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Liability of Directors in Dishonour of Cheques

R. Rajesh, ACS, Advocate, Chennai.

e-mail :

rrajeshadvocate@gmail.com

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

Liability under the Companies Act, 1956

A company though a legal entity is an artificial person which
cannot act on its own and its day to day functioning depends
upon the directors who are collectively known as the Board of
Directors who manage the affairs of the company and who are
the persons behind taking the company forward. The duties of
directors are fiduciary in nature and they act as agents of the
company and their office is that of trust, confidence and utmost
good faith. Unlike a partnership firm, the directors are not
personally liable for the debts of the company. But in respect of
certain acts performed by the directors on behalf of the company
in contravention of the provisions of the Companies Act, 1956
they would attract liability either civil or criminal or both. In
so far as the Companies Act, 1956 is concerned, for the purpose
of officer of the company who is in default, who would be
liable for any punishment or penalty would be those who fall
within the meaning of officer who is in default as per section
5 of the Act. Under the said provision the officers include the
Managing director(s) or the whole time director(s) and also the
directors of the company who will be held responsible for
committing any default or acting in violation of the provisions
of the Companies Act, 1956. The liability of such officers
depends upon the punishment expressly prescribed under the
said provision in which the offence is said to have been
committed. In the event of no penalty or punishment expressly
prescribed in any of the provisions of the Act where the offence
is committed then it would neither mean that no offence is said
to be committed under the said provision nor towards the said
offence they are not liable to any punishment hence in such
circumstances it is automatic that section 629A of the Act would
come into play which has prescribed the punishment for

contravention of any provision of the Act for which no

punishment is provided elsewhere in the Act.
In respect of several offences committed under the Companies
Act, 1956, it is not only the officers in default who are prosecuted
but also the company and similarly the punishments prescribed
in many offences is not only fine but also imprisonment. Hence
if any offence is committed by a company to which punishment
is imprisonment then how does the law enforce the punishment
against the company which has committed the default. This
issue cropped up before the Supreme Court while dealing a
case under the Income-Tax Act, 1961 and the Supreme Court
decided the issue by applying the rule of harmonious
construction which is one among the rules of interpretation of
laws. The rule of harmonious construction was applied in
construing and resolving the conflict between sections 276B
and 278B of the Income-Tax, Act, 1961. Section 276B lays
down that if a person fails to pay to the credit of the Central
Government the tax deducted at source, he shall be punished
with rigorous imprisonment for a term which shall not be less
than 3 months and shall also be liable to fine. Section 278B
expressly makes a company and its officers liable for the offences
under the Act. The mandatory sentence of imprisonment
prescribed by Section 276B obviously could not be applied to a
company. The question, therefore, arose whether a company
could at all be prosecuted under Section 276B. Resolving the
conflict by harmonious construction, it was held that the
Company would be liable for the offence but it will be liable to
be punished only by imposition of fine. By adopting the rule of
harmonious construction the mandatory sentence of
imprisonment in Section 276B was interpreted to mean that it
will 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 1997

SC 3964.]

Procedure for filing the Complaint under section 138

The conditions to be satisfied for the payee in order to file a
complaint in writing against the drawer before the Court under
Section 138 read with Section 142 towards dishonour of cheque
is: firstly, the cheque must have been presented to the bank
within a period of 6 months from the date on which it is drawn
or till it is valid whichever is earlier; secondly the payee must
make a demand for the payment of the said amount of money
mentioned in the Cheque by giving a notice in writing to the
drawer of the cheque within 30 days from the date of receipt of
information from the bank regarding the return of the cheque
as unpaid; thirdly, in the event of the drawer failing to make
the payment of the said amount of money to the payee within
15 days of receipt of the said notice and finally, the payee must
make a complaint to a court not inferior to Metropolitan
Magistrate or a First class Judicial Magistrate within one month
from the date on which the cause of action arises i.e. within one
month from the expiry of the time limit of 15 days given to the
drawer to make the payment upon receipt of the notice. The
Court is vested with the powers to condone the delay if it is
satisfied that there exists sufficient cause in not filing the
complaint within the prescribed time limit.

Punishment for dishonour of Cheques

Apart from the Companies Act, 1956 a company would also be
liable for punishment towards contravention of the provisions
of any other laws and the punishment would depend upon what
has been prescribed under the respective laws. Normally in respect
of the day to day business transactions it is natural that the
company issues cheques towards making payment in respect of
any transaction entered by it with any third party. The cheques
are issued by the company through its directors or officers of
the company who are duly authorized by the Company to issue
the same on behalf of the company. As long as the Cheques
issued by the company are honoured, the company or its officers
does not have any problem since they had not committed any
offence but in case of any cheque issued by the company is
dishonoured then the company and the officers concerned would
have to face legal consequences under the Negotiable
Instruments Act, 1881. In the normal circumstances when a
Cheque is issued by a person (drawer) to another person (payee)
and in the event of the cheque being dishonoured then the drawer
is attracted to Section 138 of the Negotiable Instruments Act,
1881 wherein the punishment prescribed for dishonour of
cheques is imprisonment for a term which may extend to 2
years or with fine which may extend to twice the amount of the
cheque or with both. Since the punishment of imprisonment is
not more than 2 years the case is a summons case and hence the

court will issue summons for the attendance of the accused and
the appearance of the accused is inevitable but the Magistrate
under section 205 of Cr.PC has powers to dispense with the
personal attendance of the accused.

Existence of liability
Mere dishonour of cheque alone would not lead to punishment
of the accused under Section 138 of the Negotiable Instruments
Act, 1881. Hence in order to succeed in the complaint filed
by the payee against the drawer of the cheque, the payee must
apart from proving that the cheque received by him was
dishonoured either due to insufficiency of funds or the amount
exceeds the arrangement made with the bank or due to stop
payment etc. It is also necessary to prove beyond doubt that
the cheque was issued to him by the drawer towards discharge
of his liability either in whole or in part. Therefore in case of
dishonour of cheque where there is no liability on the part of
the drawer to the payee then no case is said to be made out by
the payee under Section 138 of the Negotiable Instruments
Act, 1881 because it is a vital factor to prove to the satisfaction
of the Court that there was liability existing while issuing the
cheque and such a cheque was issued only to discharge that
liability. 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 section
138 in the event of dishonour of cheque.
In respect of dishonour of cheque issued by a company in
addition to the applicability of Section 138, the provisions of
Section 141 would apply which specifically deals with offences
committed by a company. Apart from the company being
directly responsible towards dishonour of the cheque issued
by it even the persons who at the time the offence was
committed was in charge of and was responsible for the conduct
of the business of the company shall be deemed to be guilty of
the offence and shall be liable to be proceeded against and
punished under the Act. If a person could prove that the offence
was committed without his knowledge or he had exercised all
due diligence to prevent the commission of such offence then
he can escape punishment under Section 138 of the Act. The
word person refers to a person who is a signatory to the
cheque irrespective of whether he is a director or not. It also
includes directors who are responsible in the management of
the day to day affairs of the company. The directors are
attracted to proceedings initiated towards dishonour of cheques
because of their vicarious liability for the offence committed
by the company. In case of a Company, a person who is incharge of and was responsible to the Company for the conduct
of the business of the Company need not necessarily be a
director, manager, secretary etc. in order to attract punishment
under Section 138. Though a director is liable if he is incharge 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 excludes

directors nominated by the Central Govt. or State Govt. or
financial corporations owned or controlled by any of these
Govts. and they are not liable for prosecution under section
138. Further Section 141 also gives an explanation for the
term company which means any body corporate and includes
a firm or other association of individuals and the term
director in relation to a firm, means a partner in the firm
hence Section 141 equally applies to a partnership firm and
partners who are in-charge in managing the affairs of the firm.

Law v. Reality
Though the law is very specific in stating that in respect of an
offence committed under section 138 is a Company only a 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 shall be deemed to be guilty of the
offence and shall be liable to be proceeded against and punished
under section 138 still in reality in most of the complaints filed
under Section 138 read with Section 141 where the offence is
committed by a company it has been a routine practice to include
all the directors of the company apart from the company as
parties (accused) to the case ignoring the fact whether they are
signatory to the cheque or not. The purpose could be to pressurize
the company and its directors for recovering the amount due
from the cheque at the earliest without any further loss of time.
The accused in a criminal case is expected to appear during
each hearing and the court of course has the power to dispense
with their appearance and in the event of the directors failing to
appear in person or through their counsel despite service of
summons the court would proceed in issuing warrant against
the directors of the company who are shown as accused in the
case for producing them before the Court.
The question as to whether a particular director is a necessary
party or not, whether he was responsible for the conduct of the
business of the company or not, whether he had knowledge
about the offence or not etc. would be considered only during
the course of the trial and until such time the director has to
participate in the court proceedings which may be a great
hardship for the innocent directors who may even be unaware
of either the issue of a cheque or dishonour of the said cheque.
For the convenience and speedy recovery of the amount by
way of settlement it is one way of pressure tactics sometimes
adopted by the complainant against the company by making all
its directors as accused to the case. In many cases the company
and its directors in order to avoid embarrassments, humiliation
etc. at the very beginning of the case itself they would prefer to
settle the dispute by paying the amount without going into the
question of whether the company is actually liable to pay such
amount or not and whether a director or directors are actually
liable in respect of that particular transaction.

Therefore several times, the question arose as to whether all

the directors of a company can be held liable for dishonour of
cheque issued by a company and can they be made a party to
the proceedings initiated under Section 138 of the Negotiable
Instruments Act, 1881 and in the event an innocent director is
made a party to the proceedings what is his way out?
Though in legal parlance until a person is proved to be guilty
he is presumed to be innocent but still It would be a strenuous
task in going through the cumbersome legal process in a
criminal case and by the time a person proves himself to be
innocent he would have either undergone a mental agony or
spent considerable time in attending the court proceedings
particularly during trial.

When a director is liable and when he is not?

If 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 he shall be liable to be proceeded against
and punished accordingly whereas if a director proves that the
offence was committed without his knowledge or that he had
exercised all due diligence to prevent the commission of such
offence he shall not be liable to punishment under this Section.

Remedy
Now dealing with the issue of dishonour of cheque issued by
a company and criminal proceedings initiated against the
company and its directors, in the event of a director who is
not in charge of the day to day affairs of the company is made
an accused in the case then what is the legal recourse which he
can opt in order to overcome such a situation where for no
reason he is made a party to the case.
The High Court in exercise of its inherent powers under section
482 of Cr.PC can quash the criminal proceedings in order to
prevent abuse of the process of any court or otherwise to secure
the ends of justice. Section 482 of Cr.PC closely resembles
the inherent powers given to the Civil Court under section
151 of C.P.C. This provision also applies to proceedings relating
to dishonour of cheques where a person who is not a necessary
party in a case but has been arrayed as an accused in the
complaint then he has got every right to move the High Court
under section 482 of Cr.PC to quash the proceedings pending
against him if he is able to completely satisfy the Court that
he is in no way connected to the proceedings and he being
made a party is merely an abuse of process of law. At the
same time it is not a valid defence, the company and its
directors cannot shirk their criminal liability on the ground
that the Company was already wound up and the Official
Liquidator has taken charge of the affairs of the Company.
The High Court under section 482 exercises its powers
cautiously and very sparingly to prevent any abuse of the
process 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 the
allegations made in the complaint without going into the truth
or otherwise of those allegations. In case of complaint
regarding dishonour of cheques, the High Court in exercise of
its power conferred under section 482 is said to have committed
an error if it had gone into the facts of the case and arriving at
a conclusion that the cheques were issued not towards any
debt or liability existing on the date on which it was issued.
Where the complaint prima facie discloses that the petitioner is
a director and is involved in the day to day affairs of the business
of the company, the question as to whether the petitioner is
actively involved in the affairs or not, is a pure question of fact,
which cannot be decided in a petition under section 482 of
Cr.PC. The said question shall have to be decided based on the
materials to be collected during the course of the trial.

Decisions of Supreme Court in cases under section 138

The Supreme Court has repeatedly held that first of all in
order to make a director liable in respect of dishonour of cheque
issued by a company there must be a specific averment or
allegation made against the said director and he must have
been a person responsible for the conduct of the day to day
affairs of the company and sufficient evidence must be
produced to show that he was in charge of or responsible to
the company for the conduct of the business of the company.
In Wahi's case, the facts were that the appellant presented a
criminal complaint under section 138 read with Section 141
of the Negotiable Instruments Act, 1881 before the Magistrate
court against a company and its directors claiming that their
liability is joint and several. The directors filed an application
before the said court to drop the proceedings against them as
they were not directors and no allegations were made against
them but the Magistrate dismissed their application on the
ground that whether they were directors at the relevant point
of time or not is to be decided on evidence. The directors
thereafter moved the High Court under section 482 of Cr.PC
to quash the proceedings against them in which the High Court
held that the preliminary evidence does not establish that the
directors were either in charge of or were responsible to the
company for the conduct of business hence allowed their
application by quashing the proceedings before the Magistrate
Court. The complainant challenging the decision of the High
Court preferred an appeal before the Supreme Court and the
said Court while dismissing the appeal enunciated the grounds
on which a director could be made liable in a case of dishonour
of cheque issued by a company. They are: there must be specific
allegations and averments made against the directors who are
shown as accused, those directors must be in charge of, and
responsible for the conduct of the business of the company.
This averment is an essential requirement under Section 141
and has to be made in a complaint. Merely a person being a

director of a company is not sufficient to make the person

liable under Section 141 of the Act. Normally a director cannot
be deemed to be in charge of and responsible to the company
for conduct of its business unless it is proved. So far the
Managing directors or Whole time directors are concerned
they would be admittedly in charge of the company and
responsible to the company for the conduct of its business by
virtue of the office they hold and therefore they get covered
under section 141 and similarly the signatory of a cheque which
is dishonoured is concerned, he is clearly responsible for the
incriminating 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 Singh
Paintal and Another (2010) 154 Comp Cas 313 (SC), the
Court following the same principles has further added that (i)
the primary responsibility is on the complainant to make
specific averments as required under the law in the complaint
so as to make the accused vicariously liable and for fastening
the criminal liability, there is no presumption that every
director knows about the transaction. (ii) Section 141 does
not make all the directors liable for the offence. The criminal
liability can be fastened only on those who, at the time of
commission of the offence, were in charge of and were
responsible for the conduct of the business of the company
(iii) Vicarious liability on the part of a person must be pleaded
and proved and not inferred (iv) if the accused is the Managing
director or a joint managing director then it is not necessary
to make specific averment in the complaint and by virtue of
that position he is liable to be proceeded with (v) if the accused
is a director or an officer of a company who signed the cheques
on behalf of the company then also it is not necessary to make
specific averment in complaint.

Conclusion
It is a settled law that not all the directors of a company are
liable in case of dishonour of cheques. The onus is on the
complainant to prove that a director is responsible for the conduct
of the affairs of the company in order to hold him liable and in
the absence of a specific averment in the complaint no director
is liable under section 138 of the Negotiable Instruments Act,
1881 unless he is a MD or JMD or WTD or he is a signatory to
the Cheque. The directors can establish the fact that they are
not guilty either by undergoing the trial before the Magistrate
Court in which the complaint is filed or by approaching the
High Court under section 482 at the earliest before the
commencement of the trial inorder to quash the proceedings
against him as he is no way connected to the proceedings initiated
before the Magistrate Court under section 138 read with Section
141 of the Negotiable Instruments Act, 1881. 

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