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Consequences of ECS dishonour

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Introduction

ECS (Electronic Clearing System) is an electronic mode of transferring money from one account to another. It can be used for the purposes like salary, pensions, payment of bills, equated monthly installments and distribution of divided interests. In short, it can be used for both credit and debit purposes. To avail the access to the scheme of ECS, one needs to inform the bank to grant authorized and the mandate will include details of one’s bank branch and account in particular. The duty of the institute lies for keeping a check on each and every action of account.It is a benefit for ECS user to set maximum amount of debit with specifying the purpose and validity period for ECS. The ECS costs nothing as per the regulations of RBI that the sponsor banks cannot charge anything to the account holders. So, it is free of cost.

Meaning of ECS dishonour

In August, 2008, the Reserve Bank of India Set up the Payment and Settlement Systems Act, 2007 for the supervision of payment and other methods for payment. To exercise its powers and discharge its duties it has set up a central authority for the settlement.

As per Section 25 of the Payment and Settlement System Act, 2007, Dishonour means when a transfer is initiated from a bank account maintained and the amount is considered insufficient to the amount  paid from that account with a bank agreement.

Provided that in the section of dishonoring of transferring the insufficient amount, nothing contained shall apply unless:

  • The electronic funds which initiated to be transferred and is insufficient is related to debt and liability as a whole or in part.
  • The transfer was made by following the proper guidelines provided by the system provider.
  • The person making the transfer fails to execute it within fifteen days of said notice given by recipient.
  • The beneficiary makes the written notice of thirty days for initiating the transfer of amount from the bank concerned regarding the dishonoring of electronic funds.

ECS Bounce and applicable laws

The failure of commitment of ECS amounts to a criminal offence. It is necessary for both parties to be fully aware of the legal obligations after entering into ECS which are provided by the law. The failure of performance of these obligations can result in a chain reaction for both the parties.

The provisions related to ECS and banking holds two most important legislation:

  1. The Section 138 of the Negotiable Instruments Act,2007 for check bounce.
  2. Section 25 of the Payment and Settlement System Act, 2007 against dishonour of electronic funds transfer.

It is very important for both parties to keep a check of obligations which needs to be catered. Otherwise, the law will transverse both the parties who have signed the cheque. The beneficiary who will try to cover it will also be held as liable if all the obligations are not being followed then the person may get imprisonment upto two years or fine which may extend upto twice the amount of cheque or ECS mandate.

What is ECS mandate?

It is an effective way of providing the effective and faster method of periodic and repetitive payments. It facilitates the paperless credit and debit transaction without giving any fee for it.

Process of setting up ECS mandate is as follows:

To set up ECS mandate, one needs to send a signed form for different types of mandates.After that the details needs to be attached and a cancelled cheque of previous saving account is to be attached.All the details are to be sent to associated banks afterwards.The payment would be deducted automatically after this process is taken into action.

What happens when the ECS mandate fails?

In the case of ECS mandate, it does not follow the simple procedure of failing due to the mismatch of signature or any credentials. It only fails when there is lack of funds in the bank of the authorized. There is no question of signature or cheque bounce.

In the case of three failures of ECS mandate, the bank would withdraw the ECS mandate facilities from the person availing it. Therefore, the procedure will continue to cancel down the ECS of the person.

Keeping the sufficient amount would be very necessary and it is also important to keep the payment utility bills to get the ECS honoured. Law has become very strict about the defaulters.

Dishonour of ECS mandate for the reason of insufficient funds (2018-2019)

In case to prevent the dishonour of ECS mandates for the reason of insufficient funds and to enforce the discipline among  the customers various guidelines have been taken into force which are as follows:

Dishonour of cheques for less than 1 crore and ECS mandate dishonour due to insufficient fund:

  • When there is disclosure of cheques due to insufficient balance less than 1 Crores, upto Six occasions will attract the stoppage of cheque book and closing of bank account in a single financial year.
  • If the insufficient balance situation is happening for the Fifth time in a single financial year, the  cautionary advisory notice will be sent to the account holder. In the case of inward cheque due to insufficient balance the same will be followed on the sixth occasion.
  • If the ECS mandates are dishonoured on the basis of insufficient balance, the account will be closed on the Fourth occasion. Cautionary advice will be sent prior.
  • Bank has the discretion to follow the guidelines on a case to case basis.
  • The failed ECS transactions for the reason of insufficient funds shall be furnished through the credit proposal.
  • The cases will be handled according to guidelines and periodically.

 General Policies:

  • Paying banks should return all the dishonouredcheques in case of insufficient balance which include the transaction related to Stock exchanges,clearing house as per return exchange. The collective banks should directly give the cheques to payees and holders.
  • It should be done within 24 hours indicating with a memo of “Insufficient balance”.
  • Full ensured co operation documents should be provided by the bank in case of proceedings related to dishonouredcheques before the court.
  • The decision of closure of issuance of cheques and closure of accounts shall be given with the discussion of  appropriate sanctioned authority.
  • Central processing units/ Late payment charge  units shall ensure the reasons on which the cheques are sent back.
  • As prescribed in Rule 6 of URRBCH (Uniform Regulation and Rules for Bank’s Clearing Houses), the bank should state the reason, the memo and should have the official signature of the branch while returning.
  • SMS alerts are admissible under the Information Technology Act, 2000 and under section 3, 65 A and 65 B of The Indian Evidence Act, 1972.

Conclusion

It is important for both parties to be careful about the sufficient funds  made for issuance of cheques and ECS mandates. If it is not done in a proper manner the liability will be on both the parties. So, the guideline policies mentioned above should be taken into consideration to avoid it.           

References

https://www.business-standard.com/article/pf/what-is-electronic-clearing-service-ecs-111070800019_1.html
https://www.expertjurist.com/ecs-bounce-and-applicable-law-the-payment-and-settlement-systems-amendment-act-2015/
https://www.planmoneytax.com/electronic-clearing-system-ecs/
https://www.canarabank.com/media/7112/policy-on-dishonour-of-cheques-2018-19.pdf

Contributed by: Shreya Marwaha, A Member of Legal Experts Team at LLL

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