Honesty and reliability play a pivotal role in any transaction involving business, especially in payments and money matters. While you are dealing with vendors/partners/companies, you mostly accept payments through cheques. Whom do you hold liable in case of a cheque bounce? Company? Its Directors? Either, both or none?
This article deals with the question of liability of Directors in cheque bouncing cases.
When can a cheque get bounced and dishonored
Banks dishonour or return unpaid cheques due to any defect in them, which may be caused intentionally by the issuer of the cheque to escape payment. A cheque bounce may happen due to the following common reasons, among others:
- Presenting of cheque to the Bank after 3 months
- Insufficient funds
- Alterations or overwriting in cheque
- Stopping of payment by account holder
- Non-matching of signature
However, it becomes an offence under the Negotiable Instruments Act, 1881 if the unpaid cheque is returned by the bank due to:
- Lack of sufficient funds in the bank account, or
- The amount on cheque exceeding the amount to be paid in agreement with the Bank
Punishment For Cheque Bounce
Cheque Bouncing is a criminal offence under Section 138 of the Negotiable Instruments Act, 1881, and may attract the following punishments:
- Imprisonment extending up to two years, or
- Monetary fine which may extend to double the amount on the cheque, or
- Both of the above
Who Is Liable When Cheque Issued By Company Is Dishonoured
When the person committing the offense of cheque bouncing is a Company being an artificial entity, how does it bear the punishments, especially imprisonment? The Directors of a Company are hired to control and manage its affairs. Should the directors then be accountable for the misdeeds of the Company?
Yes, and rightly so, the Directors may be held liable for the Company in cheque bouncing matters under Section 141 of the Negotiable Instruments Act, 1881. According to this Section, each 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.
Not only the Director, even a manager, secretary, or officer of the Company may be accountable in cases where the offence of cheque bouncing was committed due to the neglect or consent of such persons.
What Steps Should Be Taken By Payee If A Cheque Issued By A Company Is Dishonoured
- The cheque should be issued for the reason of discharge of a debt or liability, to invoke Section 138.
- Secondly, the cheque needs to be submitted to the Bank within 3 months from when it was drawn.
- After the cheque is returned unpaid by the bank, the payee (receiver of money) should send a legal notice to the Company demanding the Company to make the payment.
- If the Company has failed to reply or pay the amount of the cheque within 15 days from the legal notice, the payee can then file the complaint in a court of appropriate jurisdiction, within a stipulated time period of 30 days. The complaint should be accompanied by the following documents:
- An affidavit
- Copy of the legal notice sent to the company
- The original cheque with the “memo of return” from the bank
- 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. However, the Supreme Court has held that in the situations given below, you need not specifically state the responsibility of the accused person in the complaint:
- If the accused is the Managing Director or a Joint Managing Director of the Company
- The accused Director signed that particular cheque on behalf of the Company
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 face punishment as directed by the Court.
When Are Directors Not Liable
The Director of a Company would not have to face punishment if he is able to prove the following:
- That the offense was committed without his knowledge, and
- That he applied due diligence, or
- That there is proof beyond doubt, that the accused director was not involved in the proceedings due to his prolonged illness, or
- That the complaint has not been made in accordance with Section 138 or 141 of the Act, or
- That he resigned from his post before the cheque got dishonored
Thus, the reason to hold a person guilty of a cheque bouncing case, cannot be solely based on the fact that he happens to be the Director of a Company. Only when such person is responsible for the Company and was in charge of the conduct of its business, he may be held liable.