Proposed amendments to certain provisions of the Bahrain Law of Commerce pertaining to cheques
Banking & Finance / Bahrain
On 23 October 2022, the Central Bank of Bahrain issued a consultation letter to market participants on proposed amendments to Decree No. 7 of 1989.
Law Update: Issue 359 - Real Estate & Construction and Hotels & Leisure
Gargi AgarwalAssociate,Banking & Finance
Shouq Al Majali Trainee Lawyer,Banking & Finance
On 23 October 2022, the Central Bank of Bahrain (“CBB”) issued a consultation letter to market participants on proposed amendments to Decree No. 7 of 1989 promulgating the law of commerce (“Law of Commerce”). In this article we will discuss the proposed amendments to the Lawe of Commerce in relation to cheques from a banking and finance perspective.
The first proposed amendment is to Article 451 (3) and (4). We have set out the current Article 451 (3) and (4) and the proposed amendments to Article 451 (3) and (4) below.
(3) The drawee may not refuse to certify the cheque if requested by the drawer or the bearer and if he has sufficient funds to pay the cheque.
(4) The funds appropriated for the payment of the cheque shall remain frozen with the drawee and under his responsibility in favour of the bearer until the lapse of the period prescribed presenting the cheque for payment.”
The CBB is proposing to amend it as below:
“(3) The drawee may not refuse to certify the cheque if so requested by the drawer or bearer and the latter has sufficient funds to pay the cheque amount in full or in part.
(4) The funds required for the full payment of the certified cheque or the amount remaining following the partial payment thereof, shall remain frozen with the drawee and under its responsibility in favour of the bearer, until the expiry of the time limits prescribed for presenting the cheque for payment.”
“(1) The bearer of a cheque has the right of recourse against the drawee, endorser and other obligors if he presents the cheque within the prescribed period and the amount thereof has not been paid, and provided that he establishes non-payment by drawing up a protest. As an alternative to drawing up a protest, non-payment may be established by:
(a) A statement made by from the drawee indicating that date of presenting the cheque.
(b) A statement issued by the clearing house stating that the cheque has been presented within the legally prescribed period but the value thereof has not been paid. Such statement shall be dated, written on the cheque and signed by the person making it.”
“(1) A cheque bearer has the right of recourse against the drawee, endorsers and other obligors if he presents the cheque within the legally prescribed period and the amount thereof has not been paid in full or in part, and he establishes the failure to make full or partial payment by a protest. In lieu of protest, the failure to make full or partial payment may be established by:
a) A statement made by the drawee, indicating the date of presenting the cheque; or
b) A statement issued by a clearing house, indicating that the cheque has been presented within the legally prescribed period but the amount thereof has not been paid in full or in part. Such statement shall be dated, written on the cheque and signed by the issuer thereof.”
Whilst it may appear that the above proposed amendments to Articles 451 and 480 of the Law of Commerce, does not entirely depart from the way they are currently drafted, in our view, the proposed amendment in Article 451(3) is significant insofar that if enacted, the bearer is required to have sufficient funds to pay the amount in full OR in part. This is a significant change as it allows the bearer the option of demonstrating partial payment which is currently not permitted. The same could be said about Article 480 as the cheque bearer may have a right of recourse against the relevant obligors upon establishing failure to make partial payment.
The substantiality of the inclusion of ‘or in part’ or ‘partial payment’ is demonstrated when taking into consideration the criminal liability associated with signing cheques knowing that there are insufficient funds in the bank account. The Decree No. 15 of 1976 promulgating the Bahrain penal code, as amended (“Penal Code”), states that: “a prison sentence or a fine or both shall be the penalty for anyone who issues in bad faith a cheque which is not adequately covered by a cash consideration that is payable or if he recovers, after the issue of the said cheque, all or part of the said consideration, so that the balance would not cover the amount thereof, or if the drawee orders the stopping of the payment thereof or if he deliberately writes or signs it in a manner preventing the encashment thereof. The same penalty shall be applicable to any person who endorses a cheque to another or delivers thereto a cheque with the knowledge that it is worthless or is not payable….”
In light of the above and based on case law in Bahrain, in our view, the person signing the cheque would be held personally liable if they knew that there were insufficient funds in the bank account. However, the proposed amendment under Article 451(3) indicates that the person signing the cheque shall not be held liable if they are able to demonstrate that the bank account has sufficient funds to pay the cheque in part.
“In the event of conviction by the criminal court for any of the cheque offences provided for in the Penal Code, it shall be empowered to order the publication of a summary of the judgement at the expense of the convicted person in one of the local newspapers. Such publication shall include the name of the convicted person, his domicile, occupation and the punishment inflicted against him. In case of recurrence, the publication provided for in the preceding paragraph shall be imperative.”
The proposed revised Article 491is as follows:
a. “No blank cheques shall be issued to be used as credit or security instruments.
b. The ministry in charge of consumer protection affairs shall take the necessary measures to implement the prohibition referred to in Paragraph (a) above. The Central Bank of Bahrain shall take the necessary measures and shall issue the necessary instructions to ensure the licensees’ compliance with the Law of the Central Bank of Bahrain and Financial Institutions, promulgated by Law No. (64) of 2006, in order to implement the aforementioned prohibition, as per the powers conferred thereon towards the licensees under such Law.
c. Whoever violates the provisions of Paragraph (a) above shall be punished by a fine of no less than two hundred dinars (BHD 200) and no more than two thousand dinars (BHD 2,000). If a bearer fills out the details of a cheque and presents it for payment in violation of the provisions of Paragraph (a) above, he shall be punished by a fine of not less than ten percent (10%) of the value of the cheque, at a minimum of five hundred dinars (BHD 500), and not more than twice such value, at a maximum of ten thousand dinars (BHD 10,000).”
The proposed amendment to Article 491 of the Law of Commerce shall do away with the requirement to publish the judgment for any cheque offences as provided in the Penal Code. The CBB is proposing to amend Article 491 to prevent the issuance of blank cheques to be used as credit or security instruments. The CBB and the Ministry of Industry and Commerce (Consumer Protection Directorate) shall work collectively to ensure that Article 491(a) is implemented and cheques are not used as credit or security. Whereas Article 491 as it is currently drafted includes a wider range of prohibitions, the proposed amendments under 491(c) provide for specific penalties for non-compliance with 491(a). Among the general penalties, the amendments (if implemented) will penalise bearers who present a cheque for payment having issued it as a credit or security instrument by imposing a fine of not less than 10% of the value of the cheque provided that the fine does not exceed BHD 10,000.
In addition to the above proposed amendments, the following new articles are included in the draft amendment to the Law of Commerce:
Article (465-bis)
“If the available account balance is less than the cheque value, the drawee shall partially pay the same in the amount available in the account.
A cheque bearer may, upon presenting the cheque to the drawee, request a rejection of the partial payment, and may also re-present the partially-paid cheque.
The drawee shall annotate the partial payment on the cheque upon each partial payment and shall return the original cheque to the cheque bearer and deliver him a certificate of partial payment. The Central Bank of Bahrain may issue a resolution to set another mechanism to prove the partial payment other than the annotation on the cheque.
A cheque bearer may initiate execution proceedings against the outstanding amount of the cheque annotated with partial payment, pursuant to the provisions of Article (465-ter) hereunder.
The Central Bank of Bahrain shall issue a resolution regulating all matters related to the application of the provisions of partial payment of cheques, whether the payment is made in cash or by settling the cheque amount through written entries, such as credits, bank transfer or offset.
Notwithstanding the provisions of Article (4) above, the Central Bank of Bahrain shall, after coordinating with the relevant authorities, issue a resolution on the effective date of the provisions of this Article.”
Article (465-ter)
“A cheque annotated by the drawee as uncovered or partially covered shall be considered a writ of execution, which may be executed pursuant to the provisions of the Enforcement Law in Civil and Commercial Proceedings, promulgated by Decree No. 22 of 2021.
The minister in charge of justice affairs may, following the approval by the Supreme Judicial Council, issue a resolution drafting complementary rules and procedures for the execution against cheques annotated by the drawee as uncovered or partially covered.”
The new proposed Articles will treat an uncovered or partially covered cheque as a writ of execution pursuant to the Decree No. 22 of 2021 promulgtaing the Enforcement Law in Civil and Commercial Proceedings. Article 465-ter also includes that the Minister of Justice Affairs may issue executive regulations following the issuance of the amendmentsto the Law of Commerce (if implemented). Such regulations shall include specified enforcement rules and procedures.
It is common market practice for cheques to be used as security in Bahrain. If the proposed amendments to the Law of Commerce are implemented, then this practice would be prohibited and accepting cheques as credit or security will attract the penalties set out above. The proposed amendments to the Law of Commerce also introduce the concept of partial payment of cheques which the current Law of Commerce does not provide for. The consultation period closed on 6 November 2022. The proposed amendments have not yet been implemented. Whether or not these changes will be implemented, and the impact it would have, only time will tell.
For further information, please contact Rafiq Jaffer, Natalia Kumar, Gargi Agarwal or Shouq Al Majali.
Published in June 2023
