against the fraudster.

However, when an order is made to criminally punish a wrongdoer the Payee of the cheque does not derive any financial benefit. Payee will not be able to recover any money. However, a criminal action unlike a Civil action has in recent times being considered as a better deterrent, and less costly as the time taken is lesser than a civil action in Sri Lanka.

Therefore, a Payee would have to sort to one of the following civil remedies;

  1. To sue the Drawer of the cheque under the contract on which the payment was made.
  2. Sue to recover the sum of money stated in the cheque under liquid claims procedure.

Sue under the contract - Money Recovery

This is better known as the money recovery action in Sri Lanka. In order to succeed in this, the Payee of the cheque would have to prove that there was a contract. The Payee would have to adduce documentary evidence and/or witnesses. The dishonoured cheque may be used as evidence of contract. Thus proving an oral agreement is very difficult. Furthermore the Drawer would have a better chance of disputing the terms of contract. Since there is a need to produce more evidence in Court proceedings the time spent on litigation is also more.

However, in this event the litigation is for the "contract" and therefore any money due to the Payee which is not covered by the cheque dishonoured also can be recovered in the same action.

Sue for the recovery of money on the cheque - Liquid Claims

This is known as the liquid claim procedure. Here the Payee of the cheque can sue solely on the dishonoured cheque and would need to produce less evidence. Furthermore there is no need to prove the contract by adducing separate evidence as the drawing a dishonoured cheque itself is a wrong. Thus the time taken for litigating is also lesser.

What needs to be born in mind on dishonoured cheques under this method

  • Payee would have to obtain a duly completed cheque - this procedure cannot be used where there is an irregularity in writing the cheque. Therefore when accepting a cheque the Payee needs to satisfy himself that the details such as the signature, name of the payee, date (even if it is post dated) are correctly mentioned and the amount in writing match the amount in number.
  • The Payee has to duly present the cheque to the Bank on or after the date of the cheque.
  • Payee must obtain the original Cheque Return Notification (CRN)
  • When a cheque is dishonoured the CRN will be sent to the Payee. With the transition from the automated to the Cheque Imaging and Truncation System (CITS) dishonoured cheques are not physically returned to the customer instead a CRN is issued under the provisions of the Payment & Settlement Systems Act No.28 of 2005.

  • Payee must immediately send a letter to the Drawer stating that the cheque was dishonoured. If there is a delay, the Courts will not accept the case for litigation. The following format can be used for the same;

NOTICE OF DISHONOUR

NAME OF THE DRAWER)
..........................
.........................
.........................

Date.................

Dear Sir / Madam,

RE : CHEQUE NO. ...........

This is to notify you that cheque bearing number ......................amounting to a sum of Rupees..................................................................(Rs................) issued infavour of us, in lieu of the payments due to us by you on the aforesaid Agreement, has been returned to us with the endorsement "......................". The same has been received by us on .......................

Please make arrangements to remit a sum of Rupees......................................... ...........................(Rs.................) being the value of the returned cheque charges for the returned cheque and postage with immediate effect.

Yours faithfully,

...................

(NAME OF PAYEE)

  • Litigation process
  • Once the notice of dishonour is sent to the Payee and if the Drawer still does not settle the same, the Payee can file action under the Liquid claims procedure. The following documents need to be filed in Courts by the Payee.

    1. Plaint
    2. Original Instrument - The Original CRN received from the Bank
    3. Affidavit - stating the sum of the cheque
    4. Summons

After summons are properly served on the Drawer, the Drawer does not have an automatic right to appear and defend. This basically means that he cannot file an answer without the permission of the court. Only if the Courts are satisfied will they allow the Drawer to file defence. This is advantages to the Payee.

However, this procedure will only allow you recover what is stated in the cheque. If there are any monies which are not covered by the cheque action would have to be filed in Courts and prove the contract.

From the choice of Civil Action it is recommend that one adopts the Liquid Claims Procedure whenever possible as this would also reduce the time spent on litigation. Thus it would be a good practice to obtain a cheque even as security to cover any outstanding amounts of money whenever possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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