Credit Consumers Association

Post Dated Blank cheques can not be used as collateral February 20, 2010

In a landmark judgment, Bombay High Court has acquitted a person against whom a cheque bouncing case had been registered by a lending agency (a co-operative bank in this case) when his cheques given at the time of sanction of loan bounced.

Under the Negotiable Instruments Act, a cheque that bounces can lead to criminal prosecution of the issuer of the cheque.

It has been our case that Banks and other lenders obtain blank post dated cheques from the borrower when they give a loan, especially a personal loan where they normally advertise that security or collateral is not required.

But during the sanction process they do take blank post dated / undated cheques from the borrower.

We have raised this matter with RBI in our letter to the Governor but there has been no response till date.

Now we do not require a response from the RBI because in a landmark judgment, Justice P.R. Borkar of Bombay High Court has held that such cheques obtained before the sanction of loan can not be used as an excuse for speeding up recovery of bad loans by using the threat of prosecution under the Negotiable Instruments Act.

What does this mean to me and you is that when a bank threatens to use your post dated cheques and drag you to court if they bounce, tell the bank to just go ahead and deposit your cheques. They can not drag you to court because the cheques have not been issued in discharge of an existing liability. They were obtained by the bank in discharge of a future liability, which according to the judgment does not hold water under the Negotiable Instruments Act.

Download the entire judgment here