Director’s liability in cheque bouncing matters

Bydeb

Director’s liability in cheque bouncing matters

Cheques are a widely used means of payment, especially in business transactions involving Companies. A cheque is said to bounce when it is returned by the bank without being encashed.

The question that arises is when cheques issued by Companies are bounced, who is held liable, the Company or its Directors? The article deals with this question.
 

When Does Cheque Bouncing Occur?

Cheques are bounced or dishonoured due to any defect in them, which may have been caused intentionally by the issuer of a cheque to escape payment. The several reasons leading to bouncing of cheques are:

  • Insufficient funds
  • Presenting of cheque to the Bank after 3 months
  • Alterations or overwriting in cheque
  • Mismatch in account number
  • Crossed cheque
  • Closed Account
  • Insolvency, insanity, or death of the customer
  • Stopping of payment by account holder
  • Non-matching of signature, etc
     

However, it is an offence under the Negotiable Instruments Act, 1881 if the unpaid cheque is returned by the bank when:

  • Fundsin the bank account are insufficient, or
  • The amount on the cheque exceeds the amount to be paid in agreement with the Bank
  • Issuer of cheque instructs his bank to “Stop cheque payment”


Penalties for Cheque Bouncing Matters: 

Punishment for Cheque Bouncing, which is a criminal offence under Section 138 of the Negotiable Instruments Act, 1881 can be:

  • Imprisonment extending up to two years, or
  • Fine which may extend to double the amount on the cheque, or
  • Both of the above
     

Is The Director Liable When Cheque Issued By Company Is Dishonoured? 

When the person who commits the offence of cheque bouncing is a Company which is an artificial entity, how does it face the punishments, especially imprisonment? The Directors are appointed to control and manage the affairs of a Company. Hence, the Directors can be accountable for the misdeeds of the Company.

Directors may be held liable when the Company has committed the offence of cheque bouncing, under Section 141 of the Negotiable Instruments Act, 1881. According to this Section, every person who was in charge of the Company and responsible for its business, at the time the offence was committed will be liable, along with the Company.

Even a manager, secretary, or officer of the Company can be accountable in matters where the offence of cheque bouncing was committed due to the consent or neglect of such persons.
 

Legal Remedies Available To Payee If A Cheque Issued By A Company Is Dishonoured

Reason for issuance of the cheque:

  1. The cheque must have been issued for discharge of a debt or liability, to invoke Section- 138.
  2. Time Limit to submit cheque: the cheque should have been submitted to the Bank within three months from when it was drawn/issued.
  3. Legal Notice: When the cheque is returned unpaid by the bank, the payee (receiver of the money) must send a legal demand notice to the drawer (Company). This legal notice must demand the amount to be paid by the Company, and must also state that the Company will be prosecuted in case it fails to do so, within 15 days. It is advisable that the payee gets the draft of the notice vetted by a lawyer specializing in cheque bouncing cases before sending it to the Company.
  4. Filing of Complaint: If the Company has yet again failed to pay the amount of the cheque, or reply to payee within fifteen days from the legal notice, the payee should then file the complaint in a court of appropriate jurisdiction with the help of a lawyer, within a stipulated time period of 30 days. The complaint should be accompanied by the following documents:

·         The original cheque with the “memo of return” from the bank

  • Copy of the demand notice sent to the company
  • Affidavit


Specific Statement to be made in the Complaint:  It should be specifically stated in the complaint how and in what manner the accused Director was in charge of and responsible for the conduct of the business of the Company at the time the cheque was bounced. However, the Apex Court has held that in certain situations, as given below, one need not specifically state the responsibility of the accused person in the complaint:

  • When the accused is the Managing Director or a Joint Managing Director of the Company
  • When the accused Director signed that specific cheque on behalf of the Company


When and if the Company is found guilty in the case, and if it is proved that the Director was in charge of the business of the Company, he will have to bear the punishments as directed by the Court.
 

Situations When Directors Are Not Liable

The Director would not be held liable for the acts of the Company if he is able to prove the following:

  • That when the offence was committed he had no knowledge regarding it, and
  • That he applied due diligence, or
  • That there is proof beyond doubt, that the director due to his prolonged illness, was not involved in the proceedings
  • That the complaint has not been made in accordance with Section 138 or 141 of the Act, or
  • That before the cheque got dishonoured, he resigned from his post
     

Only when a person is responsible for the Company and was in charge of the conduct of its business, he could be held liable. Hence, the reason to hold a person guilty of a cheque bouncing case cannot solely be based on the fact that he is a Director of a Company.

About the author

deb administrator

Leave a Reply