Liability of Directors for Cheque Dishonour

Nikhil Mogha

12 Jul, 2023

Under Indian Laws, the company is regarded as a separate legal entity. The company consist of various individuals who are responsible for the day-to-day conduct of the business. While the shareholders receive the returns on their investment, the board of directors is responsible for the management and functioning of the company. Henceforth, any transactions entered on behalf of the company are approved by the board of directors, and therefore, they can be held accountable for all acts of the company.

The Negotiable Instruments Act of 1881¹ provides the aggrieved party with a remedy to file a case against the company and its board of directors if the cheque is dishonoured. The acts of dishonor of cheques drawn by the company against the party do not subsume the liability of directors. They are vicariously liable for any default on the part of the company. The present article will discuss the liability of the director and defines the role of the Negotiable Instruments Act of 1881 in providing a remedy to the aggrieved party.

What is Dishonour of Check under the Negotiable Instruments Act?

The dishonour of a cheque literally means “Cheque Bounce.” It is a situation whereby the bank refuses to pay the person due to any deficiency in the accounts of the drawer of the cheque. Section 138 of NI Act, 1881 talks about the dishonour of cheque and states that the dishonour of cheque shall take place if any cheque drawn by the individual for the payment to another person in the process of discharging their duty is returned due to:

1. Insufficient amount in the account
2. More amount than available in the account

What conditions are to be fulfilled before filing a case?

Section-138 of NI Act, 1881 further states the conditions before filing any case against the individual for the dishonour of a cheque:

1. The holder of the cheque shall present the cheque to the bank within 6 months from the date on which it is drawn or within its validity, which is earlier.
2. The holder of the cheque shall, within 15 days from the date of receipt by the bank on dishonour of the cheque, make a demand by sending a notice to the drawer.
3. If the cheque holder fails to pay the amount within 15 days of the receipt of the notice, then the said person can be held liable and punished for not more than 2 years or with a fine that may extend to 2 times the amount of the cheque.

Liability of Director under Section-141 of Negotiable Instruments Act, 1881

The key managerial persons carry out the decisions of the company. Hence, the directors are vicariously liable for any transactions entered in the company’s name. The principle of vicarious liability can be understood as the relationship between employer and employee wherein the employer is responsible for every act of the employee. The NI Act has further reiterated the same principle by providing a separate section in the act. Section 141 of the act clearly states that if the acts of the company are in contravention of Section -138 (Dishonour of Cheque), then the person responsible for the company’s day-to-day activities is to be held liable. In clear terms, the act states directors’ liability for the offence committed under Section 138, provided the directors have the knowledge and have given connivance to the act.

Who can be held responsible under Section 141 of the act?

The persons responsible for the conduct of the business can be held liable for the offence under Section 138 of the act. Further, Section 141 (2) of the act clearly states the persons who can be held liable for the offenses committed under Section 138, provided the act is committed with the consent or connivance of the:

1. Director
2. Manager
3. Secretary
4. Any other Officer

From the plain reading of Section 141, it can be clearly inferred that only those directors who are directly connected with the transaction that led to an offence can be held liable. All the directors of the company cannot be merely apprehended for the acts committed by other directors, and therefore, the liability of directors shall depend on the direct connection of the person with the wrong transaction.

Who is a Director under Section-141 of the Negotiable Instruments Act of 1881?

According to Section 141 of the Negotiable Instruments Act 1881, a “Director” means a partner of the firm, and a “company” include a corporate body, firm, and association of individuals.

What are the Exemptions to disprove the liability of the director under Section 141 of the NI Act?

The Negotiable Instrument Act, 1881 under Section 141, along with dictating the liability of directors for any acts committed on behalf of the company, also states the exemptions. The liability of directors can be discharged only:

1. When the act is committed without the knowledge
2. When the person has exercised all due diligence to avoid such offence.

Leading Case Laws

1.    Vicarious liability of directors: SMS Pharmaceuticals Ltd. v. Neeta Bhalla & Anr., (2005) 8 SCC 89

The court in the case reiterated the view that compliance under section 138 of the NI Act, 1881, shall contain the material evidence for initiating any legal proceedings against the directors of the company. The court states that every person in the company cannot be held liable for the commission of the acts. The liability of directors only arises for those persons who are responsible for the conduct of the business at the relevant time and not on the basis of holding a designation or office of a company.

2.    Liability of Partner in a Partnership Firm: Dilip Hariramani vs Bank of Baroda, Criminal Appeal No. 767/2022

The court in the case has answered the issue of whether a partner can be convicted and held to be vicariously liable when the partnership firm is not accused of the offence. While interpreting Section 141 of the act, the court states that the partner can only be held vicariously liable when the principal or primary accused is the company. It means that the vicarious liability of the partner only arises when the company or firm is the primary offender. The sole acts of the director or firm cannot make the company liable for the offence.

3.    Liability of independent Non-Executive Directors: Sunita Palita and Ors. v M/S Panchami Stone Quarry (2022)

The court in the case has answered the issue of whether the non-executive directors can be held liable for the offence under Section 138 of the Negotiable Instruments Act, 1881. The court reiterated that the complaint shall not indulge every director of the company in its complaint for cheque dishonour. The complainant shall only file a complaint against those directors who are directly connected with the transactions. Therefore, the liability of independent non-executive directors could not be inferred for the offenses to they are not directly related to.

Conclusion

The Negotiable Instruments Act 1881, under Section 138, read with Section 141 of the act, had clearly stated its intention to make the liability of directors for the offence committed by them in the name of the company. By the general principle of law, they are the management of the company and are responsible for the daily conduct of the business. Similarly, if any case is brought for cheque dishonour, the directors, managers, or other responsible persons can be held vicariously liable. At the same time, the complainant shall only indulge those managerial persons who are directly related to the transactions.

Read our Article: Liabilities and Disqualifications for Appointment of Director

1. https://www.indiacode.nic.in/handle/123456789/2189?sam_handle=123456789/1362