• Security blank cheques with discharging of laibility from dealer to a distributor or supplier

Hi

Can we take blank security cheques from retailer to whom we are supplying goods on credit and if he do not pay such amount, same cheque can be used to recover outstanding amount.

Is keeping blank security cheques is legel ?
or need any type of agreement with concern party?

Please guide...
Asked 1 year ago in Business Law from Mehsana, Gujarat

when blank cheques are issued by drawer he authorises drawee to fill in the details

2) however it is better that amount of cheque be filled in by the retailer

3) you should enter into stockist agreement with retailer

4) get it drafted by local lawyer

Ajay Sethi
Advocate, Mumbai
66920 Answers
4041 Consultations

5.0 on 5.0

Blank cheques can be obtained for the purpose of security.

The business agreement is apart from this.

T Kalaiselvan
Advocate, Vellore
56685 Answers
701 Consultations

5.0 on 5.0

Hi

You cannot prosecute a person if he has given the said security cheque as security. So obtaining a cheque as advance payment or in lieu of goods delivered is the preferred option.

Since you are supplying goods on credit, you can always mention that goods are supplied and the buyer has accepted the goods in condition and order and hence payment has made vide cheque number______dated.___

Please note if you enter the date on cheque, you should present the cheque within 90 days. So depending on your credit period, you may or may not enter the date of cheque.

No need for agreement.

All that you need to incorporate in your Invoice or in Delivery Note is that

a) Quantum of goods. (Quantity, sale consideration, interest for credit period etc) and

b) that the buyer has accepted the goods in good condition and order (i.e title to goods have passed from you to buyer) and

c) Payment made vide cheque dated _____, for amount ___(amount should match the invoice amount and / or principal + interest for credit period).

d) Keeping blank cheques of buyers is Legal provided they are not kept as security, but as legal tender for goods/ services so purchased by the customers or as advance payments from customers.

Hope this information is useful.

Rajgopalan Sripathi
Advocate, Hyderabad
1658 Answers
298 Consultations

5.0 on 5.0

Dear Client,

It is usual practice to keep blank cheque for security purpose, all it need to be duly signed.

Agreement is advisable to keep evidence of business relationship and admission of retialer that, he has given cheque under agreement.

Yogendra Singh Rajawat
Advocate, Jaipur
13207 Answers
17 Consultations

4.6 on 5.0

1. Yes you can very much keep security cheque to secure your payment and in the event if default of payment you can present those cheques for honour.

2. There is no illegality in keeping blank undated cheque. However to remove any dispute you may fill up the amount by the drawer of the cheque himself.

3. There is no need to make any separate agreement for this though there is no harm either if make an agreement on this.

I repeat that in absence of such agreement also you can keep and present the cheque in future.

Devajyoti Barman
Advocate, Kolkata
17808 Answers
252 Consultations

5.0 on 5.0

As usual practice you can keep security cheques there is no illegality in it. Kindly get details filled by the person issuing cheque. Donot keep black cheques let amount be filled in as per invoices in the said cheques.

If you are supplying under invoices on purchase order no separate agreement for transiction is required.

Shubham Jhajharia
Advocate, Ahmedabad
19310 Answers
75 Consultations

5.0 on 5.0

Dear Sir,

You can take blank security cheques for any legal business transaction. It is valid. But to be more cautions you must take collateral security like promissory note etc. The relevant rules for cheque bounce case are as follows.

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1. In which court do I need to file the complaint case under Section 138 N.I. Act in case drawer did not pay after receiving notice?

A complaint case under Section 138 N.I. Act can be filed in any competent court in whose jurisdiction any of the following acts have occurred:

a) Place of drawing of the cheque,

b) Address of bank where cheque was presented (holders bank address),

c) Address of bank where cheque is payable (drawers bank address)

d) Place from where notice was received by drawer of cheque

a. It is possible that each of these four acts could have occurred at different localities. The complainant can choose any one the above places to determine jurisdiction of court where they wish to file complaint.

2. What can I do if it has been more than 30 days since I received information of dishonour of cheque?

If the cheque is still valid i.e. 3 months (currently) have not passed from the date of its issue, you can represent the cheque again to your banker as there is no restriction regarding the number of times a cheque can be presented and that every subsequent representation and dishonour gives rise to fresh cause of action for filing complaint. It may be noted that once a notice for payment is given then the holder must file a complaint under Section 138 N.I. Act within 30 days from expiry of notice period as a fresh cause of action will not arise if the cheque is presented again and it is dishonoured and failure to file complaint will lead to loss of remedy available under Section 138 N.I. Act.

3. How long after notice has been served can I file a case against the drawer?

After giving notice you need to file a complaint case against drawer under Section 138 N.I. Act within 30 days from the expiry of notice period i.e. 15 days. In other words you need to file complaint case against drawer within 45 days (15+30) from the date of issue of notice. Failure to do so will lead to loss of remedy under Section 138 N.I. Act; however, you can file a summary suit for recovery of money and initiate criminal proceedings under Section 420 I.P.C. within 3 years from date of issue of cheque.

4. What can I do if I do not have the drawer's address?

You need the address of the drawer of cheque to issue notice as contemplated under provisions of N.I. Act; also the address is necessary if you wish to avail other legal remedies available to you. You can send the notice to the last known address. In case the address of the drawer has changed and the drawer has not left a forwarding address and the notice is returned with the noting that addressee is not available at the address or addressee has left without leaving a forwarding address then you need to file a complaint case after 15 days (notice period) of receipt of such information or returned notice and within 30 days from expiry of notice period. Failure to do so will lead to loss of remedy under Section 138 N.I. Act; however, you can file a summary suit for recovery of money and initiate criminal proceedings under Section 420 I.P.C. within 3 years from date of issue of cheque

5. What should I do if the notice was returned and could not be served to the drawer?

When a notice is returned to the sender as unclaimed or with the noting that addressee is not available at the address or addressee has left without leaving a forwarding address then the date of receipt of such information or returned notice would be the commencing date for the notice period of 15 days. Complaint case under Section 138 N.I. Act must be filed within 30 days from expiry of notice period. Such reckoning would be without prejudice to the right of the drawer of the cheque to show that he had no knowledge that the notice was brought to his address or previous address.

6. Can Mohan Law Chambers assist in drafting of legal notice as required by Section 138 of N.I. Act.?

Yes, Mohan law Chambers offers assistance in drafting of legal notice as required by Section 138 of N.I. Act.

7. How long after receiving information of dishonour of cheque do I have to serve notice to the drawer?

You need to serve a legal notice to drawer of cheque demanding payment of cheque amount within 30 days of the receipt of information from your banker regarding dishonour of cheque under Section 138 N.I. Act.

8. What if the cheque was given for a reason other than to discharge a legally enforceable debt or other liability?

In cases where cheque was given for a reason other than to discharge a legally enforceable debt or other liability, the provisions of Section 138 N.I. Act are not applicable e.g. Cheque given as Gift, in charity, donation etc.

9. Can a cheque issued in security attract offence under Section 138 N.I. Act?

With respect to the dishonour of cheques given as security, legal position is not very clear. It is subject to presumption and proof thereof that may be given by either party in support of their case. High Court of Delhi in the case of M/s Datt Enterprises ltd. vs. V.K.Dua held that the security cheque does not attract the provisions of Section 138 N.I. Act., if cheques were given as a security cheque as per past practice and pending reconciliation of accounts and not towards discharge of any liability.

10. What is a legally enforceable debt or other liability?

Legally enforceable debt or other liability should be such which is contracted in accordance with law and which is not opposed to public policy viz., wagering contracts, debt obtained for running brothel or gambling house etc.

11. What is Section 138 N.I. Act and why is remedy available under it preferable to remedy available under other laws?

a. Section 138 N.I. Act was made to provide an additional criminal remedy over and above the civil remedies available; to provide a speedy and effective remedy to holder of dishonoured cheque.

b. Summary suit for recovery of money takes time (approximately 3 to 5 years) and criminal proceedings under Section 420 I.P.C. does not provide any provision for recovery of money and is meant only for prosecution of the drawer of the cheque who entertains dishonest intention to cheat.

12. What is a summary suit for recovery of money?

Summary suit is a civil legal proceeding initiated for recovery of money due under any written agreement, cheque etc. These proceedings are different from normal recovery suit, as here the liability to prove that petitioner is not liable to recover any amount is on defendant for which he needs to obtain leave to defend from the court.

13. What is the validity of the cheque in day to day business?

The current validity of cheques is 6 months. However, please note that from April 1, 2012. The validity will change to three months as per recent directive of RBI (under Sec. 35A, Banking Regulation Act, 1949)

14. What can I do if a cheque given to me has been dishonoured?

a. The holder of a cheque that has been dishonoured can seek remedy in the following manner:

i) Action under Section 138 Negotiable Instruments Act (N.I. Act): Give notice under within 30 days of receipt of information of dishonour from the bank. In case of non- payment by the drawer within the notice period of 15 days, then the holder must institute a complaint case for prosecuting drawer within 30 days of expiry of notice period.

ii) Civil Action as Summary Suit: Issue notice within 3 years from issue date of cheque and institute a summary suit for recovery of cheque amount along with interest and legal expenses. The notice can also be used while filing summary suit for recovery of money.

iii) Criminal Action: Initiate criminal proceedings by filing complaint under Section 420 Indian Penal Code (I.P.C.) within 3 years from issue date of cheque. Please note that there is no provision for recovery of money under Section 420 I.P.C. and this section is meant only for prosecution of the drawer of the cheque when dishonest intent to cheat in inferred.

15. What documents / evidences do I need at the time of filing complaint case under Section 138 N.I. Act?

You will need at the minimum, the following:

a) Proof of service of notice - receipt of postal department / courier

b) Copy of notice

c) Cheque in original

16. What can I do if I do not file a complaint within 30 days from expiry of notice period?

If you have not filed a complaint case within 30 days after expiry of notice period, you can file a summary suit for recovery of money and initiate criminal proceedings under Section 420 I.P.C. within 3 years from the date of issue of cheque.

17. What can I do if it has been more than 30 days since I received information of dishonour of cheque and 6 months has passed from the date of issue of cheque?

a. Other remedies are also available to recover the cheque amount. You can file a summary suit for recovery of money and initiate criminal proceedings under Section 420 I.P.C. within 3 years from date of issue of cheque. In case the cheque was never presented during its validity period then a summary suit is the only available remedy for recovery of money.

(Notice can be given to drawer up to 3 years from date of issue of cheque for instituting a summary suit for recovery of money. Criminal proceedings for prosecution of drawer can also be instituted within 3 years from date of issue of cheque under Section 420 I.P.C.)

18. The drawer is asking me to settle the claim at a reduced value. What should I do?

Its up to you to settle the claim at a reduced value as the same will save your precious time, as well as legal hassle. Now-a-days courts are also encouraging amicable settlement between the parties. However, if you settle the dishonoured cheque amount at a reduced value, you will lose all remedies available under law.

19. What remedy do I have if the drawer delays in settling after conviction?

In a recent 2010 judgement, Supreme Court has laid strict rules to deal with such delaying tactics. Delay in settling cheques bounced will cost up to 20% of the cheque amount post-conviction. This is detailed as: 10% at District Court level; 15% at the High Court level; and up to 20% at the Supreme Court level. For e.g., Defaulter going for settlement will have to pay 10% of the cheque amount to avoid going to the jail.

20. Can I recover interest and legal expenses from the drawer of the dishonoured cheque?

Yes, you can recover interest and legal expenses from the drawer of the dishonoured cheque in a summary suit for recovery of money, but not in the proceedings initiated under Section 138 N.I. Act. However, under Section 138 N.I. Act the award maybe higher than the cheque amount.

21. What should I do if the drawer does not make payment upon receipt of notice?

You can adopt either or any of the remedies available to you:

a) Can file a criminal complaint against drawer of cheque under Section 138 of N.I. Act.

b) Can file a summary suit for recovery of money, interest and legal expenses.

c) Can file a criminal complaint against drawer of cheque under Section 420 of I.P.C. Please note that there is no provision for recovery of money under Section 420 I.P.C. and this section is meant only for prosecution of the drawer of the cheque.

In case a person has filed suit for recovery, then he is not precluded from filing a complaint under Section 138 of the Negotiable Instruments Act and Section 420 of the Indian Penal Code. The pendency of criminal matters would not be an impediment to proceeding with the civil suits.

Kishan Dutt Kalaskar
Advocate, Bengaluru
4433 Answers
112 Consultations

5.0 on 5.0

Hello,

Yes you can do the needful, there is no illegality in the same. Make an agreement with regards to said security deposit.

It will be better if you enter into an agreement.

Regards

Anilesh Tewari
Advocate, New Delhi
16918 Answers
259 Consultations

5.0 on 5.0

To establish a case under S.138 NI, the legally enforceable debt or liability has to be established. Thus, contract notes along with cheques duly signed, verified with the past signatures, past signed documents along with the amount, duly signed in the handwriting of the debtor shall hold good.

Rajaganapathy Ganesan
Advocate, Chennai
1512 Answers
8 Consultations

4.9 on 5.0

Dear,

Its not a good practice to keep blank security cheque, but if you want than, it should be duly signed by the

retailer.

Yes preapre agreement with concern party, it will help you in future.

Tarun Agarwal
Advocate, Jaipur
769 Answers
3 Consultations

4.9 on 5.0

Hi, Once the cheque is issued, it is issued for consideration, but the if the other party able to establish before the Court that he has given blank cheque for security purpose then your case will be failed.

Pradeep Bharathipura
Advocate, Bangalore
4624 Answers
229 Consultations

4.5 on 5.0

Yes blank signed cheques are legal for security purpose.

Laksheyender Kumar
Advocate, Delhi
734 Answers
2 Consultations

4.8 on 5.0

This is normal practice to take blank security checks for realisation of outstanding amount are to take legal action in case of non payment under Negotiable Instrument Act if your dealers agreed to give you a blank cheques you may go ahead and you need not to get into any kind of agreement

Vimlesh Prasad Mishra
Advocate, Lucknow
5507 Answers
18 Consultations

4.9 on 5.0

Hi,

You may very well take the blank cheques as security and it is legal.

Ganesh Singh
Advocate, Delhi
3115 Answers
9 Consultations

4.5 on 5.0

Sir

It is not illegal to hold a blank cheque for security. However, as per the prevailing law, you must have an agreement in place with the retailer, so in future, if there is a default, then you can encash the case, and the retailer cannot take the plea that it was a security cheque.

Currently two judgment of Gujarat High Court holds the field in this regards. So, the better thing is have an agreement in place to secure your future rights.

Feel free to contact. I am based in Ahmedabad and practice in High Court

Regards

Vivek N Mapara

Vivek Mapara
Advocate, Ahmedabad
28 Answers
3 Consultations

5.0 on 5.0

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