Liability of Director under Negotiable Instruments Act, 1881

The Negotiable Instruments Act, of 1881 provides a safety net for creditors (whether deemed or actual) who are having difficulty recovering a defaulted amount due to debt or any other liability. Section 138 of the Negotiable Instruments Act, 1881 imposes criminal liability on such defaulter for cheque(s) dishonor, which includes imprisonment for a maximum of two years or a fine of up to twice the amount of the cheque. As a result, cheque dishonor is a criminal offense that can be tried in a learned Magistrate’s Court with appropriate jurisdiction. This article will discuss the liability of the Director under the Negotiable Instruments Act, 1881.

Key Abstract

Section 138 of the Negotiable Instruments Act, 1881 imposes criminal liability on the offender for non-compliance or dishonoring of a cheque that includes imprisonment for a period exceeding 2 years or a penalty of twice the amount. Therefore, dishonoring the cheque is a criminal case triable by the competent Magistrate’s Court. 

However, if the company violates the law the criminal liability will not be held against that principal defaulter, as it comes under a ‘juristic person’. Therefore, Section 141 of the Negotiable Instruments Act, 1881 rescues the creditor as a criminal offense is imposed on all persons who were “in charge” at the time of the offense and responsible for “business conduct”. 

Bouncing of Cheques

Check bouncing is common terminology used to describe a situation where the person being paid in the form of a check is unable to cash the check. It was defined in Section 138 of the Negotiable Instruments Act 1881 as any check drawn by a person in payment to another person who is returned unpaid to the bank because there are insufficient funds in the account or the amount exceeds the prescribed limit. The person being paid is known as the payee or drawer and the person paying through the check is known as the drawer or payee. So it is due to the inability of the outlet to pay the amount owed to the payee.

Analysis of Section 141 of Negotiable Instruments Act, 1881

The offenses committed by companies are listed in Section 141 of the Negotiable Instruments Act, 1881. It deals with the non-payment of checks issued by the business. Every person who was in charge of the operation of the company at the time the offense was committed is subject to liability under this section, including those in important managerial roles like a director.

The violation of Section 138 must have been committed as the primary offense to be subject to the provisions mentioned or included in Section 141 of the Negotiable Instruments Act, 1881. However, it is also stated that no person or individual shall be held accountable if that person can demonstrate that the offense was committed without his knowledge on his part and that he took all the reasonable and necessary measures that a prudent man would have taken to prevent the offense from occurring.

A charge will be filed with the appropriate implication on all persons considered to be involved in the day-to-day affairs of the company. Therefore, to refute the fact that the director is involved in the day-to-day affairs of the company should be sufficient to indict him.

Scope of Section 141 of Negotiable Instruments Act, 1881

When determining the meaning and scope of section 141 about the responsibility of the director, the Court of Honor decided that the responsibility according to section 141(1) can be attributed to a person who has control over the day-to-day activities of the company, while according to section 141(1) it defines the presumed liability for the fiction of a person holding the prescribed functions according to the provisions, i.e. a director, executive, secretary or another functionary of the company. 

The first provision according to section 141(1) provides immunity from criminal liability to persons for a criminal offense by companies due to proper conduct. In such a case, the burden of proof will be on the accused person. 

The second condition according to section 141(1) provides the proposed director with complete immunity. 

Hon’ble Supreme Court in the Dilip Hariramani case placed heavy reliance on its earlier judgment Aneeta Hada v. Godfather Travels and Tours Private Ltd. stated that a complaint should in principle satisfy one of the two requirements of section 141 for establishing vicarious criminal liability and that such persons may be considered fictitious and may be held liable and subsequently punished. 

The Hon’ble Court further held that if the company was not held to be the main accused in the matter till then, the fiction cannot be complete and such a mistake can vitiate the entire proceedings before the learned Court.

Liability of the Director under the Negotiable Instruments Act, 1881

The liability of the director under the Negotiable Instrument Act, 1881 can be understood with the help of judicial pronouncements that courts reiterated for a better understanding of the general people.

The Honorable Court, while affirming the meaning and scope of Section 141 in respect of the Director’s obligation, held that debt under subsection (1) of Section 141 may be imposed on a person in directing the day-to-day business of the company who holds designated positions under the provision of a director, manager, secretary or other company officials.

The first regulation under subsection (1) of Section 141 provides protection against criminal misconduct for corporate liability. In that case, the task of witnessing will be to the accused. The second regulation under subsection (1) of Section 141 provides complete protection for the appointed director.

The Honorable High Court in Dilip Hariramani (supra) relies heavily on its previous decision of Aneeta Hada v. Godfather Travels and Tours Private Ltd. holding that the complaint must satisfy one of the two requirements of Section 141 to locate the vicarious liability case and then punishment. In addition, the Supreme Court asserted that unless the company was held to be the main accused in the case until then the myth would not be complete, and such a mistake could jeopardize the whole case in the High Court.

Opinion of Judiciary

According to the Supreme Court ruling on K.K. Ahuja vs V.K. Vora & Another, the position under Section 141 of the Act may be summarized as follows:

• If the respondent is the Managing Director or the Joint Managing Director, he or she is not required to impose a penalty on the complaint he or she holds, and is responsible to the company, for the business conduct of the company.
  It is sufficient if an amendment is made that the respondent was jointly the Managing Director or Executive Director in due course. This is because the prefix “Managing” of the word “Director” makes it clear that they are in charge and responsible to the company, in terms of the business conduct of the company.

• In the case of a Director or company official who has signed a check on behalf of the company, there is no need to make any declaration he or she holds and is bound to the company, following the company’s business conduct, or make any other suspects in connection with the consent of the permit or negligence. The very fact that the unregistered check was signed by him on behalf of the company will create liability under subsection (2) of Section 141 of the Act.
• In the case of a Director, the secretary or manager [as defined in Section 2 (24) of the Companies Act, 1956] or the person referred to in subsections (e) and (f) of Section 5 of the Companies Act, 1956, the company is required to file a lawsuit under Section 141 (1) of the Act. No further objections may be required in this appeal, though further notice may be required. They may also be required to make an obligation under Section 141 (2) of the Act by making the necessary changes in respect of consent and consent or negligence, in the appeal, so that the matter falls within that section.
• Other company officials may not be held liable under subsection (1) of Section 141 of the Act. Some company executives may be charged only under subsection (2) of Section 141 of the Act, by responding to a complaint about their position and duties with the company and their role in the matter and the scandal of the check, disclosure of consent, negligence, or connivance.

Understanding Liability of Non-Signatory Directors with the help of the Judiciary

The Supreme Court ruled in the case of S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla that it was necessary to allege in the plaint that the person named as the accused was in charge of running the business of the company at the time the offense was committed, which means the aforementioned issue is no longer a case. 

A specific statement that this person managed the affairs of the company at the time is crucial because a person holding the position of director cannot be considered a person responsible for the management of the company and responsible for it.

In Ashutosh Ashok Parasrampuriya v. M/s. Gharrkul Industries Pvt. Ltd., the honorable court reiterated the aforementioned principle and held that in cases involving unsigned directors, a specific averment in the complaint is necessary to convince the learned Judge to proceed against the director so accused vicariously for the company’s behavior.

Final words

The issue of the ambit and scope of Section 141 of the Negotiable Instruments Act, 1881 is well documented when individuals in charge of the conduct of business matters or who hold positions such as directors, managers, secretaries, etc. can be unjustly charged with a criminal offense for dishonoring of a cheque. 

The complainant while selecting the trial is actual and provides a straightforward statement confirming that the person was in charge of the day-to-day affairs of the company and, that the company should be named as the main suspect in establishing the criminal liability. From there, it is important to be careful when filing a complaint under the Negotiable Instruments Act, 1881 to provide adequate redressal.

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