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Liability of Directors in Dishonour of ChequesR. Rajesh, ACS, Advocate, Chennai.

After the amendment of the Negotiable Instruments Act cheque dishonor has beenmade a criminal offence with serious repurcussions. How far company directors couldbe made liable for such an offence, is what has been probed here.

e-mail :rrajeshadvocate@gmail.com

Liability under the Companies Act, 1956A company though a legal entity is an artificial person whichcannot act on its own and its day to day functioning dependsupon the directors who are collectively known as the Board ofDirectors who manage the affairs of the company and who arethe persons behind taking the company forward. The duties ofdirectors are fiduciary in nature and they act as agents of thecompany and their office is that of trust, confidence and utmostgood faith. Unlike a partnership firm, the directors are notpersonally liable for the debts of the company. But in respect ofcertain acts performed by the directors on behalf of the companyin contravention of the provisions of the Companies Act, 1956they would attract liability either civil or criminal or both. Inso far as the Companies Act, 1956 is concerned, for the purposeof officer of the company who is in default, who would beliable for any punishment or penalty would be those who fallwithin the meaning of officer who is in default as per section5 of the Act. Under the said provision the officers include theManaging director(s) or the whole time director(s) and also thedirectors of the company who will be held responsible forcommitting any default or acting in violation of the provisionsof the Companies Act, 1956. The liability of such officersdepends upon the punishment expressly prescribed under thesaid provision in which the offence is said to have beencommitted. In the event of no penalty or punishment expresslyprescribed in any of the provisions of the Act where the offenceis committed then it would neither mean that no offence is saidto be committed under the said provision nor towards the saidoffence they are not liable to any punishment hence in suchcircumstances it is automatic that section 629A of the Act wouldcome into play which has prescribed the punishment for

contravention of any provision of the Act for which nopunishment is provided elsewhere in the Act.In respect of several offences committed under the CompaniesAct, 1956, it is not only the officers in default who are prosecutedbut also the company and similarly the punishments prescribedin many offences is not only fine but also imprisonment. Henceif any offence is committed by a company to which punishmentis imprisonment then how does the law enforce the punishmentagainst the company which has committed the default. Thisissue cropped up before the Supreme Court while dealing acase under the Income-Tax Act, 1961 and the Supreme Courtdecided the issue by applying the rule of harmoniousconstruction which is one among the rules of interpretation oflaws. The rule of harmonious construction was applied inconstruing and resolving the conflict between sections 276Band 278B of the Income-Tax, Act, 1961. Section 276B laysdown that if a person fails to pay to the credit of the CentralGovernment the tax deducted at source, he shall be punishedwith rigorous imprisonment for a term which shall not be lessthan 3 months and shall also be liable to fine. Section 278Bexpressly makes a company and its officers liable for the offencesunder the Act. The mandatory sentence of imprisonmentprescribed by Section 276B obviously could not be applied to acompany. The question, therefore, arose whether a companycould at all be prosecuted under Section 276B. Resolving theconflict by harmonious construction, it was held that theCompany would be liable for the offence but it will be liable tobe punished only by imposition of fine. By adopting the rule ofharmonious construction the mandatory sentence ofimprisonment in Section 276B was interpreted to mean that itwill be imposed where it is possible to impose it. [M.V. Javali

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v. Mahajan Borewell & Co., (1997) 8 SCC 72 (or) AIR 1997SC 3964.]Procedure for filing the Complaint under section 138The conditions to be satisfied for the payee in order to file acomplaint in writing against the drawer before the Court underSection 138 read with Section 142 towards dishonour of chequeis: firstly, the cheque must have been presented to the bankwithin a period of 6 months from the date on which it is drawnor till it is valid whichever is earlier; secondly the payee mustmake a demand for the payment of the said amount of moneymentioned in the Cheque by giving a notice in writing to thedrawer of the cheque within 30 days from the date of receipt ofinformation from the bank regarding the return of the chequeas unpaid; thirdly, in the event of the drawer failing to makethe payment of the said amount of money to the payee within15 days of receipt of the said notice and finally, the payee mustmake a complaint to a court not inferior to MetropolitanMagistrate or a First class Judicial Magistrate within one monthfrom the date on which the cause of action arises i.e. within onemonth from the expiry of the time limit of 15 days given to thedrawer to make the payment upon receipt of the notice. TheCourt is vested with the powers to condone the delay if it issatisfied that there exists sufficient cause in not filing thecomplaint within the prescribed time limit.

Punishment for dishonour of ChequesApart from the Companies Act, 1956 a company would also beliable for punishment towards contravention of the provisionsof any other laws and the punishment would depend upon whathas been prescribed under the respective laws. Normally in respectof the day to day business transactions it is natural that thecompany issues cheques towards making payment in respect ofany transaction entered by it with any third party. The chequesare issued by the company through its directors or officers ofthe company who are duly authorized by the Company to issuethe same on behalf of the company. As long as the Chequesissued by the company are honoured, the company or its officersdoes not have any problem since they had not committed anyoffence but in case of any cheque issued by the company isdishonoured then the company and the officers concerned wouldhave to face legal consequences under the NegotiableInstruments Act, 1881. In the normal circumstances when aCheque is issued by a person (drawer) to another person (payee)and in the event of the cheque being dishonoured then the draweris attracted to Section 138 of the Negotiable Instruments Act,1881 wherein the punishment prescribed for dishonour ofcheques is imprisonment for a term which may extend to 2years or with fine which may extend to twice the amount of thecheque or with both. Since the punishment of imprisonment isnot more than 2 years the case is a summons case and hence the

court will issue summons for the attendance of the accused andthe appearance of the accused is inevitable but the Magistrateunder section 205 of Cr.PC has powers to dispense with thepersonal attendance of the accused.

Existence of liabilityMere dishonour of cheque alone would not lead to punishmentof the accused under Section 138 of the Negotiable InstrumentsAct, 1881. Hence in order to succeed in the complaint filedby the payee against the drawer of the cheque, the payee mustapart from proving that the cheque received by him wasdishonoured either due to insufficiency of funds or the amountexceeds the arrangement made with the bank or due to stoppayment etc. It is also necessary to prove beyond doubt thatthe cheque was issued to him by the drawer towards dischargeof his liability either in whole or in part. Therefore in case ofdishonour of cheque where there is no liability on the part ofthe drawer to the payee then no case is said to be made out bythe payee under Section 138 of the Negotiable InstrumentsAct, 1881 because it is a vital factor to prove to the satisfactionof the Court that there was liability existing while issuing thecheque and such a cheque was issued only to discharge thatliability. Hence in case of a gift or voluntary donation etc.there is no liability on the part of the drawer to pay the payee.In such cases punishment cannot be imposed under section138 in the event of dishonour of cheque.In respect of dishonour of cheque issued by a company inaddition to the applicability of Section 138, the provisions ofSection 141 would apply which specifically deals with offencescommitted by a company. Apart from the company beingdirectly responsible towards dishonour of the cheque issuedby it even the persons who at the time the offence wascommitted was in charge of and was responsible for the conductof the business of the company shall be deemed to be guilty ofthe offence and shall be liable to be proceeded against andpunished under the Act. If a person could prove that the offencewas committed without his knowledge or he had exercised alldue diligence to prevent the commission of such offence thenhe can escape punishment under Section 138 of the Act. Theword person refers to a person who is a signatory to thecheque irrespective of whether he is a director or not. It alsoincludes directors who are responsible in the management ofthe day to day affairs of the company. The directors areattracted to proceedings initiated towards dishonour of chequesbecause of their vicarious liability for the offence committedby the company. In case of a Company, a person who is in-charge of and was responsible to the Company for the conductof the business of the Company need not necessarily be adirector, manager, secretary etc. in order to attract punishmentunder Section 138. Though a director is liable if he is in-charge of the affairs of the company still the 2nd proviso of

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Section 141(1) inserted w.e.f. 06.02.2003 expressly excludesdirectors nominated by the Central Govt. or State Govt. orfinancial corporations owned or controlled by any of theseGovts. and they are not liable for prosecution under section138. Further Section 141 also gives an explanation for theterm company which means any body corporate and includesa firm or other association of individuals and the termdirector in relation to a firm, means a partner in the firmhence Section 141 equally applies to a partnership firm andpartners who are in-charge in managing the affairs of the firm.

Law v. RealityThough the law is very specific in stating that in respect of anoffence committed under section 138 is a Company only a personwho at the time the offence was committed was in charge of,and was responsible to the company for the conduct of thebusiness of the company shall be deemed to be guilty of theoffence and shall be liable to be proceeded against and punishedunder section 138 still in reality in most of the complaints filedunder Section 138 read with Section 141 where the offence iscommitted by a company it has been a routine practice to includeall the directors of the company apart from the company asparties (accused) to the case ignoring the fact whether they aresignatory to the cheque or not. The purpose could be to pressurizethe company and its directors for recovering the amount duefrom the cheque at the earliest without any further loss of time.The accused in a criminal case is expected to appear duringeach hearing and the court of course has the power to dispensewith their appearance and in the event of the directors failing toappear in person or through their counsel despite service ofsummons the court would proceed in issuing warrant againstthe directors of the company who are shown as accused in thecase for producing them before the Court.The question as to whether a particular director is a necessaryparty or not, whether he was responsible for the conduct of thebusiness of the company or not, whether he had knowledgeabout the offence or not etc. would be considered only duringthe course of the trial and until such time the director has toparticipate in the court proceedings which may be a greathardship for the innocent directors who may even be unawareof either the issue of a cheque or dishonour of the said cheque.For the convenience and speedy recovery of the amount byway of settlement it is one way of pressure tactics sometimesadopted by the complainant against the company by making allits directors as accused to the case. In many cases the companyand its directors in order to avoid embarrassments, humiliationetc. at the very beginning of the case itself they would prefer tosettle the dispute by paying the amount without going into thequestion of whether the company is actually liable to pay suchamount or not and whether a director or directors are actuallyliable in respect of that particular transaction.

Therefore several times, the question arose as to whether allthe directors of a company can be held liable for dishonour ofcheque issued by a company and can they be made a party tothe proceedings initiated under Section 138 of the NegotiableInstruments Act, 1881 and in the event an innocent director ismade a party to the proceedings what is his way out?Though in legal parlance until a person is proved to be guiltyhe is presumed to be innocent but still It would be a strenuoustask in going through the cumbersome legal process in acriminal case and by the time a person proves himself to beinnocent he would have either undergone a mental agony orspent considerable time in attending the court proceedingsparticularly during trial.

When a director is liable and when he is not?If it is proved that the offence has been committed with theconsent or connivance of, or is attributable to, any neglect onthe part of any director he shall be liable to be proceeded againstand punished accordingly whereas if a director proves that theoffence was committed without his knowledge or that he hadexercised all due diligence to prevent the commission of suchoffence he shall not be liable to punishment under this Section.

RemedyNow dealing with the issue of dishonour of cheque issued bya company and criminal proceedings initiated against thecompany and its directors, in the event of a director who isnot in charge of the day to day affairs of the company is madean accused in the case then what is the legal recourse which hecan opt in order to overcome such a situation where for noreason he is made a party to the case.The High Court in exercise of its inherent powers under section482 of Cr.PC can quash the criminal proceedings in order toprevent abuse of the process of any court or otherwise to securethe ends of justice. Section 482 of Cr.PC closely resemblesthe inherent powers given to the Civil Court under section151 of C.P.C. This provision also applies to proceedings relatingto dishonour of cheques where a person who is not a necessaryparty in a case but has been arrayed as an accused in thecomplaint then he has got every right to move the High Courtunder section 482 of Cr.PC to quash the proceedings pendingagainst him if he is able to completely satisfy the Court thathe is in no way connected to the proceedings and he beingmade a party is merely an abuse of process of law. At thesame time it is not a valid defence, the company and itsdirectors cannot shirk their criminal liability on the groundthat the Company was already wound up and the OfficialLiquidator has taken charge of the affairs of the Company.The High Court under section 482 exercises its powerscautiously and very sparingly to prevent any abuse of theprocess of any court. The Court would refuse to interfere if

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prima facie offence had been made out on the basis of theallegations made in the complaint without going into the truthor otherwise of those allegations. In case of complaintregarding dishonour of cheques, the High Court in exercise ofits power conferred under section 482 is said to have committedan error if it had gone into the facts of the case and arriving ata conclusion that the cheques were issued not towards anydebt or liability existing on the date on which it was issued.Where the complaint prima facie discloses that the petitioner isa director and is involved in the day to day affairs of the businessof the company, the question as to whether the petitioner isactively involved in the affairs or not, is a pure question of fact,which cannot be decided in a petition under section 482 ofCr.PC. The said question shall have to be decided based on thematerials to be collected during the course of the trial.

Decisions of Supreme Court in cases under section 138The Supreme Court has repeatedly held that first of all inorder to make a director liable in respect of dishonour of chequeissued by a company there must be a specific averment orallegation made against the said director and he must havebeen a person responsible for the conduct of the day to dayaffairs of the company and sufficient evidence must beproduced to show that he was in charge of or responsible tothe company for the conduct of the business of the company.In Wahi's case, the facts were that the appellant presented acriminal complaint under section 138 read with Section 141of the Negotiable Instruments Act, 1881 before the Magistratecourt against a company and its directors claiming that theirliability is joint and several. The directors filed an applicationbefore the said court to drop the proceedings against them asthey were not directors and no allegations were made againstthem but the Magistrate dismissed their application on theground that whether they were directors at the relevant pointof time or not is to be decided on evidence. The directorsthereafter moved the High Court under section 482 of Cr.PCto quash the proceedings against them in which the High Courtheld that the preliminary evidence does not establish that thedirectors were either in charge of or were responsible to thecompany for the conduct of business hence allowed theirapplication by quashing the proceedings before the MagistrateCourt. The complainant challenging the decision of the HighCourt preferred an appeal before the Supreme Court and thesaid Court while dismissing the appeal enunciated the groundson which a director could be made liable in a case of dishonourof cheque issued by a company. They are: there must be specificallegations and averments made against the directors who areshown as accused, those directors must be in charge of, andresponsible for the conduct of the business of the company.This averment is an essential requirement under Section 141and has to be made in a complaint. Merely a person being a

director of a company is not sufficient to make the personliable under Section 141 of the Act. Normally a director cannotbe deemed to be in charge of and responsible to the companyfor conduct of its business unless it is proved. So far theManaging directors or Whole time directors are concernedthey would be admittedly in charge of the company andresponsible to the company for the conduct of its business byvirtue of the office they hold and therefore they get coveredunder section 141 and similarly the signatory of a cheque whichis dishonoured is concerned, he is clearly responsible for theincriminating act and will also be covered under section 141(2)of the Negotiable Instruments Act, 1881. [N.K. Wahi v.Shekahar Singh and Others (2007) 137 Comp Cas 939 (SC).]Even in National Small Industries Corp. Ltd. v. Harmeet SinghPaintal and Another (2010) 154 Comp Cas 313 (SC), theCourt following the same principles has further added that (i)the primary responsibility is on the complainant to makespecific averments as required under the law in the complaintso as to make the accused vicariously liable and for fasteningthe criminal liability, there is no presumption that everydirector knows about the transaction. (ii) Section 141 doesnot make all the directors liable for the offence. The criminalliability can be fastened only on those who, at the time ofcommission of the offence, were in charge of and wereresponsible for the conduct of the business of the company(iii) Vicarious liability on the part of a person must be pleadedand proved and not inferred (iv) if the accused is the Managingdirector or a joint managing director then it is not necessaryto make specific averment in the complaint and by virtue ofthat position he is liable to be proceeded with (v) if the accusedis a director or an officer of a company who signed the chequeson behalf of the company then also it is not necessary to makespecific averment in complaint.

ConclusionIt is a settled law that not all the directors of a company areliable in case of dishonour of cheques. The onus is on thecomplainant to prove that a director is responsible for the conductof the affairs of the company in order to hold him liable and inthe absence of a specific averment in the complaint no directoris liable under section 138 of the Negotiable Instruments Act,1881 unless he is a MD or JMD or WTD or he is a signatory tothe Cheque. The directors can establish the fact that they arenot guilty either by undergoing the trial before the MagistrateCourt in which the complaint is filed or by approaching theHigh Court under section 482 at the earliest before thecommencement of the trial inorder to quash the proceedingsagainst him as he is no way connected to the proceedings initiatedbefore the Magistrate Court under section 138 read with Section141 of the Negotiable Instruments Act, 1881.

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