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Indians facing a lot of cheque bounce cases now a days especially in business transactions. When a cheque is issued by the bank and due to insufficient funds or other reason it is dishonoured the question arises whether the directors of the company be held personally liable for the cheque bounce?
The answer to this problem mainly lies in section 138 and section 141 of Negotiable Instruments Act ,1881 (NI Act). These with the liability of companies, their directors and cheque dishonour.
What is Negotiable Instruments Act,1881?
It is an important Indian law that looks after financial instruments which include cheques, promissory notes, and bill of exchange.
The aim of this act is to ensure that credibility and trust in financial transactions.
The most important section under this act is section 138, which makes cheque dishonour a criminal offence.
What is a Cheque Bounce?
A cheque bounce happens when a bank disagrees to honour a cheque issued by a company or person. This may happen due to:
1. Insufficient bank funds
2. Closed account
3. Drawer stops the payment
4. Exceeding agreement with the bank
5. Section 138 of NI Act, cheque bounce is considered a criminal offence if certain conditions not fulfilled.
Basic conditions under Section 138:
The cheque must be issued for payment of a legally enforceable liability or debt.
Within the three months of issue the cheque should be presented to the bank.
A legal notice to be sent within 30 days to the payee if the cheque is dishonoured
The drawer must fail to make payment within 15 days of receiving the notice
What happens when a company issues a cheque?
Most of the business transactions are done by cheque of a company. When a company issues a cheque from its bank account and it bounces, the question arises:
Is the company responsible alone, or can its directors also be punished?
This issue is addressed under section 141 of Negotiable Instruments Act.
Liabilities of Directors under Section 141:
Section 141 introduces the concept of vicarious liability. This means that along with the company its certain officers can also be held liable for the offence.
According to section 141:
The primary offender is the company.
Directors, officers or managers who were in charge of the responsible for the conduct of company’s business at the time of the offence can also be prosecuted.
However not every director is automatically liable.
When can a director be held liable?
A director can be held liable if
She or he was responsible for the day-to-day work of the company.
There is specific complaint which states that the director was in charge of company’s business at the time of offence.
The director had knowledge or invlovment in the transaction
This protects non-executive directors or independent executive directors who are not involved in the daily operations.
Important Supreme Court Judgements:
S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005) 8 scc 89
In this case the Supreme court held that just being the director is not enough to make a person liable in a cheque bounce case.
The complaint should state that the director was in charge of and responsible for the company’s business at the time of the offence.
National Small Industries Corp. Ltd v. Harmeet Singh Paintal (2010) AIR SCW 1508
The court said that vicarious liability cannot be imposed on all directors automatically.
Only those directors who were involved actively in the conduct of the company’s business can be prosecuted.
K.K. Ahuja v. V.K. Vora (2009) 10 scc 48
In this the court said that manging directors and joint management directors are assumed to be responsible for company’s affairs, but ordinary directors require specific allegations in the complaint.
Can a Director Escape Liability?
Under section 141 the directors are provided a defence to the directors.
A director can avoid punishment if the prove that:
Director did not have the knowledge of the offence committed or,
They had exercised due negligence to prevent the offence.
For example, the director was not involved in the financial decision or had already before the cheque was issued resigned, they may not be held liable.
Punishment for Cheque Bounce
Under section 138 of Negotiable Instruments Act, the punishment may include:
Imprisonment upto 2 years or,
Fine up to twice the amount of the cheque or,
Both imprisonment and fine
Court encourages compounding of offences, meaning the settlement can be done by the parties by paying the cheque amount.
Why these laws are important?
These laws are important because they protect trust in commercial transactions.
If companies or people could issue cheque without consequences business transactions would become unreliable.
The court ensures that only responsible individuals are punished, not every director of the company.
Conclusion:
Under Negotiable Instruments Act, cheque dishonour is a serious legal issue, while the company is only primarily responsible, section 141 allows courts to hold company directors liable when they are involved in the decision making and management of the company.
However, the directors are protected under the law who are not involved in the daily operations of the company. The Supreme Court through its several judgements has balanced the need for business accountability and protection of innocent directors.
Therefore, before defending or filing the cheque bounce case against directors, it is important to understand who was responsible for the company’s business at the time of the offence.
FAQ SECTION
Can a director be jailed for a cheque bounce?
Yes, under Section 138 and Section 141, the director may be punished if they were in charge of the company’s business at the time the check was issued.
Is each director responsible for a bounced check? No.The company’s directors are the only ones who can be held accountable for its day-to-day operations.
Can a single business be sued?
Typically, the company and its responsible directors must be named as defendants first.
What is the punishment for cheque bounce?
Up to 2 years imprisonment or fine up to twice the cheque amount or both.
