All About Directors Liability in Cheque Bounce Case

Cheque bounce or dishonour of cheque is a very common phenomenon where a cheque is returned by the bank without being encashed due to several reasons like insufficient funds, mismatch of signature, etc. It has been defined under section 138 of the Negotiable Instruments Act, 1881. This section stipulates that anyone who is guilty of cheque bounce will be punishable with imprisonment.

The main question which arises here is that when companies issue cheque and it bounces, who is responsible, is the company or the directors? In this article, we will deal with this question and also go into the concept of cheque bounce and its remedies also.

Why does a cheque bounce?

A cheque can bounce due to many reasons, be it intentional or unintentional. Some of the reasons for cheque bounce are:

Legal Framework in case of cheque bounce and liability of directors

Dishonour of cheque is a criminal offence under section 138 of the Negotiable Instrument Act, 1881. It stipulates a maximum imprisonment of two years, fine which maybe double the amount of cheque or both.

The Act further under section 141 states that when a company commits the offence of cheque bounce, it shall be prosecuted along with all the people who were in charge and conducting the business of the company.

So now the question arises, what is the liability of directors and independent directors in cheque bounce of the company.

Directors or Independent Director’s Liability in Cheque Bounce Case- An in-depth study

Directors have a fiduciary position in the company, and they have to manage the affairs of the company. Their liability arises because of their position as an officer or agent of the company and also because they are in the position of the trustees. Whereas an independent director is not charged with the day to day affairs of the company, but they are involved in the decision-making activities.

We look from the purview of section 138, when a company commits such an offence, the open doors towards vicarious liability. Section 141 states every person who was in charge and responsible for conducting business at the time of the offence will be guilty.

But section 149(12) of the Companies Act, states that a director will not be liable if the offence is committed without his knowledge.  Furthermore, it stated that an independent director could not be made liable for the acts of the company except in limited circumstances which had occurred with his knowledge and consent.

When a complaint is filed against the company for cheque bounce, it is very common to arraign the directors of the company. All the directors have to face prosecution. The Courts have from time and again been cautious while interpreting both section 138 as well as the Negotiable Instrument Act to ensure that only those directors are prosecuted who handled day to day affairs of the company. If a director was not in charge of the company, then he will not be liable.

Exceptions

A director will not be liable to punishment for cheque bounce if the offence was committed without his knowledge, and he exercised due diligence for avoiding such circumstances, he was suffering from prolonged illness and was not involved in the day to day activity, he resigned before the bouncing of the cheque.

Case Laws

The Supreme Court had said that all directors who are involved in the day-to-day running of a company would be made liable for a bounced cheque, but not one who resigned before the cheque was issued. The top Court said this while dealing with a case filed by a private company that had lent money to another. 

In Bhardwaj Thirvenkata Venkatavaraghavan v PVR Ltd, the main question before the Delhi High Court was that whether a non-executive nominee director of the company who has issued the cheque will be responsible for the cheque bounce. The Court reiterated that in order to be prosecuted for cheque bounce, the person should be responsible for the day to day activities.

Legal Remedies for the dishonour of cheque

• Legal Notice for Cheque Bounce

When cheque bounces, the payee should send a legal notice to the drawer for making the payment. It should mention that legal proceedings will be initiated if payment is not complete. It is advisable to hire expert lawyers for drafting the legal notice.

• Complaint

If the company has failed to make the payment within the said period, the payee will file a complaint in the Court within 30 days along with with the original cheque, the return memo from the bank, copy of the legal notice and an affidavit.

Conclusion

Hence, when the question of directors liability of cheque bounce arises, the burden of proof lies on the complainant for proving the liability of the director in cheque bounce. He has to prove that the director was responsible for the day to day affairs of the company. But if the director is Managing or Joint Managing Director, or signatory to the bounced cheque he will be liable.

For more information on the directors liability in cheque bounce, and director disqualification contact our team of experts on LawyerINC.