Liability of Directors in Case of Dishonoured Cheque

Introduction:

Cheques are one of the important mediums for day to day business transactions as well as for all other monetary transactions. It keeps a record of every detail and also provides proof of transactions. To prevent from the threaten or bouncing of cheque, the lawmakers found it essential and provide regulations and laws for matters related to the use of Cheques which is described in Negotiable Instrument Act 1881.

According to Section 6 of Negotiable Instrument Act 1881 the Cheque is defined as a“cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.[1]

But the question arises that is the director liable when Cheque issued by a company is dishonoured. Let us make a view upon this as described below.

The Directors are appointed to control and to look after all the affairs related to the company and if any such offence happens related to the dishonour of cheque then the Director is also held liable. According to the Supreme Court, all directors involved in the day to day running of a company can be made liable for a bounced cheque, but not one who resigned before the cheque was issued.[2]

According to the Section 141 of the Negotiable Instrument Act, 1881 “every person who was in charge of the company and responsible for its business, at the time the offence was committed will be liable along with the company[3]. If the director was not in charge during the time of the offence then he or she would not be liable even if the name of the director is attached to it.

Further, it is provided in clause 2 that the directors, managers and any other people holding office by whose consent, connivance, negligence has caused the offence then he or she will be liable.[4]

Exceptions to the Director’s Liability:

A director will not be liable for dishonouring of cheques in two circumstances which are described below-

1. When the offence has committed without his knowledge.
2. When he has exercised all due diligence in order to avoid it.

In the case of SMS Pharmaceuticals vs. Neeta Bhalla and Anr. 2006 the court laid down two points: –

1. The complaint which was filled must include that the director was in charge of the company when the cheque was issued.
2. The director of a company is not liable simply because they are a designated director, they must also be responsible for the running of the company.
3. The person whose signature is there will be responsible and held liable.

When the Director can free themselves from liability:

In the case of Gunmala Sales Pvt Ltd V. Navkar Infra Projects Pvt Ltd, the court held that the directors will remove liability only when there is an unquestionable proof of their not having involvement in the proceedings of the company due to prolonged illness or resignation etc.[5]

Defences available to Directors:

The director can make defences in the following situations: –

1. The accused director may take the defence that he or she was not in charge of the day to day activities at the time of the bounced cheque being issued.
2. The accused director may take the defence of the exceptions provided in Section 138 i.e. she had no knowledge of it or he had exercised all due diligence in order to avoid the cheque bouncing.
3. The complaint has not been made in accordance with Section 138 or 141.

How we file a case if a cheque bounces or dishonoured:

If the cheque issued by a company cannot be encashed by the bank than an individual may take recourse after considering Section 138. The complaint must be filed and presented before the Magistrate court. An appeal should be filed in the Sessions Court. Section 142 of the Negotiable Instrument Act 1881 provides the procedure for filing a complaint.

The procedures are described as follows: –

1. A complaint must be made in writing by the payee
2. The complaint must be lodged within one month of serving notice and fifteen days of non- payment.
3. No court inferior to the Metropolitan Magistrate or the Judicial Magistrate can try the case.

Conclusion:

The law considering the bouncing of cheque provides adequate justice for the wrong ones. The directors of a company can also held liable for the dishonour of cheque or and cheque bouncing. This increases liability and widens the scope of the natural principle of law in the corporate field.

References:

[1]https://www.vakilno1.com/legal-faq/dishonour-of-cheque-section-138-of-the-negotiable-instruments-act.html

[2]https://economictimes.indiatimes.com/news/politics-and-nation/directors-can-be-held-liable-for-dishonour-of-cheque-rules-sc/articleshow/44894320.cms

[3][3]https://lawrato.com/indian-kanoon/cheque-bounce-law/directors-liability-in-cheque-bouncing-matters-2172#:~:text=The%20Directors%20are%20appointed%20to,the%20Negotiable%20Instruments%20Act%2C%201881.

[4]https://blog.ipleaders.in/section-138-directors-liability-cheque-bounce/

[5]https://blog.ipleaders.in/section-138-directors-liability-cheque-bounce/

This article is authored by Rishu Gautam, Second-Year, BBA. LL.B student at The ICFAI University, Dehradun.

Also Read – How Many Times A Cheque Can Be Bounced?