Dishonour of Cheque and Liability of Directors

Criminal liability of director of the company for dishonour of a cheque

The Negotiable Instruments Act, 1881 deals with dishonour of a cheque and punishment relating to the dishonour of a cheque due to the insufficiency of funds, signature not matched or stop payment(provides under section 138 of the N.I. Act).

The director of the company also held liable for the offences 138 by them under sections per Section 141(1) of Negotiable Instruments Act, 1881 imposes criminal liability committed by a company and the director, manager or secretary in charge of the company. Section 141(2) of Negotiable Instruments Act, 1881 imposes criminal liability, if the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager,  any other officer of the company. 

Section 141 in The Negotiable Instruments Act, 1881

(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence: ²² [Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.]

(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation.— For the purposes of this section,—

(a) “company” means any body corporate and includes a firm or other association of individuals; and

(b) “director”, in relation to a firm, means a partner in the firm.]

 A director can be vicariously held liable for the offences committed by a company. In S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla[1], the SC said that every person cannot be made liable under Section 141 of Negotiable Instruments Act, 1881. The requirements for conviction under Section 141 of Negotiable Instruments Act, 1881 are-

1. The person must hold a position in the company where he is in charge of the company and responsible for its conduct.
2. The offence has been committed with his connivance or consent or is attributable to the person.

In Sabitha Ramamurthy v. R.B.S. Channabasavaradhya[2], the SC said that for prosecuting a person under Section 141 of Negotiable Instruments Act, 1881, an averment has to be made in the complaint alleging the accused to be vicariously liable for the offences under Section 138 of Negotiable Instruments Act, 1881. It is a prerequisite and therefore, without making an averment in the complaint, a person cannot be vicariously held liable for offences under Section 138 of Negotiable Instruments Act 1881.

In K.K. Ahuja v. V.K. Vora[3], the SC laid down guidelines with respect to the conviction under Section 141 of Negotiable Instruments Act, 1881.

In Anita Malhotra v. Apparel Export Promotion Council[5], the respondent resigned from her post in 1998. A notice was issued to the appellant asking her to face legal consequences in case of non-payment in 2004. She contended that she was not liable under Section 138 of Negotiable Instruments Act, 1881 but the HC passed an order against her. The SC held that an ex-director who had resigned from her post before the dishonour of a cheque, could not be made under Section 138 of Negotiable Instruments Act, 1881. She was, therefore, acquitted from the allegations made in the complaint filed under Section 138 of Negotiable Instruments Act, 1881.

In Standard Chartered Bank v. State of Maharashtra[6], the SC said that an averment in the complaint alleging the accused vicariously liable for the offence under Section 138 of Negotiable Instruments Act, 1881 is an essential requirement under Section 141 of Negotiable Instruments Act, 1881.InNational Small Industries Corp. Ltd. vs.Harmeet Singh Paintal[7], the SC acquitted an ex- director because on the date when the cheque was issued, he was no longer a director of the company.

In Krishna Texport and Capital Markets Ltd. vs. Ila A. Agrawal[8], a complaint was issued against the company and its directors for dishonour of a cheque under Section 141 of Negotiable Instruments Act, 1881. They contended that individual notices were not issued, therefore, ingredients of Section 138 of Negotiable Instruments Act, 1881 were not met, and they were not liable under Section 141 of Negotiable Instruments Act, 1881. The SC rejected their contention and held them liable under Section 141 of Negotiable Instruments Act, 1881.

Can a director be held liable for dishonour of a cheque, if the company has been acquitted for the said charge?

In Sheoratan Agarwal vs. State of Maharashtra[9], a Managing director and production manager and were prosecuted for the offense under Section 10of The Essential Commodities Act, 1955. They contended that they could not be made liable for the offences unless the company was incriminated. The SC said that Section10 of The Essential Commodities Act, 1955 did not require the parties to be incriminated before proceeding against the other persons. It is important to note that Section10 of The Essential Commodities Act, 1955 is very much alike Section 141 of Negotiable Instruments Act, 1881. Further, in Anil Hada v Indian Acrylic Ltd.[10], the SC observed that under Section 141(1) of Negotiable Instruments Act, 1881, the prosecution against a company is not a sine qua non for prosecuting against its directors.

In AneetaHada vs. Godfather Travels & Tours (P) Ltd[11]., the three-judge bench of the SC said that a person cannot proceed against directors of a company without making the said company a party under the suit. It, therefore, overruled, Sheoratan Agarwal’s[12] case fully and Anil Hada’s[13] case partly. It was reiterated in Standard Chartered Bank vs. State of Maharashtra[14].

The current position with regards to the subject is that a director cannot be held liable for dishonour of a cheque without proceeding against the company for the said charge.

It is well settled that the liability of a director, manager and secretary under Section 141(1) of Negotiable Instruments Act, 1881 comes into play only when it is proved that the said officer was in charge of the company or responsible for the conduct of its business. Section 141(2) of Negotiable Instruments Act, 1881is attracted only when any other officer connives or consents to dishonour of a cheque.

In a catena of cases, the SC has held that an averment alleging that the directors to be an accused in the complaint is indispensable and without it, no director can be held liable under Section 138 of Negotiable Instruments Act, 1881. Also, a director can approach the High Court under Section 482 of CrPC before the trial commences in the Magistrate Court, asking to quash the proceedings initiated against him under Section 138 read with Section 141 of Negotiable Instruments Act, 1881.