Liability Of Directors In Case Of Dishonor Of Cheque

Introduction:

The way cheques are issued, bounced, and dealt with has changed dramatically throughout the years. Our country has benefited greatly from commercial globalization. The use of cheques expanded in tandem with the rapid growth of commerce and trade, as did the number of cheque bouncing disputes. The purpose of Sections 138-142 of the Negotiable Instruments Act of 1881 is to improve the efficiency of banking operations and ensure the legitimacy of business transactions involving cheques. A person who issues a cheque to satisfy a debt or liability in whole or in part and the cheque is dishonoured by the bank on presentation is guilty of a criminal offence punishable by imprisonment, fine, or both. In the event of a dishonour by a company, vicarious liability would be imposed on three types of people: the company itself, everyone in control of the company’s activities, and other people like directors, managers, secretaries, and other officers of the firm. This blog discusses the point of law, the directors’ liability in such a case, as well as the applicable territorial jurisdiction for bringing a lawsuit and various court rulings.

Dishonor of cheque under section 138 of NI Act, 1881.

Any cheque written by a person in payment to another person that is returned to the bank unpaid because there are insufficient funds in the account or the amount exceeds the permissible limit has been defined under Section 138 of the Negotiable Instruments Act, 1881. The payee or drawee is the person who is being paid, and the drawer or payer is the one who is paying via check. As a result, it is due to the drawer’s inability to pay the amount owed to the payee.

The conduct of an offence is one thing, but prosecution is quite another in criminal law. Section 138 of the Act governs the commission of an offence. Section 142 of the Act governs prosecution. It’s also worth noting that, while Section 138 makes dishonouring a check a crime punishable by imprisonment and a fine, it also includes safeguards to protect drawers of such instruments when dishonour occurs for reasons other than dishonest intentions.It calls for the service of a notice on the drawer of the instrument, instructing him to make the payment covered by the cheque, and allows prosecution only after the statutory period has expired and the drawer has failed to make the payment within that time.

LIABILITY OF A DRAWER OF A DISHONOURED CHEQUE

  • Civil liability: – When a cheque is returned unpaid, the drawer’s legal status changes to that of a primary debtor to the holder. The holder, like any creditor, can file a civil suit to recover the money from the drawer, rendering him liable as the principal debtor. The judiciary has also ruled in most of the cases, that the pendency of criminal cases would not prevent civil cases from moving forward. Both remedies may be possible at the same time.
  • Criminal liability: – When a cheque drawn by a drawer is dishonoured by the drawee due to a lack of cash, the drawer is considered to have committed a criminal offence. Sections 138 to 142 of the Negotiable Instrument Act 1881 deal with a drawer’s criminal liability in the event of a cheque being dishonoured. Because the substance of the offence under S.138 of the Act and S.420 of the IPC differs, conviction under one provision does not preclude prosecution under the other.In the case of A Veerbhadra Rao vs. Government of A.P.(1994), the full bench of the Andhra Pradesh High Court held that when a person issues a cheque or a post-dated cheque, he implicitly represents to the payee that the cheque will be met when presented to the bank in the ordinary course of events. Even with the introduction of S.138 of the Act, a prosecution under S.420 IPC is maintainable in this situation if dishonest intent at the time of the cheque issuance is established.

Exceptions to Criminal liability

  • Cheque issued in Discharge of Liability: The cheque must be issued in discharge of any debt or other liability owed by the drawer to the payee, in whole or in part. A complaint was filed in Kumar vs. Bapsons Foot Wear(1995) for the dishonour of a cheque, alleging that the accused issued a cheque in the course of business. The complaint was challenged in court via a petition. The court granted the petition, ruling that the essential requirement for an offence under section 138 of the Act, that the cheque be drawn for the discharge in whole or in part of any debt or other liability, had not been met because the accused issued the cheque in the course of their business, according to the complaint.
  • Cheque presented as a gift: The maker of the cheque is not liable for prosecution if the cheque was not issued for the purpose of cancellation of any debt or other liability. The maker of the cheque is not liable for prosecution if the cheque is given as a gift or present and is dishonoured by the bank. No criminal culpability may be established unless the two conditions laid out in section 138 are met.
  • Absence of mens rea: Section 138 creates a strict responsibility, since the wording “such person will be judged to have committed an offence” expressly state. The bank’s return of the check for one of the two reasons listed in the section is an essential condition for severe liability to exist. The offence is not made out if the check is returned for any other reason. The offence under Section 138 has its own set of statutory criteria that preclude the use of the mens rea doctrine.

DISHONOR OF CHEQUE BY COMPANIES

The integrity and honesty of the parties are crucial to the proper and seamless running of all commercial transactions, notably the use of checks as instruments. The payee suffers incalculable loss, injury, and inconvenience when a bank dishonours a cheque, and the entire credibility of business transactions within and outside the country suffers a serious setback. A company, being an artificial person constituted by law, acts through its directors and officers, who are responsible for the company’s day-to-day operations. The drawer firm bears the brunt of the criminal liability for cheque dishonour, but it also extends to the company’s officers. The general rule in criminal trials is against vicarious liability, which means that no one can be held legally accountable for the actions of another. This general concept, however, is vulnerable to exceptions due to particular provisions in statutes that extend liability to others. Companies are governed by Section 141 of the Negotiable Instruments Act of 1881 (“NI Act”).

When a company’s cheque is returned unpaid, the following people are considered to be guilty of the crime, along with the company, and can be prosecuted and punished:

  • Every person who was in charge of and responsible to the company for the conduct of the company’s business at the time the offence was committed;
  • Any Director, Manager, Secretary, or other officer of the company with whose consent and connivance the offence under section 138 was committed; and
  • Any Director, Manager, Secretary, or other officer of the company whose negligence resulted in the company committing the offence under section 138.

LIABILITY OF THE DIRECTORS IN CASE OF DISHONOUR

Section 141 makes anybody who was in control of and responsible for the conduct of the company’s operations at the time of the offence criminally liable for dishonouring a cheque. Such a person is vicariously liable to be held guilty for the offence under Section 138 and penalized as a result of a deeming provision in Section 141. Under the provisions, a director of a company who was not in charge of or responsible for the conduct of the company’s business at the relevant time will not be held liable for a criminal offence. There must be specific averments against the directors, demonstrating how and in what manner they were accountable for the conduct of the company’s operations, in order to hold them liable for the company’s violations of Section 141.

A firm is included in the definition of a company for the purposes of Section 141. A partner of a firm can be found guilty of an offence committed by the firm if he was in charge of and responsible to the firm for the conduct of the firm’s business, or if it can be proven that the offence was committed with the consent or connivance of, or was attributable to any negligence on the part of the partner in question.

CASES

The court held the following in SMS Pharmaceuticals v. Neeta Bhalla and Anr. (2005):

  1. The complaint must state explicitly that the director was in charge of the company at the time the cheque was written.
  2. A company’s director is not liable only because they are a designated director; they must also be responsible for the company’s operations.
  3. The cheque’s signatory is responsible and will be held liable.

The court further stated in Saroj Kumar Poddar v. State (NCT of Delhi) (2007), that Section 141’s requirements must be strictly defined, and that the complaint must detail the circumstances and establish the reasons why the director should be held vicariously accountable.

QUASHING OF CRIMINAL PROCEEDINGS UNDER SECTION 482 OF CODE OF CRIMINAL PROCEDURE

If a case is filed against a drawer unjustly under Section 138 of the Negotiable Instruments Act, 1881, the drawer may petition the High Court to have the matter dismissed under Section 482 of the Code of Criminal Procedure.

  • Director Must be Wrongly Accused: In the case of Gunmala Sales Pvt Ltd v. Navkar Infra Projects Pvt Ltd(2015) thecourt found that the director in question must have been wrongfully charged in order for legal proceedings to be dropped.
  • In Cases Where Cheque Acts as Security: The court cannot dismiss the legal proceedings because the cheque was issued as a security.

CONCLUSION

It is well established that not all of a company’s directors are liable in the event of a cheque being dishonoured. In the absence of a particular allegation in the complaint, no director is accountable under section 138 of the Negotiable Instruments Act, 1881, unless he is a Managing Director or Joint Managing Director or a signatory to the Cheque.The directors can prove their innocence either by going to trial before the Magistrate Court where the complaint was filed, or by going to the High Court under section 482 as soon as possible before the trial to have the proceedings against them quashed because he is unrelated to the proceedings initiated before the Magistrate Court under section 138 read with Section 141 of the Negotiable Instruments Act, 1881.

Author: Anuja Saraswat – a student of  B.A.LL.B (Hons.) from NMIMS Kirit P. Mehta School of Law (Mumbai), in case of any queries please contact/write back to us via email vidushi@khuranaandkhurana.com or contact us at Khurana & Khurana, Advocates and IP Attorneys.

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