Vicarious Liability of Directors in Dishonour of Cheques: A Conspectus of Contemporary Judicial Rulings

Cheques are issued and handled when they bounce and have undergone significant changes throughout the years. The usage of cheques increased along with the brisk expansion of trade and commerce, and so did the number of conflicts involving cheque bouncing. Sections 138-142 of the Negotiable Instruments Act, of 1881 (“NI Act”) are designed to increase banking efficiency and protect the validity of commercial transactions involving cheques.
 If someone writes a cheque to pay off a debt or obligation in full or in part, and the check is rejected by the bank when it is presented, they have committed a crime that is punishable by imprisonment, a fine, or both. The company itself, everyone in charge of the business’s operations, and other persons like directors, managers, secretaries, and other officials of the company would all be held vicariously liable in the case of a breach of trust by a firm. The legal issue, the directors’ liability in this scenario, the relevant geographical jurisdiction for filing a lawsuit, and several court lawsuits are all covered in this blog.

Summary of Statutory Provisions
Section 138 of the NI Act is the primary provision that imposes criminal culpability on the defaulter for cheque dishonorment; nonetheless, the legislation imposes both civil and criminal liability on the defaulter who has drawn an unpaid cheque. The law defines cheque dishonour as an offence for which the offender may face up to two years in jail or a fine of up to double the value of the cheque or both. The article also specifies a pre-litigation procedure that includes the aggrieved person sending an obligatory demand notice to the defaulter, and if the defaulter fails to fulfil the demand notice, the aggrieved person files a complaint with the competent court with the purpose of adjudication.
Section 141 of the Act establishes the culpability of a juristic person when a business, a limited liability partnership, a partnership firm, or any other form of organisation of persons commits a default offence (hereinafter referred to as Director). According to Section 141, the offender is both the juristic person and the individual responsible for the administration of the juristic person’s business. The person liable might be any of the defaulting juristic person’s directors, managers, secretaries, or other officers. As a result, such natural criminals holding positions of responsibility in a defaulting juristic person may be punished by the learned Court in line with Section 138 penalties.

Jurisprudential Overview Under Section 141 NI Act
Because of the nature of the relationships between these individuals, such as employer-employee relationships, the concept of vicarious liability developed from the broader concepts of tort. In the current context, the existence of a relationship between a legal person and a natural person, such as a director, establishes the director’s criminal responsibility for the crime committed by the legal person vicariously, and as a result, any such director or other person who is responsible for illegal actions due to negligence or knowledge may be punished in accordance with the applicable laws.
The Hon’ble Supreme Court recently examined the issue of the Director’s vicarious responsibility for an offence under Section 138 read with Section 141 of the NI Act in its judgement in Dilip Hariramani v. Bank of Baroda. In this case, the bank provided a cash credit facility and loan to the partnership firm. As partial repayment, the authorised signatory of the company issued cheques, which were not honoured as there was insufficient money. The partnership firm was not made an offender or accused during the trial proceedings before the learned Magistrate, but the partners were identified as accused as partners of the firm. The partners were found guilty by the learned Magistrate.

The Hon’ble Supreme Court examined the provision of Section 141 and held the following
“7. …Sub-section (1) to Section 141 of the NI Act states that where a company commits an offence, every 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, as well as the company itself, shall be deemed to be guilty of the offence. The expression ‘every person’ is wide and comprehensive enough to include a director, partner or other officers or persons. At the same time, it follows that a person who does not bear out the requirements of being ‘in charge of and responsible to the company for the conduct of its business’ is not vicariously liable under Section 141 of the NI Act. The burden is on the prosecution to show that the person prosecuted was in charge of and responsible to the company for the conduct of its business. The proviso, which is in the nature of an exception, states that a person liable under subsection (1) shall not be punished if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of a such offence. The onus to satisfy the requirements and take benefit of the proviso is on the accused. Still, it does not displace or extricate the initial onus and burden on the prosecution to first establish the requirements of sub-section (1) to Section 141 of the NI Act. The proviso gives immunity to a person who is otherwise vicariously liable under sub-section (1) to Section 141 of the NI Act.”
“8. Sub-section (2) to Section 141 of the NI Act states that notwithstanding anything contained in sub-section (1), where a company has committed any offence under the Act, and it is proved that such an offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of any director, manager, secretary or other officers of the company, then such director, manager, secretary or other officers of the company shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Sub-section (2) to Section 141 of the NI Act does not state that the persons enumerated, which can include an officer of the company, can be prosecuted and punished merely because of their status or position as a director, manager, secretary or any other officer unless the offence in question was committed with their consent or connivance or is attributable to any neglect on their part. The onus under sub-section (2) to Section 141 of the NI Act is on the prosecution and not on the person being prosecuted.”
A corporate person is a juristic person by nature; it is a legal fiction creation with no real physical existence. These legal or judicial entities were established by incorporation in accordance with a number of statutes, such as the Companies Act, the Partnership Act, the LLP Act, etc. The natural persons who control and oversee these juridical persons’ operations and business are responsible for the ideas and deeds of these persons. As a result, the legislation has constructed the aforementioned deemed fiction in order to prosecute the real offender who has illegally exploited the business as a means of committing the crime of dishonouring a cheque and must be punished following Section 138 of the NI Act.

Liability of a Drawer of a Dishonoured Cheque
When a cheque is returned unpaid, the drawer gains the legal status of a main debtor to the holder. The holder, like any creditor, can file a civil suit against the drawer to recover the money, making him accountable as the primary debtor. In most situations, the judiciary has also held that the pendency of criminal cases does not prohibit civil cases from proceeding. Both remedies may be available at the same time.
When a drawer’s cheque is dishonoured by the drawee due to a lack of funds, the drawer is regarded to have committed a criminal offence. Sections 138 to 142 of the Negotiable Instruments Act 1881 address a drawer’s criminal culpability in the event that a cheque is dishonoured. While the content of the offence differs under Section 138 of the Act and Section 420 of the IPC, conviction under one provision does not prevent prosecution under the other. Andhra Pradesh High Court held in the case of A Veerbhadra Rao v. State of Andhra Pradesh that when a person issues a cheque or a post-dated cheque, he implicitly communicates to the payee that the cheque will be honoured when handed over to the bank in the regular run of events. Even with the addition of Section 138 of the Act, a prosecution under Section 420 of the IPC is still possible in this case if dishonest intent at the time of the cheque issuing is shown.

Recent Developments
The Hon’ble Supreme Court made several critical observations in its recent ruling in Sunita Palita v. M/s Panchami Stone Quarry. While stressing the necessity of explicit averments on the directors’ role in the pleadings, the Hon’ble Supreme Court has stated that when the individual has the word ‘Managing’ applied to their position as Director, it is apparent that they are in charge of and accountable for the firm. A director of a company who was not in charge or responsible for the conduct of the company’s business at the relevant time will not be liable under those provisions, the Court stated, citing S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla. The Court also noted that the liability depends on the role one plays in the affairs of a company and not on designation or status alone. It also noted the ruling in Pooja Ravinder Devidasani v. State of Maharashtra and noted that, unless the director in question is the designated Managing Director or Joint Managing Director who is responsible for running the company’s affairs, specific averments must be made in the pleadings to substantiate the complainant’s claim that the director was in charge of and responsible for conducting the company’s business.
In a recent decision dated in the case of Prakash Chand v. State & Anr, the Hon’ble Delhi High Court stated that to hold a director or officer-in-charge of an accused company liable for dishonouring a check under the NI Act, the Court must take into account the specific role he or she played. According to Section 141 of the NI Act, an officer who was in charge of and accountable to the company for the conduct of its business will only be held accountable for violating Section 138 of the NI Act, which prohibits dishonouring cheques, if it can be demonstrated that the officer had his consent, knowledge, connivance, neglect, etc. when the offence was committed. If the concerned officer can show that the offence was committed without his knowledge or that he took reasonable steps to stop it from happening, he will not be held liable under Section 141 of the NI Act. Because there is no presumed culpability of a director in such instances, and there is no presumption that every director is aware of the alleged transaction, simply being a director of a company does not make him or her liable under Section 141 of the NI Act.

Concluding Remarks
The issue of the scope and ambit of Section 141 of the NI Act has been clearly defined in light of the aforementioned statutory provisions and the Hon’ble Supreme Court’s ratio decidendi. As a result, those who hold positions such as director, manager, secretary, etc. and are responsible for the conduct and affairs of the company may be held criminally vicariously liable for the dishonouring of the company’s cheques. In preferring a trial, the complainant must offer particular averment establishing that the person was managing the day-to-day activities of the corporation, and the company must be listed as the major accused to create the legal fiction of vicarious criminal culpability. It is thus vital to keep this in mind while registering a complaint under the NI Act for proper redress and adjudication.

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