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 and explains the punishments and legal remedies and why you would require a cheque bounce lawyer.

When Does Cheque Bouncing Occur?

Cheques are bounced or dishonored 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 the account number

• Crossed cheque

• Closed Account

• Insolvency, insanity, or death of the customer

• Stopping of payment by the account holder

• Non-matching of signature, etc

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

• Funds in the bank account are insufficient, or

• The amount on the cheque exceeds the amount to be paid in agreement with the Bank

• The issuer of the cheque instructs his bank to “ Stop cheque payment”

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Penalties for Cheque Bouncing Matters:

Punishment for Cheque Bouncing , which is a criminal offense 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 offense 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 offense 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 offense 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 offense 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 the issuance of 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 the 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 cheque bounce lawyer , within a stipulated time period of 30 days. The complaint should be accompanied by the following documents:

& middot 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: The complaint should specifically state how and in what manner the Director was responsible for the Company's business 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:

• If the accused director is the MD (Managing Director) or Joint Managing Director of the Company

• When the accused Director signed that specific cheque on behalf of the Company

If the Company is found guilty and it is proved that the Director was in charge of the Company's business, he/she will have to bear the punishments by the courts. 

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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 offense 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

• Before the cheque got dishonored, 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.

Advocate Chikirsha Mohanty

Greater Kailash - 1, Delhi
5 years

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