A cheque from a company may be made for the financing of loans, purchases, spending of business money, or other obligations that are enforceable in law. If the company cheque is dishonoured, a case may be filed under section 138 of the Negotiable Instrument Act. But the director is not automatically deemed liable. The provisions of section 141 only make a person liable if the person satisfies certain statutory pre-conditions.
Why Directors Need to Understand Personal Liability
The cheque bounce proceedings can have the serious consequences for directors because they may involve the criminal prosecution, court appearances, financial liability, as well as the reputational concerns.
Understanding the legal position helps directors to:
- Determine whether they have actually been made liable in accordance with law;
- Understand their role in the company’s transaction;
- Identify defects in the legal notice or complaint;
- Prepare an appropriate defence;
- Avoid unnecessary personal liability;
- Understand the significance of Section 141 of the Negotiable Instruments Act; and
- Take timely legal action before the proceedings progress.
A director should not assume either that he or she is automatically liable or that being a director provides complete immunity.
The actual facts and the pleadings in the complaint are extremely important.
What Happens When a Company’s Cheque Bounces?
When a cheque issued by a company is dishonoured, the cheque holder may initiate proceedings under Section 138 if the statutory requirements are fulfilled.
Generally, the following sequence is involved:
- The cheque is presented to the bank within its validity period;
- The cheque is dishonoured;
- The payee receives information regarding dishonour;
- A statutory demand notice is issued within the prescribed period;
- The drawer is given the statutory opportunity to make payment; and
- If payment is not made within the prescribed period, a complaint may be filed before the competent court.
Where the drawer is a company, the company may be made an accused.
The complaint may also name directors or other officers where the requirements of Section 141 are alleged to be satisfied.
Therefore, the liability of the company and the personal liability of its directors must be separately examined.
Is Every Company Director Personally Liable?
No. It is important to note that merely being called a “director” is not enough to establish criminal liability in accordance with Section 138 read with Section 141 of the Negotiable Instruments Act.
The law states that the person being prosecuted should have been in charge of and responsible for the conduct of the business of the company at the relevant point of time, or falls under one of the other categories that is specified under Section 141.
Thus, it is not possible to say that a director who did not participate in the relevant business activities will be responsible due to the mere mention of the title.
The complaint must contain all the necessary factual allegations in order to provide a statutory basis for the prosecution of any given director.
Section 141 of the Negotiable Instruments Act
Section Part 141 pertains to crimes perpetrated by corporations.
In the event that a corporate crime has occurred under Section 138, anyone who was responsible for and overseen the company’s operations during that time may be defined as guilty as per this rule.
The provision arises from the theory of statutory vicarious criminal liability.
This is important because criminal liability is ordinarily personal. A director is therefore not automatically prosecuted merely because the company has committed an offence.
The prosecution must establish the statutory conditions necessary to impose liability upon the concerned individual.
The exact role of the director, the allegations contained in the complaint, and the circumstances surrounding issuance of the cheque therefore become extremely important.
When Can a Director Be Personally Liable?
A director may face prosecution where the statutory requirements under Section 141 are satisfied.
Relevant circumstances may include:
- The director was in charge of the company’s business;
- The director was responsible for the conduct of the company’s business;
- The director had a significant role in the transaction resulting in issuance of the cheque;
- The director was responsible for the company’s financial or commercial operations;
- The director participated in the decision resulting in issuance of the cheque; or
- The complaint contains the necessary allegations establishing the person’s responsibility under Section 141.
However, the mere use of general or mechanical statements may not always be sufficient.
The court examines whether the complaint discloses the necessary factual foundation for proceeding against the particular director.
Liability of Managing Directors and Persons in Charge of Business
The position can be different where the accused is a Managing Director, Joint Managing Director, or a person who was clearly in charge of the affairs of the company.
Where the individual’s position and role establish responsibility for the conduct of the company’s business, the requirement under Section 141 may be more readily satisfied.
However, even in such cases, the statutory requirements must be considered carefully.
The court does not determine liability merely from the title attached to a person. The pleadings, documents, company structure, transaction, and circumstances surrounding the dishonoured cheque may all become relevant.
Directors should therefore examine whether the complaint properly establishes their role at the relevant time.
Liability of Non-Executive and Independent Directors
A non-executive or independent director should not automatically assume that being named in a cheque bounce complaint means that conviction is inevitable.
Such directors may have limited involvement in the company’s day-to-day operations.
The important issue is whether the statutory requirements for imposing liability under Section 141 are fulfilled.
A director who was not responsible for the conduct of the company’s day-to-day business may have grounds to challenge the proceedings where the complaint does not disclose the necessary factual basis.
The specific facts of each case are therefore important.
Importance of the Legal Notice and Complaint
The legal notice and complaint should be examined carefully by the director.
The following questions may be relevant:
- Was the cheque actually issued by the company?
- Who signed the cheque?
- What was the underlying transaction?
- Was there a legally enforceable debt or liability?
- Was the statutory notice properly issued?
- Was the director specifically named in the notice?
- What role of the director has been alleged?
- Does the complaint explain how the director was responsible for the company’s business?
- Was the director actually holding the relevant position when the cheque was issued and dishonoured?
- Was the director involved in the transaction?
These details may become important while deciding the appropriate legal defence.
Common Defences Available to Company Directors
Depending upon the facts, a director may have several possible legal defences. These may include:
1. Not in Charge of the Company’s Business
A director may contend that he or she was not responsible for the conduct of the company’s business at the relevant time.
2. No Role in the Transaction
The director may establish that the transaction giving rise to the cheque was handled by other officers and that the director had no involvement.
3. Resignation Before the Relevant Transaction
If a director had resigned before the relevant period, the date and validity of the resignation may become significant.
4. Defective Statutory Averments
If the complaint fails to contain the necessary allegations required for invoking Section 141, the accused director may challenge the continuation of proceedings.
5. No Legally Enforceable Debt
Where there was no legally enforceable debt or liability underlying the cheque, the ingredients of Section 138 may be disputed.
6. Payment Already Made
Where the underlying amount had already been paid or otherwise discharged, supporting documents may become important.
7. Misuse or Dispute Regarding the Cheque
In appropriate cases, evidence may show that the cheque was misused or that it was not issued in discharge of the alleged liability.
The availability and strength of any defence depend upon the facts and evidence of the particular case.
Can a Director Be Arrested in a Cheque Bounce Case?
Section 138 of the Negotiable Instruments Act deals with cases of cheque bouncing. Though it is a criminal case, the accusation does not automatically lead to the arrest of the director.
The process involves issuing of process by the court and appearance of the accused in accordance with applicable law and order of the court.
Directors negligent toward a summons or court proceeding can face trouble.
If a director has been summoned in a cheque bouncing case, legal advice must be sought to ascertain the necessity of appearing in court or obtaining exemption, bail, or any other remedy.
Practical Steps for Directors Facing Proceedings
A director who receives a legal notice or court summons should take the following practical steps:
- Obtain a complete copy of the cheque bounce complaint.
- Examine the statutory legal notice carefully.
- Identify the underlying transaction.
- Determine who issued and signed the cheque.
- Review the company’s bank statements and transaction records.
- Collect board resolutions and relevant company documents.
- Verify the director’s position during the relevant period.
- If applicable, preserve resignation and company-record documents.
- Maintain correspondence with the complainant.
- Do not ignore court summons.
- Avoid making unnecessary admissions without legal advice.
- Seek professional legal advice at the earliest stage.
Early examination of the documents can sometimes identify whether the proceedings against an individual director have a sustainable legal foundation.
A company director is not automatically personally liable for a dishonoured company cheque. Section 138 addresses cheque dishonour, while Section 141 determines when liability may extend to directors responsible for the company’s business. Managing directors may face greater exposure. Therefore, directors should carefully examine the complaint, legal notice, company records, transaction, cheque, and their actual role before taking legal action.
How Lead India Can Help?
- Provide legal guidance to directors facing cheque bounce proceedings.
- Examine whether the requirements of Section 138 and Section 141 are satisfied.
- Assist in reviewing cheque bounce notices and complaints.
- Help directors understand whether personal criminal liability can legally arise.
- Assist in preparing appropriate responses to legal notices.
- Provide representation before the appropriate court.
- Assist in exploring settlement or compromise where legally and commercially appropriate.
- Help to identify possible remedies where the proceedings against director are legally unsustainable.
One can talk to lawyer from Lead India for any kind of legal support. In India, free legal advice online can be obtained at Lead India. Along with receiving free legal advice online, one can also ask questions to the experts online free through Lead India.
FAQs
1. Is each and every director personally liable for company’s bounced cheque?
No. Mere designation as a director does not automatically create criminal liability. The requirements of Section 141 must be satisfied.
2. Can a director be prosecuted when the company issued the cheque?
Yes. A director may be prosecuted along with the company if the statutory requirements under Section 141 are fulfilled and the necessary allegations are made against that director.
3. Is a non-executive director automatically liable for cheque bounce?
No. The court must examine whether the statutory requirements for imposing liability are satisfied and whether the director was in charge of and responsible for the conduct of the company’s business.
4. What if the director did not sign the cheque?
Not signing the cheque does not by itself completely exclude liability. Section 141 can then extend liability to the persons who satisfy all of its statutory requirements even if they did not personally sign cheque.
5. What if director resigned before cheque bounced?
The relevant dates and circumstances must be examined. If the director had ceased to hold the relevant position before the material events, this may become an important defence, subject to the facts and applicable law.
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