Liabilities of a director in case of a cheque dishonor

The article contemplates to present up-to-date analysis of the cases relating to the vicarious liability of the directors in cases of dishonor of cheques by companies. The trend is increasing where the cheques which are issued by a corporate body is dishonor and complaints under section 138 read with section 141 of negotiable instruments act, 1881 are being filed implicating directors of the company. The supreme court has recently in matter of gunmala sales case discussing plethora of cases upon the subject has laid down new principles as to when the complaints implicating the directors in such cases can be quashed against the director.


The use of cheques is well recognized method for payment in daily business and it was desired that the commitment made by the payer be honored in all occasions. To encourage the use of cheques and with an intention to save the interest of the unpaid payee/holder of cheque 17th Chapter of the Negotiable Instruments Act, 1881 containing Sections 138 to 142 was introduced into the statute book in year 1988 by parliament which provided for punishable with imprisonment and fine for dishonor of cheque.  Though a remedy was available to the unpaid payee through institution of civil suit for recovery of money but the remedy contemplated under S.138 is different with certain special features which were less time consuming and troublesome for complainants. With elapse of time and rampant use of cheques the law under S.138 underwent vide interpretation by the courts. So much that S.138 has become the most common litigation in every area and the courts are flooded with the complaints. The trend suggests that the complaints nowadays are increasing majorly against the companies. The problem with such complaints arises while drafting it is difficult to find a face on which the accusations u/s. 138 could be made apart from the signatory. In view of which the legislation has specifically provided for provision viz. S.141 Offences by companies which draws up vicarious liability upon every person who at the time of the offence, when the cheque was issued, was in charge of and was responsible to the company for the conduct of the business. The law in this regard has been interpreted more than once and recently in the case of Gunmala Sales Pvt. Ltd. v. Anu Mehta . The law in that case has been almost settled by the Apex Court however without fixing any formulae it has been observed as to what it is the modicum requirement to implicate a director of the company.


Vicarious liability is a form of strict secondary liability that arises under the common law doctrine of agency respondeat superior the responsibility of the superior of the acts of their subordinate or in a broader sence the responsibility of any third party that had the right, ability or duty to control the activities of a violator. The concept of the vicarious liability has been deep rooted in civil jurisprudence but such a concept is alien to the criminal jurisprudence. There is no vicarious liability in criminal law unless the statute takes that also within its fold.  In dealing with such a matter in Maksud Saiyed v. State of Gujarat  Apex Court observed that the penal code does not contain any provision for attaching vicarious liability on the part of the Managing Director or the Directors of the Company when the accused is the Company. The Bank is a body corporate. Vicarious liability of the Managing Director and Director would arise provided any provision exists in that behalf in the statute. Statutes indisputably must contain provision fixing such vicarious liabilities. Even for the said purpose, it is obligatory on the part of the complainant to make requisite allegations which would attract the provisions constituting vicarious liability.


Under Negotiable Instruments Act the proposition for imposing vicarious liability with regard to offence created under section 138 has been particularly laid down u/s.141. In matter of Sabitha Ramamurthy v. R.B. S. Channabaasavaradhya  it was held that Section 141 raises a legal fiction by reason of which a person although is not personally liable for commission of such an offence would be vicariously liable therfore. Such vicarious liability can be inferred against the company only if the requisite statement is made in the complaint. The proviso  to S.141(1) gives teeth to counter the inference that could be drawn under section 141 (1) wherein every person so implicated under the offence could raise plea and prove that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence. The provision does not stop there and empowers the complainant to implicate such other director, manager persons by whose consent, connivance or negligence.


Under Section 190 of the Code, any Magistrate of first class (and in those cases where Magistrate of the second class is specially empowered to do so) may take cognizance of any offence under the following three eventualities:

  • upon receiving a complaint of facts which constitute such offence;
  • upon a police report of such facts; and upon information received from any person other than a police officer, or upon his own knowledge, that such offence has been committed.

This Section which is the starting section of Chapter XIV is subject to the provisions of the said Chapter. The expression “taking cognizance” has not been defined in the Code. However, when the Magistrate applies his mind for proceeding under Sections 200-203 of the Code, he is said to have taken cognizance of an offence.

This legal position is explained by this Court in S.K. Sinha, Chief Enforcement Officer v. Videocon International Ltd & Ors.  in the following words:

“19. The expression “cognizance” has not been defined in the Code. But the word (cognizance) is of indefinite import. It has no esoteric or mystic significance in criminal law. It merely means “become aware of: and when used with reference to a court or a Judge, it connoted “to take notice of judicially”. It indicates the point when a court or a Magistrate takes judicial notice of an offence with a view to initiating proceedings in respect of such offence said to have been committed by someone.

20. “Taking Cognizance” does not involve any formal action of any kind. It occurs as soon as a Magistrate applies his mind to the suspected commission of an offence….”

The Apex Court in the matter of Sunil Bharti Mittal v. CBI  it was observed that at the stage of taking cognizance, the only consideration before the Court remains to consider judiciously whether the material on which the prosecution proposes to prosecute the accused brings out a prima facie case or not. The Court further observed that cognizance of an offence and prosecution of an offender are two different things. Section 190 of the Code empowered taking cognizance of an offence and not to deal with offenders. Therefore, cognizance can be taken even if offender is not known or named when the complaint is filed or FIR registered. Their names may transpire during investigation or afterwards. A wide discretion has been given as to grant or refusal of process and it must be judicially exercised. A person ought not to be dragged into Court merely because a complaint has been filed. If a prima facie case has been made out, the Magistrate ought to issue process and it cannot be refused merely because he thinks that it is unlikely to result in a conviction.


The observation by three judge bench judgment in SMS Pharmaceuticals  was that as per S. 141 it is necessary to specifically aver in a complaint under section 141 that at the time the offence was committed the person accused was in charge of and responsible for the conduct of business of the company. In the matter of N.K. Wahi , it was held that to launch a prosecution a clear and unambiguous allegation as to how the directors are incharge and responsible for the conduct of the business of the company. Following the observations made by Apex Court in plethora of cases the Apex Court resounded the same in the latest case of Gunmala Sales  that basic averment is required that a particular director was in charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed so that the Magistrate could issue process under section 203 and 204 CrPC.

Where Not Quashed : Person on Position of Signatory And Managing Director / Joint Director : In the matter of SMS Pharmaceuticals  held that the managing director or joint managing director would be admittedly in charge of the company and responsible to the company for the conduct of its business. Similarly, the signatory of the dishonored cheque in question would be clearly liable for the incriminating act and will be covered under S.141 (2). The mindset of the court in not extending much of the protection to the managing director or joint director was that it was by the virtue of their offices they are liable vicariously. Similarly in matter of K.K. Ahuja , wherein the accused is the Managing Director or Joint Managing Director the court held that the because the prefix ‘Managing’ to the word ‘Director’ makes it clear that they were in charge of and are responsible to the company for the conduct of the business of the company. It was further observed that the looking to the position of the signatory it would give rise to responsibility under sub section (2) of S.141. It was also held that other officers of the company could not be made responsible under S.141 (1) but only after disclosing their consent, connivance or negligence under S.141(2). Therefore, the court has drawn distinction between two sets person while discussing two kinds of responsibilities.

In KK Ahuja case the Court has considered the position of law as given in the companies act and considered provisions Sections 5 and 291 of Companies Act, 1956 with the definitions in clauses (24), (26), (30), (31), (45) of section 2. The court summed up that following persons are considered to be the persons who are responsible to the company for the conduct of the business of the company : —

  • the managing director/s;
  • the whole-time director/s;
  • the manager;
  • the secretary;
  • any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to act;
  • any person charged by the Board with the responsibility of complying with that provision (and who has given his consent in that behalf to the Board); and
  • where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors. It follows that other employees of the company, cannot be said to be persons who are responsible for the conduct of the company.

Person holding Honorary Post : In the matter of N. Rangachari , the appellant therein stated that he was honorary chairman of the company without any remuneration. He was never assigned with the financial and business activities. The High Court while dismissing the application said that the court cannot decide such pleas under section 482 CrPC. Those pleas have to establish at trial. The Apex Court while affirming the judgment of the High Court held that a person having business dealing with the company may not be aware of the arrangement within the company in regard to its management. It was further observed that in the commercial world a person having a transaction with a company is entitled to presume that the Director of the company are in charge of the affairs of the company and it is for the director to prove to the contrary at the trial. The Court observed that from reading of the complaint it is clear that the appellant therein was director of the company and was in charge of the affairs of the company when the dishonored cheques were issued.

Similarly, in the matter of Malwa Cotton & Spinning Mills Ltd. , it was held that a person in the commercial world having a transaction with a company is entitled to presume that the Directors of the company are in charge of the affairs of the company and if any restriction on their power is placed by the memorandum of articles of the company, it is for the director to establish that in the trial.

In Paresh P. Rajda v. State of Mah.  , it was observed that the specific allegations had been leveled against the appellant that he being responsible officer of the company was equally liable and that if it is ultimately found that he had, in fact, no role to play he would be entitled to acquittal. Further, that at a stage where the trial had not yet started it is inappropriate to quash the proceedings against them.

Where Quashed : In K. Srikanth Singh vs. North East Securities Ltd. , it was held that  mere fact that at some point of time, an officer of a company had played some role in the financial affairs of the company, will not be sufficient to attract the constructive liability under section 141 of the Act.

Effect Of Resignation : The court in the matter of Saroj Kumar Poddar v. State , held that the accused person has resigned from the directorship of the company. There is no averment in the complaint as to how and in what manner the appellant was responsible to it for the conduct of the business of the company or otherwise responsible to it in regard to its functioning. However, it that matter the court has also observed that the exactly on what date the said resignation was accepted by the company is not known. In matter of Anita Malhotra while discussing similar issue it was observed since the cheque was signed in the year 2004 and the director resigned on 20.01.98 and the complaint was quashed.


BRIEF FACTS: The present case came up before the Apex Court in special leave petitioner being aggrieved by the order of the High Court by which the complaint under S.138 read with S.141 against the directors of the company were quashed. The company issued cheques which were dishonored on 02.08.11. With regard to one director Siddharth Mehta it was argued that he resigned on the 30.09.10 and with regard to other directors plea was taken that they were not in charge of and not responsible for the conduct of the business of the company. The High Court allowed the application for quashment of the complaint and observed that in the complaint except the averments that the Directors were in charge of and responsible to the company at the relevant time, nothing has been stated as to what part was played by them and how they were responsible regarding the finances of the company, issuance of cheque and control over the funds of the company.

FINDINGS: The court after considering the judgments delivered came to the following two important findings which are in brief stated hereunder :-

  1. Once in a complaint filed under Section 138 read with Section 141 of the NI Act the basic averment is made that the Director was in charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed, the Magistrate can issue process against such Director;
  2. In the facts of a given case, on an overall reading of the complaint, the High Court may, despite the presence of the basic averment, quash the complaint because of the absence of more particulars about role of the Director in the complaint. It may do so having come across some unimpeachable, uncontrovertible evidence which is beyond suspicion or doubt or totally acceptable circumstances which may clearly indicate that the Director could not have been concerned with the issuance of cheques.

The Apex Court in appeal held that the High Court did not go into question (b) as to whether director who resigned has been prosecuted after his resignation has been accepted by the board of directors of the company. It is merely stated that Siddharth Mehta had resigned from the directorship on 30.09.10 but no unimpeachable or uncontrovertible evidence was brought on record. The Apex Court therefore, set aside the order of the High Court and remitted the matter to it for fresh consideration.


In the cases discussed above it appears that the law under S.141 has been bone of contention very frequently. The intention of the legislature while including such a provision appears to be give teeth to the complaint of the complainant whose is a victim of non-payment of his dues by the corporate bodies while extending the liability to every such officer who at the time when the alleged cheque was dishonored was in charge of and was responsible to the company for the conduct of the business of the company. The concept of vicarious liability has been imported here. Further the legislation has given protection in view of S.141 proviso by saying to every such person who has been implicated under a complaint that the effect of inference of liability under section 141 (1) would not touch the person who proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of the offence. The legislation has also provided further in S.141(2) that if complainant proves alongwith the responsible person under S.141(1) that if the offence was committed with the consent, connivance of, or negligence of any director, manager, secretary or other officer of company would also be deemed to be liable to be proceeded against. The legislation has favored the complainant and has been tough on company while saying that if you are a company and if you are persons holding responsible positions in a company you should be beware that cheques issued from the desk of the company should be honored by your banks or the dagger of prosecution would hand over all of you.

In matter of Gunmala Sales the Apex Court has brought some clarity in law while holding that it is sine qua non to state basis averment that the Director was in charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed. And the complaint could only be quashed qua the director if he can prove while producing on record unimpeachable, uncontrovertible evidence which is beyond suspicion or doubt or totally acceptable circumstances which may clearly indicate that the Director could not have been concerned with the issuance of cheques. Till now as per the cases discussed above only fact of resignation or terminal illness have been classified as cases where the complaints have been quashed on the basis of  second finding as discussed above.

The Apex Court has commented that no fixed formulae can be imposed and no fetters can be imposed upon the inherent powers of High Courts and it depends upon the facts of the case but has also said that at this stage the High Court could not go for mini trial or roving inquiry. The Apex Court also observed that role of a director in a company is a question of fact depending on the peculiar facts in each case and that there is no universal rule that a director of a company is in charge of tis everyday affairs.

The two questions are still open, firstly, whether any more of such instances apart from resignation or terminal illness could be considered for quashment of complaint as required by the second finding of the Apex Court. Secondly, whether more fact apart from basic averment that the directors were in charge of and responsible for the conduct of business of the company would be required for inference of liability. As it was observed in KK Ahuja case that some particulars will be desirable, in case of Anita Malhotra it was observed that complaint ought to have specified her role in day to day affairs, in matter of A.K. Singhania it was observed that it is not necessary to reproduce language of S. 138 but substance of complaint should disclose that the accused was in charge of and responsible. But, leverage has been shown towards complainant in the case of N. Rangachari while observing that a person having business dealings with the company may not be aware of the arrangement within the company. This observation appears logical that a layman complainant could not have known the arrangement within company, role of a particular director, daily meeting leading to daily affairs, the directors involving in decision. Therefore, second question becomes pertinent. We are hopeful Gunmala Sales case would serve as a guiding light for various court in country and that a more clearer pronouncement would be soon available to bring more transparency in the law.

– Murtuza Bohra

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