Wednesday, March 5, 2008

Judge removes sting from law on bounced cheques


Written by Albert Muriuki ImageMarch 05, 2008: A High Court judgment has removed teeth from a recently enacted law that criminalises issuance of bouncing cheques.

In a judgement that some legal experts argue is expressly contrary to the provisions of the relevant law, Mr Justice Jackton Ojwang said disputes arising from failure to honour promissory notes should be resolved through mediation and in the courts.

It appears to put issuance of bouncing cheques under the ambit of civil offences for which a person cannot serve a jail term— except where contempt of court is evident — and where the remedy comes mostly in the form of compensation for damages.

It also turns the clock backwards on official attempts to shore up confidence in the cheque as a means of financial transaction.

The rampant issuance of dud cheques has eroded confidence in it as a means of payment, adding to the cost of financial transactions in the economy as most institutions reject personal cheques.

The credibility erosion has left bankers cheques as the only viable means of carrying out paper money transactions, creating a vibrant income stream for banks.

But in the ground breaking judgement delivered last Friday, Mr Justice Ojwang said the issuance of bouncing cheques fell under private contractual matters where the most practical course of judicial action was compensation and reconciliation.

It means issuers of bouncing cheques can escape jail terms by quickly entering into private agreements with the payees on how to make good on the payments.

“In all cases the court may promote reconciliation and encourage and facilitate the settlement in an amicable way of proceedings for common assault, or for any other offence of a personal or private nature not amounting to a felony,” Mr Justice Ojwang said.

Felony is a term used in common law to refer to very serious crimes.

Issuance of bouncing cheques though criminalised by an Act of Parliament is considered a misdemeanour, a less serious offence that attracts a fine of Sh50,000, a one-year imprisonment or both.

The judgement arose from a case involving Joseph Kimani Kamau and Zilphan Arende Abila.

Mr Abila had complained that Mr Kamau had issued a $23,496 bad cheque (Sh2 million at the time of the offence in 2005) for the importation of a Mercedes Benz. It had been drawn on Commercial Bank of Africa but was referred to drawer for insufficient funds. Mr Kamau pleaded guilty and was sentenced by a magistrate’s court to 18 months in prison.

That custodial sentence went against a probation report that had informed the guilt plea. The report, though not binding to court, had recommended he be put under probation on account of being a first offender.

In giving the custodial sentence, the magistrate had relied on the prevalence of cases of bouncing cheques despite Mr Kamau having settled part of Mr Abila’s dues after the cheque had bounced. At the time, only Sh300,000 was outstanding.

“Considering the probation officers report, I do not find this case a suitable one for probation, given the prevalence of this kind of offence, I will overlook the probation officers report and sentence the accused to serve 18 months in jail,” said the magistrate.

The High Court, however, disagreed and concluded that the sentence could not stand because of its non-compliance with established legal principles.

“The offences charged in this case were misdemeanours, and related to private contractual matters, in respect of which the most practical course of action was to see to a process of compensation and reconciliation between the parties. Considering that the parties, by their own devices, were well agreed on a process of compensation, in my opinion, it was inappropriate for the lower court to abstain from accommodating the principle of reconciliation. On this account, I would not sustain the sentence awarded by the lower Court,” the judge said.

Mr Kamau had also been charged with the offence of obtaining money irregularly.

Statistics show that between January and September last year , at least 34 of the 41 licensed commercial banks reported incidents of bouncing cheques, with the total value in the nine months estimated at over Sh2.2 billion.

The law criminalising issuance of bouncing cheques was passed in 2004 and states that any person who draws or issues a cheque on an account is guilty of a misdemeanour, if they know that the account has insufficient funds; knows that the account has been closed; or has previously instructed the bank or other institution at which the account is held not to honour the cheque.

The CBK annual report shows that in the financial year to June 2007, the daily volume of cheques settled through the central clearing house averaged 46,833 valued at Sh8.51 billion.

According to the CBK, bounced cheques have the principal effect of undermining confidence in the use of cheques as payment instruments in the banking system.

“This in turn hinders the extension of credit and the settlement process with business increasingly resorting to cash on delivery. In addition, drawees of bounced cheques pay additional fees and resultant charges to their banks thereby increasing the cost and risk of doing business,” said the Central Bank in a press statement in January this year.

Lawyers were reserved in their opinion on the judgment stating that behavioural change from the issuers was the best remedy in solving the menace.

“Even if you were to increase the penalty for offenders, the law still provides for out of court settlements and most victims of bad cheques are never interested in pursuing legal cases after getting compensation from the drawers of the cheques,” says commercial lawyer and advocate of the High Court Emmanuel Wetangula, adding that the best way out of the situation was for honesty among business associates.

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