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 cheque1.

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 meth-
ods 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 con-
tinue 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 protesta-
tion 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 legit-
imize 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. In-
sight 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 legit-
imate 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 pro-
posed 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. Subse-
quently 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 af-
fecting 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 doesnt, then
he can plead not guilty and choose to raise a defence.

2 Law Commission of India Report 245

3Ram 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 Defen-
dant 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 7000

3 Fee for Leading Evidence 10,000

4 Fee for Legal Notice 5000

5 Typing per Pge 20 x 20

6 Notary Attestation 500

7 Reply 5000

8 Transport 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 per-
son 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 reme-
dy wont 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 plain-
tiff to go to court for remedy only if he is fully assured that hell 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 plaintiffs 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 ones 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 pur-
sue 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 plaintiffs 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 set-
tlement 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 > Defendants 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 wont 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 law-
suits. 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 opti-
mal 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 behav-
ioural 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 ds dominant strategy would be no care or dishonouring the
check always, as there is no law to regulate his actions, hence hell 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 hes 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 Instru-
ments 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 sur-
plus of +5, in case of an arbitration always the defendant council would put the lowest value vari-
able 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 ps
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 proceed-
ing in court, he has to wait for another 3 years to get a judgement, by including the lawyers fee and
subsequent transport fees, the plaintiff can face a fee of around Rs 32,000, which is if certainty ex-
ists 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 hell get back Rs 2,00,000/-
along with another Rs 2,00,000/- as compensation (as the plaintiff gets double the amount as com-
pensation, in case of dishonour under Section 138 of Negotiable Instrument Act) and hence the sur-
plus of Defendant reduces to +2 only whereas the Plaintiffs 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 Lawyers 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, hell 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 in-
struments or where the plaintiff seeks to recover debt or liquidated amount. The essence of summa-
ry 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 de-
fendant 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 un-
conditionally 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 intend-
ed 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 deal-
ing 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 alloca-
tion 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 total-
ity 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 in-
dividual7.

6 Bimal N. Patel, Ranita Nagar, Hiteshkumar Thakkar, Law and Economics in India: Understanding and practice, Rout-
ledge, 22-Jul-2016, p 168

7 Ibid., p 169