Dishonour of Cheques - Director's Liability in Case of Dishonour - Academike

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Dishonour of Cheques: Directors

Liability in case of Dishonour
April30,2015bykanchi LeaveaComment
ByKhusbooAgarwal,NationalLawUniversityJodhpur
Editors note: Cheques are a type of bill of exchange and were developed as a way of
makingpaymentswithouttheneedtocarrylargeamountsofmoney.Adishonouredcheque
cannotberedeemedforitsvalueandisworthlesstheyarealsoknownasanRDI(returned
deposit item), or NSF (nonsufficient funds) cheque. Cheques are usually dishonoured
because the drawers account has been frozen or limited, or because there are insufficient
funds in the drawers account when the cheque was redeemed. A cheque drawn on an
accountwithinsufficientfundsissaidtohavebouncedandmaybecalledarubbercheque.
Banks typically charge customers for issuing a dishonoured cheque, and in some
jurisdictionssuchanactisacriminalaction.Adrawermayalsoissueastoponacheque,
instructingthefinancialinstitutionnottohonouraparticularcheque.
PART I: Cheques-Position of Law

[A] Origin of Cheques as System of Payment
ThewordchequehasbeenderivedfromthePersianwordcheck,awrittenvowtopayfor
goodswhentheyweredeliveredtoavoidmoneyhavingtobetransportedacrossdangerous
terrain.[i]Duringthe1stcenturyAD,banksinPersiaandsurroundingregionsissuedlettersof
http://www.lawctopus.com/academike/dishonourofcheques/
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creditknownasSakks,whicharebelievedtohavebeenthebasisofthemoderncheque.[ii]
Up till about 1770s, bankers adhered to the original method of issuing promissory notes,
payabletothebearer on demand.[iii] But about this time they changed the form of making
the purchases of the bills. When their customers brought them bills to discount, instead of
givingthemtheirpromissorynotespayabletobearerondemand,theywrotedownthevalue
of the value of the bill to the credit of their customers in their books. They then gave them
bookscontaininganumberofprintedforms.Theseformswerecalledcheques,andwere
billsofexchange,drawnuponthebanker,payabletobearerondemand.[iv]
Payment instruments and mechanisms have a very long history in India. The earliest
paymentinstrumentsknowntohavebeenusedinIndiawerecoins.[v]Aninstrumentinuse
during the Muslim period was the Pay order. Pay orders were issued from the Royal
TreasuryononeoftheDistrictorProvincialtreasuries.TheywerecalledBarattesandwere
akintopresentdaydraftsorcheques.[vi]
The private banks and the Presidency Banks introduced other payment instruments in the
Indian money market. Cheques were introduced by the Bank of Hindoostan, the first joint
stockbankestablishedin1770.[vii]TheCalcuttaClearingBanksAssociation,whichwasthe
largestbankersassociationatthattime,adoptedclearinghouserulesin1938.[viii]Afterthe
setting up of Reserve Bank of India in 1935, the Clearing Houses in the Presidency towns
weretakenoverbytheReserveBankofIndia.[ix]
Overthecenturies,innovationsincreasedthesophisticationofcheques.Thissophistication
is perhaps surprising given the cheques apparently simple nature: a piece of paper with a
fewmagicwordssuchaspaytotheorderofwrittenacrossit.[x]
[B] De nition of Cheque

The term cheque has been defined under Section 6 of the Indian Negotiable Instruments
Act,1882[xi](theAct).Accordingtothissection,achequeisabillofexchangedrawnona
specifiedbankernotexpressedtopayableotherwisethanondemand.
Section73oftheBritishBillsofExchangeAct,1882,embodiesasimilardefinitionofcheque.
Itisabillofexchangedrawnbyabankerpayableondemand.[xii]
The same words have been used to define cheque in Section 165 (1) of the Canadian
Statute.[xiii]
TheUniformCivilCode,publishedin1952definescheckas[xiv]:
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adraft,otherthanadocumentarydraft,payableondemandanddrawnonabankor
acashierscheckortellerscheck.
Aninstrumentmaybeacheckeventhoughitisdescribedonitsfacebyanotherterm,such
asmoneyorder.Inherentinitsdefinition,achequeisapromisetopaywhichcanbetaken
by the bearer or indorsee and cashed or converted on demand into federal reserve notes
equalingthevaluestatedonthecheque.[xv]
ChequeisaspeciesofBillsofExchange.[xvi]OnaconjointreadingofSection5oftheAct
whichdefinesBillsofExchangeandSection6,amoredetaileddefinitionofchequecanbe
foundtobe:
A cheque is an unconditional order in writing, signed by the person giving it, requiring the
banktowhomitisaddressedtopayondemandacertainsumsofmoneyto,ortotheorder
of,aspecifiedpersonortobearer.[xvii]
[C] Requirements of a Cheque vis--vis Bill of

Exchange
Whileachequehasmanyfeaturesincommonwithbillsandisinmanyrespectsgovernedby
the same rules and principles and is often taken to be included in the general term bill in
enactments,ithasseveraldistinctcharacteristicsthatdiffersfrombills.[xviii]
1.Achequemustalwaysbedrawnonbankorabanker,andispayableimmediatelyon
demandwithoutanydaysofgrace.[xix]Abillofexchangeisanegotiableinstrumentin
writingcontaininganinstructiontoathirdpartytopayasumofmoneyatadesignated
futuredateorondemand.Acheque,ontheotherhand,isabillofexchangedrawnon
abankbytheholderofanaccountpayableondemand.Thus,achequeundersection
6 of the Act is also a bill of exchange but it is drawn on a banker and is payable on
demand.Itis,thus,obviousthateventhoughabillofexchangeisdrawnonabanker,if
itisnotpayableondemand,itisnotacheque.[xx]
2.A cheque requires no acceptance apart from prompt payment. It is presented for
payment only. Accordingly, there is no Privity of contract between the banker and the
payee,whocannot,therefore,suethebankondishonour.
3.Achequeissupposedtobedrawnuponfundsinthehandsofthebanker.
4.Thedrawerofachequeisnotdischargedbyfailureoftheholdertopresentitindue
timeunlessthedrawerhassustaineddamagebydelay.[xxi]
5.Achequeisnotnotedorprotestedfordishonourandisgenerallyinland.
6.Inrespectofcrossedcheques,thereisprotectiongiventothebakerwhichispeculiar
totheseinstruments.[xxii]
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[D] Types of Cheques

1.Bearer Cheque: A cheque which has no named payee and made payable to .. or
beareriscalledabearercheque.[xxiii]Ifabearerchequeislost,thefindercancashit,
unlessthebankisnotifiedintimetostopthepayment.
2.Order Cheque: A cheque, payable to the payee or as ordered by him through his
endorsement,iscalledanordercheque.[xxiv]
3.Uncrossed/OpenCheque:Achequewhichdoesnothaveacrossingandthereforeis
payableondemandatthecountersofthebankandbranchonwhomitisdrawn.[xxv]
4.CrossedCheque:Whenachequebearsacrossitsfaceanadditionofthewordsand
companyoranyabbreviationthereof,betweentwoparalleltransverselines,oroftwo
parallel transverse lines simply, either with or without the words Not negotiable, that
additionshallbedeemedcrossingandthechequeshallbedeemedtobecrossed.[xxvi]
5.AntedatedCheque:Achequewhichbearsadatebeforethedateofissueisanante
datedcheque.
6.Postdated Cheque: A postdated cheque is an instrument which bears a date later
thanthedateofissue.[xxvii]
7.StaleCheque:Ifachequeispresentedforpaymentaftersixmonthsfromthedateof
issueofthecheque,itiscalledastalecheque.Astalechequeisnothonoredbythe
bank.
[E] E-Cheques
Clause(a)ofExplanation1ofSection6oftheActdefinesachequeintheelectronicform
asunder:
Achequeintheelectronicformmeansachequewhichcontainstheexactmirrorimageofa
paper cheque, and is generated, written and signed in a secure system ensuring the
minimum safety standards with the use of digital signature (with or without biometrics
signature)andasymmetriccryptosystem
ThetermelectronicformhasbeendefinedunderTheInformationTechnologyAct,2000,as
any information generated, received, sent or stored in media, magnetic optical, computer
memory,microfilm,computergeneratedmicroficheorsimilardevide.[xxviii]
Thedefinitionofelectronicchequerequiresthatitmustbeanexactmirrorimageofapaper
cheque. That being so, all the elements necessary to make a paper instrument a valid
cheque,shouldbepresentintheimage.[xxix]
An eCheque is an electronic document which substitutes the paper check for online
transactions. Digital signatures (based on public key cryptography) replace handwritten
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signatures.Thedigitalsignatureisstoredwiththebanksothattheechequecanbeverified
asitmovesthroughthepaymentprocess.[xxx]
TheminimumsecurityrequirementssupportedbytheeChequesystemareasfollows[xxxi]:
Confidentiality:keepinginformation(e.g.emailmessage,paymentorder,etc)secret.
Authentication:knowingandverifyingtheoriginand/ordestinationofinformation.
Integrity:verifyingthatthedatahasntbeentamperedwith.
Nonrepudiation:knowingthatthedata,oncesentcannotberetractedordenied.
Examples of echeques include Paypal, 2checkout.com, LinkPoint, iTransact and
paybycheck.
PART II: Dishonour of a Cheques- Section

138
The present day economies of the world which are functioning beyond the international
boundariesarerelyingtoaverygreatextentonthemechanismofthenegotiableinstruments
such as cheques and bank drafts. Since business activities have increased, the attempt to
commitcrimesandindulgeinactivitiesformakingeasymoneyhavealsoincreased.
Chapter XVII [Of Penalties in Case of Dishonour of Certain Cheques for Insufficiency of
FundsintheAccounts]containingSections138to142wasinsertedbytheBanking,Public
Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988.[xxxii] The
operative portion of Chapter XVII contained in Section 138 [Dishonour of cheque for
insufficiency,etc.,offundsintheaccount]cameintoeffectfromApril1,1989.
[A] Object of incorporation of Chapter XVII in

Negotiable Instruments Act
The laws enacted in Chapter XVII exclusively deal with penal consequences which the
drawerofachequewillfaceintheeventofdishonourofthechequeissuedbyhim.
Earlier to the enactment of this Chapter, the aggrieved person was without any remedy.
Before14thFebruary,1956,therewasachapter,beingChapterXVIIintheAct.Itcontained
twosectionsSection138and139.Section138relatedtopowertoappointnotariespublic
andSection139dealtwithpowertomakerulesfornotariespublic.Butwiththeintroduction
oftheNotariesAct,1952,bothsections139and139becameredundant.[xxxiii]
ChapterXVIIwasreintroducedbytheBanking,PublicFinancialInstitutionsandNegotiable
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Instruments Laws (Amendment) Act, 1988 with a new nomenclature for the Chapter: Of
Penalties in Case of Dishonour of Certain Cheques for Insufficiency of Funds in the
Accounts.Thisnewchaptercontainedfivesections,namely,sections139,139,140,141and
142.Itwasincorporatewithaspecifiedobjectofmakingaspecialprovisionbyincorporating
astrictliabilitysofarasthecheque,asanegotiableinstrument,isconcerned.
Tosafeguardthehonestandgenuinebankcustomers,theAmendmentActdirectedthatthe
court will not take cognizance of the offence except in a complaint in writing and no court
inferior to that of a Metropolitan Magistrate or a first class Judicial Magistrate shall try the
offence.
Withthisamendment,theNegotiableInstrumentsActacquiredadoublecharacter.Earlierit
wasanenactmentfallingexclusivelyundercivillawconfinedtocivilliability,henceforthitwill
alsohaveapenalprovision.
Theprovisiondoesnotpunishtheactoftakingloanbutitpenalizesapersonwhoproposed
torepaytheloanbyissuanceofachequeandthechequeisnotencashedduetoshortage
offundsintheaccount.[xxxiv]
These provisions have been incorporated in the larger public interest. There are inbuilt
safeguardsforthehonestdrawerssuchas:
1.Thechequehasbeenpresentedtothebankwithinaperiodofsixmonthsfromthedate
onwhichitisdrawnorwithintheperiodofitsvalidity,whicheverisearlier
2.The payee or the holder in due course of the cheque, as the case may be, makes a
demandforthepaymentofthesaidamountofmoneybygivinganotice,inwritingto
thedrawerofthecheque,withinfifteendaysofthereceiptofinformationbyhimfrom
thebankregardingthereturnofthechequeasunpaidand
3.Thedrawerofsuchchequefailstomakethepaymentofthesaidamountofmoneyto
the payee or, as the case may be, to the holder in due course of the cheque, within
fifteendaysofthereceiptofthesaidnotice.[xxxv]
[B] The Amendment Act of 2001

AftertheadditionofSection138142intheAct,theParliamentagainpassedanActknown
asRepealingandAmendingAct,2001(Act30of2001)witheffectfrom392001.Thesaid
actreceivedtheassentofthePresidenton392001andwaspublishedinGazetteofIndia
Extra.AsperthesaidAct30of2001,anumberofCentralActswererepealedinwholeorin
part. The Act, Banking, Public Financial Institutions and Negotiable Instruments Laws
(Amendment)Act,1988Act66of1988)waswhollyrepealedbyRepealingandAmending
Act,2001(Act30of2001)asperSection3andtheFirstScheduleofthesaidAct.[xxxvi]
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However, the provision providing for punishment of one year imprisonment for bouncing of
chequescontinuestobeinthestatutebook.Onlythe1988amendmentintheprincipalActof
1881hasbeenrepealed.[xxxvii]Accordingly,thedishonourofchequesforinsufficiency,etc.
offundsintheaccountcontinuestobeanoffenceunderSections138to142(bothinclusive)
oftheNegotiableInstrumentsAct,1881.Section6AoftheGeneralClausesAct,1897makes
thepositionamplyclear.
TheclarificationwasgivenaftertheBouncedChequeVictimsGrievancesForumbroughtto
the notice of the Government that the Courts have stopped accepting new complaints on
account of repeal of the Banking, Public Financial Institutions and Negotiable Instruments
Laws(Amendment)Act,1988bytheRepealingandAmendingAct,2001.
[C] Constitutionality of Laws Under Chapter XVII

of the Act
a. Whether Parliament has passed laws violating Article
246 (3) read with Entry 30 of List II of Seventh Schedule of
Constitution:
Any law regulating the relationship of debtor and their mutual rights and liabilities can be
passedbyaStateLegislaturealonebyvirtueofArticle246(3)readwithEntry30ofListIIof
theSeventhScheduleoftheConstitution.Inthecircumstanceitisofutmostimportanceto
decide whether section 138 of the Act can be equated with moneylending or activities
concernedwithmoneylending.ThisveryquestionfellfordecisioninthecaseofM.Mohan
Krishnav.UnionofIndia[xxxviii]whereitwasheldbyJusticeM.N.Raothat:
Thenatureoftheoffencecreatedbysection138oftheActalthough,incidentally,affectsthe
relations between a debtor and a creditor, in its true nature and character pith and
substance it does not encompass moneylending and moneylenders envisaged by entry
30ofListII.Itdoesnotconcern,ingeneral,eitherthebusinessofmoneylendingorpersons
whocarryonthebusinessofmoneylending.Astatutoryoffenceiscreatedbysection138of
theActwhenapersonissuesachequeforthedischargeinwholeorinpartofanydebtor
other liability and if it is returned by the bank unpaid either because the amount of money
standingtothecreditoftheaccountofthedrawerisinsufficientortheamountcoveredbythe
cheque is in excess of the amount to be paid from the account of the drawer by an
agreement with the bank. Thus the limited sphere within which section 138 of the Act
operates cannot, by any stretch of reasoning, be approximated to or equated with money
lending or activities concerned with moneylenders. The section concerns dishonour of
cheques in certain circumstances and the resultant consequences. Banking and cheques
(entries45and46ofListI)arethusprimarilythematterscoveredbysection138.Although,
incidentally, the impugned legislation trenches upon the debtor and creditor relationship,
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whichisbutanaspectofmoneylendingandmoneylenders,itcannotbesaidthatinitstrue
natureandcharacter,thelegislationconcernsmoneylendersandmoneylending.
Section138to142oftheActarenotultraviresandParliamenthadpowerandcompetence
toenactChapterXVIIcontainingSections138142underEntry45and46ofListFirstofthe
SeventhSchedule.[xxxix]
b. Laws relating to dishonour of cheques, if ultra vires:

ThelawsenactedandincorporatedinChapterXVIIoftheActarenotviolativeofArticles14
and 21 of the Constitution. While exemplifying the legal position, the Delhi High Court
observed:
the legislature can always create an offence of absolute or strict liability. The principle of
strict liability has been introduced to encourage greater vigilance to prevent usual callous
attitude of drawers of cheques in discharge or debt or liability. In the instant case, the
elementofmensreahasbeenexcludedinthelargerpublicinteresttocurbtheinstancesof
dishonouringofchequesandtolendgreatercredibilitytothecommercialtransactionswhich
arevitalfortrade,businessandindustryingeneralandforinternalbusinesstransactionsin
particular.
[D] Ingredients of the Offence under Section 138

ToconstituteanoffenceunderSection138oftheAct,thefollowingingredientsneedstobe
fulfilled:
1.Cheque should have been issued for the discharge, in whole or part, of any debt or
otherliability.[xl]
2.Thechequeshouldhavebeenpresentedwithintheperiodofsixmonthsorwithinthe
periodofitsvalidity,whicheverisearlier.[xli]Note:Thechequemaybepresentedany
numberoftimesforcollectionwithinitsvalidity.
3.The payee or the holder in due course should have issued a notice in writing to the
drawerwithinthirty(fifteenpriorto2002amendments)daysofthereceiptofinformation
byhimfromthebankregardingthereturnofthechequeasunpaid.
4.Afterthereceiptofthesaidnoticebythepayeeortheholderinduecourse,thedrawer
should have failed to pay the cheque amount within fifteen days of the receipt of the
saidnotice.Notice:Noticeofdishonourisunnecessarywhenthepartyentitledtonotice
cannotafterduesearchbefound.[xlii]
5.Onnonpaymentoftheamountdueonthedishonouredchequewithinfifteendaysof
thereceiptofthenoticebythedrawer,thecomplaintshouldhavebeenfiledwithinone
month fromthedate of expiry of the grace time of fifteen days,beforeaMetropolitan
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Magistrate or not below the rank of a Judicial Magistrate of the first class.[xliii] The
cognizanceofacomplaintmaybetakenbytheCourtaftertheprescribedperiod,ifthe
complaint satisfies the Court that he had sufficient cause for not making a complaint
withinsuchperiod.
6.TheoffenceundertheActiscompoundable(insertedbythe2002Amendment).[xliv]
In a complaint of the present nature, it is not necessary for the complainant to allege the
details of the original transaction. He need mention only the fact that the issuance of the
cheque was to discharge in whole, or in part, any debt or other legal liability. The purpose
behind the incorporation of Section 138 of the Act being lend credibility for cheque
transactions, for establishing the requirements in Section 138, there is no burden on the
complainant to prove before the court the entire details of the transaction resulting in the
issuanceofcheque.[xlv]
[E] Grounds for Dishonour of Cheque

The Blacks Law Dictionary defines dishonour as: An instrument is dishonoured when a
necessaryoroptionalpresentmentisdulymadeanddueacceptanceorpaymentisrefused,
or cannot be obtained within the prescribed time, or in case of bank collections, the
instrumentisreasonablyreturnedbythemidnightdeadlineorpresentmentisexcusedand
theinstrumentisnotdulyacceptedorpaid.[xlvi]
Theworddishonourhasnotbeenusedinthestatutes,thoughitisfrequentlyusedbythe
judgesandthejurists.Theworddishonour,wheneverusedinthecontextoftheprovisions
containedinChapterXVIIoftheAct,meansreturnofthechequeunpaidbythebank,when
presentedeitheratthecounterorthroughaclearingBank.[xlvii]
Abankermaydishonourachequeforvariousreasonsandthereasonsforsuchdishonour
normally appear in return memo, i.e., the communication slip attached to the dishonoured
cheque.
Someofthesereasonsare:
Refer to Drawer: This expression has been explained as used while returning
chequesforwantoffundsinthedrawersaccount,orbecauseofserviceofagarnishee
order.[xlviii]Inbankparlance,itmeansthatthechequehasbeenreturnedforwantof
funds in the account of the drawer of the cheque.[xlix]. The endorsement refer to
drawerisaneuphemisticwayofinformingthepayeethatthedrawerofthechequehas
gotnoamounttohiscredittohonourthecheque.[l]Whenthechequeisreturnedwitha
simple endorsement refer to drawer, the proceedings cannot be quashed at the
threshold.[li]
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Exceeds arrangement: The endorsement exceeds arrangement denotes nothing but

thefactthatthechequewasgivenforanamountwhichwasnotcreditedintheaccount
inwhichthechequehasbeendrawn.Inotherwords,thechequeamountismorethan
thebalanceamountinthataccount.Itamountstoinsufficiencyoffund.[lii]
Accountclosed:Anoffenceintermsofsection138iscommittedevenifthechequeis
returnedonthegroundof`closureoftheaccount.[liii]
Closingoftheaccountafterissuingachequebytheaccountholderandreturnofthe
chequewiththeremarksAccountClosedisnotasolutionorescapefromthepenal
consequencesandapersonisliabletobeprosecutedfortheoffenceaftercompliance
withtheotherrequirementsoflaw.[liv]
Dishonourofthechequeonthegroundthattheaccountisclosedistheconsequence
oftheactofthedrawerrenderinghisaccounttoacipher.Ifsection138washeldnot
attracted in such cases, it would encourage dishonest persons to issue cheques and
before presentation of the cheque close that account and thereby escape from the
penalconsequencesofsection138.[lv]
Bankersremarkaccountoperationjointly,otherDirectorssignaturerequired:Aclear
reading of section 138 leaves no doubt that the circumstances under which the
dishonourofchequetookplacearerequiredtobetotallyignored.Thelawonlytakesa
noteofthefactthatthepaymenthasnotbeenforthcominganditmatterslittlethatany
of the manifold reasons may have caused that situation if for instance, the closure of
account or the stoppage of payment or any other of the common place reasons for
dishonour were to be justifiable, then the legislature would have set these out in the
sectionasexceptions,notconstitutinganoffence.Nosuchintentioncanbereadinto
section 138 as none exists. Thus, the return of the cheque unpaid with the advice
accountoperationjointly,otherDirectorssignaturerequiredamountstodishonourof
thechequewithinthemeaningofsection138.[lvi]
MaterialAlterations:Section87oftheActmakesitclearthatanymaterialalterationof
the negotiable instrument renders the same void as against anyone who is party
thereto. When the alteration would adversely affect the interest of the other side, the
samecanbetermedasmaterialalteration.Inotherwords,whenthedateischanged,
that too in an invalid cheque after the expiry of the period of validity, it is certainly
materialalterationsinceitaffectstheparties.
Some of the other reasons for returning the cheque that does not attract the provisions of
Section138are:
1.Accounttransferredtoour..Branch
2.Drawerdeceased
3.Amountinwordsandfigurediffers
4.NotdrawnontheBank
5.Drawn on nonresident account. Form A. 7(c) approved by Reserve Bank of India
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required
6.Revenuestamprequired
7.Alterationdate/figure/wordsrequiresdrawersfullsignature
8.Multilated
9.Crossedaccountpayeeonly
10.Paymentstoppedbythedrawer
11.Payeesindorsementincomplete/required
12.Containextraneousmatter
13.Collectingbankersconfirmationrequiresclearingbanksguarantee
14.Crossed,pleasepresentthroughabank
15.Crossedtotwobanks.
[F] Civil Liability in Dishonour of Cheque

Generally, in case of dishonour of cheque, the payee or holder in due course, as the case
maybe,hastworemedies:
Tofileacivilsuit
TobringacriminalprosecutionunderSection138
AcivilsuitforrecoveryofmoneyaswellasacomplaintunderSection138ismaintainable.
[lvii] Civil liability of dishonour of cheque is not taken away or curtailed because of
incorporationofChapterXVIIintheAct.Note
Mere launching of a prosecution under Section 138 or even obtaining conviction under
Section138againstthedrawerwouldnotpreventthecomplainantfromtakingacivilaction
for recovery of the cheque amount or any part of it. It would not offend the rule against
double jeopardy.[lviii] The Supreme Court has held that pendency of the criminal matters
wouldnotbeanimpedimenttotheproceedingswiththecivilsuits.[lix]Bothremediesmaybe
simultaneouslypossible.
[G] Criminal Liability in Dishonour of Cheques

Prior to the introduction of chapter XVII, the drawer of a dishonoured cheque could be
criminally prosecuted under S.420 of the Indian Penal Code. However, even today
prosecutionunderthegeneralfortheoffenceofcheatingismaintainable.Theoffenceunder
S.138oftheActandS.420oftheIPCaredifferentinnature,thereforeconvictionofoffence
under one provision does not bar prosecution under the other.[2] The full bench of the
Andhra Pradesh High court has held that when a person issues a cheque or a postdated
cheque, he impliedly represents to the payee that in the ordinary course of events, the
chequeonitspresentationtothebankwouldbemet.Insuchacircumstance,evenwiththe
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introduction of S.138 of the Act, prosecution under S.420 IPC is maintainable if dishonest
intentionatthetimeoftheissuanceofthechequeisestablished.
Acriminalliabilityisprovidedundersection138oftheAct,whichprovidesimprisonmentfor
twoyearsorwithfinewhichmayextendtotwicetheamountofthecheque,orwithboth.
Incaseofdishonourofchequethedrawerofitmaybeprosecutedundersections417and
420oftheIndianPenalCode,1960(IPC).However,italldependsonthecircumstancesof
eachcase.Everydishonourofchequeisnotcheating.
InA Veerbhadra Rao vs. Government of A.P.[lx], it has been held by the Andhra Pradesh
High Court that where the accused issues a postdated cheque with knowledge that the
funds in his account are insufficient and such cheque would be dishonoured he commits
offenceofcheatingundersection420ofIPC.
The punishment in the form of two years imprisonment has been provided in case of
dishonour of cheque. The imprisonment generally given only for criminal activity and
dishonour of cheque considering criminal Act punishment for two years imprisonment
provision has been made. Consequently, criminal liability has been imposed when the
chequegetsdishonoured.
a. Exceptions to Criminal Liability

ChequeissuedinDischargeofLiability:Itismustthatthechequewhichisgivenshould
beindischarge,inwholeorinpartofanydebtorotherliabilityofthedrawertowards
thepayee.
InK.Kumarvs.BapsonsFootWear[lxi],acomplaintwasfiledforthedishonourofacheque,
it was alleged that in the course of business the accused issued a cheque. A petition was
filed to quash the complaint. The court allowed the petition holding that the essential
requirementforanoffenceundersection138oftheActthatthechequemustbedrawnfor
dischargeinwholeorinpartofanydebtorotherliabilityhasnotbeenfulfilledasaccordingto
theallegationinthecomplaintthechequewasissuedinthecourseoftheirbusinessbythe
accused.
Cheque given as a gift: In Mohan Krishna vs. Union of India, the court held that if a
cheque was not issued for the purpose of discharge of any debt or other liability, the
makerofthechequeisnotliableforprosecution.Ifthechequeisgivenbywayofgiftor
presentandifitisdishonouredbythebank,themakerofthechequeisnotliablefor
prosecution.Unlessthetwoconditionssetoutinsection138weresatisfied,nocriminal
liabilitycanbefastened.
b. Mens Rea Not Essential
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b. Mens Rea Not Essential

Section138excludesmensreabycreatingastrictliability,asisexplicitfromthewordssuch
personshallbedeemedtohavecommittedanoffence.Thereturningofthechequebythe
bankforoneofthetworeasonsstatedinthesectionisthenecessaryconditioncreatingstrict
liability.Ifthechequeisdishonouredonanyotherground,theoffenceisnotmadeout.The
offenceunderSection138carriesitsownstatutoryrequirementsexcludingtheapplicationof
thedoctrineofmensrea.[lxii]
c. Defence that may be taken

Ifthematterisexaminedcritically,thenthefollowingmaybeasetofdefencethatmaybe
takenareasfollows[lxiii]:
Absenceofalegallyenforceabledebtorliability.
Chequewasnotreturnedforthereasonsconstitutinganoffence.
Complaintisnotaspertimeperiodprovidedinsections138and142,i.e.,thepleaof
limitation.
Absenceoflegalnoticeof15days.
LackofJurisdiction.
Noreturnofchequetothepayee.
PART III: Section 141: Offence by

Companies (Dishonour of Cheque)
Proper and smooth functioning of all business transactions, particularly of cheques as
instruments primarily depends upon the integrity and honesty of the parties. Undoubtedly,
dishonourofachequebythebankcausesincalculableloss,injuryandinconveniencetothe
payee and the entire credibility of the business transactions within and outside the country
suffersaserioussetback.Acompany,beinganartificialpersoncreatedbylaw,actsthrough
itsdirectorsandofficerswhoareresponsiblefortheconductofthebusinessofthecompany.
Acriminalliabilityonaccountofdishonourofchequeprimarilyfallsonthedrawercompany
andisextendedtoofficersoftheCompany.Thenormalruleinthecasesinvolvingcriminal
liabilityisagainstvicariousliability,thatis,nooneistobeheldcriminallyliableforanactof
another.[lxiv] This normal rule is, however, subject to exception on account of specific
provisionbeingmadeinstatutesextendingliabilitytoothers.Section141oftheNegotiable
InstrumentAct,1881(NIAct)regulatesoffencesbycompanies.
When a cheque issued by a company is dishonoured. In addition to the Company, the
followingpersonsaredeemedtobeguiltyoftheoffenceandshallbeliabletobeproceeded
againstandpunished:
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Every person, who at the time the offence was committed, was incharge of and was
responsibletothecompanyfortheconductofthebusinessofthecompany
AnyDirector,Manager,Secretaryorotherofficerofthecompanywithwhoseconsent
andconnivance,theoffenceundersection138hadbeencommittedand
Any Director, Manager, Secretary or other officer of the company whose negligence
resultedintheoffenceundersection138beingcommittedbythecompany.
[A] Companies Act read conjunctively with the

N.I Act
AvisittosomeprovisionsofCompaniesAct,1956shallenableustoappreciatetheroleand
functionsofcertainkeymanagerialpersonnelasengagedbycompanies.
Acombinedreadingofsection5and291oftheCompaniesAct[lxv]readwiththedefinitions
inclauses(24),(26),(30),(31)and(45)ofsection2ofthatActwouldshowthatthefollowing
persons are considered to be the persons who are responsible to the company for the
conductofthebusinessofthecompany:
themanagingdirector/s
thewholetimedirector/s
themanager
thesecretary
Anypersoninaccordancewithwhosedirectionsorinstructionstheboardofdirectorsof
thecompanyisaccustomedtoact
Any person charged by the board with the responsibility of complying with the
provisions(andwhohasgivenhisconsentinthatbehalftotheboard)and
Where any company does not have any of the officers specified in clauses (a) to (c),
anydirectorordirectorswhomaybespecifiedbytheboardinthisbehalforwhereno
directorissospecifiedissospecified,allthedirectors.
[B] Director and His Position

The word director is defined in Section 2 (13) of the Companies Act, 1956 as: Director
includesanypersonoccupyingthepositionofdirector,bywhatevernamecalled.
There is no universal rule that a director of a company is in charge of its everyday affairs.
There is no magic as such in a particular word, be it Director, Manager or Secretary. It all
dependsuponrespectiverolesassignedtotheofficersinacompany.Acompanymayhave
ManagersorSecretariesfordifferentdepartments,whichmeans,itmayhavemorethanone
Manager or Secretary. These officers may also be authorised to issue cheques under their
signatureswithrespecttoaffairsoftheirrespectivedepartments.[lxvi]
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[C] Vicarious Liability

IntheBlacksLawDictionary,thetermvicariousliabilityisdefinedas:
Theimpositionofliabilityononepersonfortheactionableconductofanother,basedsolely
onarelationshipbetweenthetwopersons.Indirectorimputedlegalresponsibilityforactsof
another,forexample,theliabilityofanemployeefortheactsofanemployer,or,aprincipal
fortortsandcontractsofanagent.[lxvii]
Section141oftheActmakesanaturalpersonvicariouslyliablefortheoffenceundersection
138 of the Act committed by the company provided such person has some nexus with the
crime.Thenexusofthepersonchargedwiththeoffencemayariseinthefollowingways:
Eitherheisinchargeof,andwasresponsibleto,thecompany
Theoffencehasbeencommittedwiththeconsentorconnivanceof,orisattributableto,
orduetoanyneglectonthepartof,anydirector,managersecretaryorotherofficerof
thecompany.
PARTIV: Cases
[A] National Small Industries Corp. Ltd. Versus
Harmeet Singh Paintal & Anr.[lxviii]
Facts:National Small Industries Corporation Ltd. had filed 12 criminal complaints
underSection138readwithSections141and142oftheActagainstM/sJayRapid
Roller Limited, a Company incorporated under the Companies Act, its Managing
DirectorShriSukhbirSinghPaintal,anditsDirectorShriHarmeetSinghPaintal.It
istheclaimoftheappellantthatsoastomaketheManagingDirectorandDirectorof
the Company liable to be prosecuted under the provisions of the Act, they had
specifically averred in the complaint that all the accused persons approached it for
financingofbillintegratedmarketsupportprogram.Itwasalsostatedthattheaccused
personshadissuedchequeswhichweredishonoredonpresentationagainstwhichthe
appellant had filed criminal complaints under the provisions of the Act against all the
respondents.Itistheirfurthercasethatalltheaccusedpersonsacceptedtheirliability
anddeliveredvariouscheques,whicharethesubjectmatterofthepresentappeals.
DCMFinancialServicesLtd.,enteredintoahirepurchaseagreementon25.02.1996
with M/s International Agro Allied Products Ltd. At the time of entering into the
contract, the Company handed over postdated cheques to the appellant towards
paymentofmonthlyhire/rentalcharges.RespondentNo.1DevSarinwasoneofthe
Directors of the said Company. The cheque issued by International Agro and Allied
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ProductsLtd.infavouroftheappellantwasdulypresentedforpaymenton28.10.1998
and the same was returned unpaid for the reason that the Company had issued
instructions to the bankers stopping payment of the cheque. The appellant issued a
legal notice on 05.12.1998 to the Company, Respondent No.1 and other Directors
underSection138oftheActinformingthemaboutthedishonouringofthechequein
question.Despitetheserviceofthenotice,theCompanydidnotmakethepaymentto
the appellant. The appellant, on 11.01.1999, filed a complaint before the Metropolitan
Magistrate,NewDelhiagainstrespondentNo.1andothersunderSection138readwith
Section141oftheAct.
DecisionofthelowerCourt:Byorderdated04.02.1999,theMetropolitanMagistrate,
New Delhi, after recording evidence, summoned the accused persons including
respondentNo.1.RespondentNo.1filedanapplicationbeforetheAdditionalSessions
Judge,Delhifordroppingofproceedingsagainsthim.Byorderdated08.09.2004,the
MetropolitanMagistratedismissedthesaidapplication.Aggrievedbythesaidorder,the
respondent filed a petition under Section 482 of the Criminal Procedure Code before
the High Court for quashing of the complaint. The High Court, after finding that the
avermentsagainstrespondentNo.1areunspecificandgeneralandnoparticularroleis
assigned to the appellant, quashed the summoning order insofar as it concerned to
him.
Judgment:AspertheJudgmentwrittenbyHisLordshipMrJusticeP.SathasivamJthe
following principles of Law emerge from the Apex Court for fixing the liability of
DirectorsunderSection141oftheActforprosecutingthemforanactionunderunder
Section138oftheAct:
1.The primary responsibility is on the complainant to make specific averments as are
required under the law in the complaint so as to make the accused vicariously liable.
For fastening the criminal liability, there is no presumption that every Director knows
aboutthetransaction.
2.Section141doesnotmakealltheDirectorsliablefortheoffence.Thecriminalliability
canbefastenedonlyonthosewho,atthetimeofthecommissionoftheoffence,were
inchargeofandwereresponsiblefortheconductofthebusinessofthecompany.
3.Vicarious liability can be inferred against a company registered or incorporated under
the Companies Act, 1956 only if the requisite statements, which are required to be
averredinthecomplaint/petition,aremadesoastomakeaccusedthereinvicariously
liableforoffencecommittedbycompanyalongwithavermentsinthepetitioncontaining
thataccusedwereinchargeofandresponsibleforthebusinessofthecompanyandby
virtueoftheirpositiontheyareliabletobeproceededwith.
4.Vicariousliabilityonthepartofapersonmustbepleadedandprovedandnotinferred.
5.If the accused is a Managing Director or a Joint Managing Director then it is not
necessary to make specific averment in the complaint and by virtue of their position
theyareliabletobeproceededwith.
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6.If the accused is a Director or an officer of a company who signed the cheques on
behalf of the company then also it is not necessary to make specific averment in the
complaint.
7.The person sought to be made liable should be in charge of and responsible for the
conductofthebusinessofthecompanyattherelevanttime.Thishastobeaverredas
afactasthereisnodeemedliabilityofaDirectorinsuchcases.
[B] Anita Malhotra v. Apparel Export Promotion

Council and Anr.[lxix]
Facts:TheAppellant,whowasanonexecutiveDirectorontheBoardofM/sLapareil
Exports(P)Ltd.resignedfromtheDirectorshipon31.08.1998.On20.11.1998,
recordingtheresignationoftheAppellant,theCompanyfiledstatutoryForm32withthe
RegistrarofCompanies.Anoticedated10.12.2004wasissuedtotheAppellant
regardingdishonorofallegedchequesunderSection138oftheActbythe
Respondents.TheAppellant,videletterdated15.12.2004,repliedtothesaidnotice
informingtheRespondentsthatshehadresignedfromtheDirectorshipoftheCompany
longbackin1998.Byletterdated17.12.2004,theRespondentssoughtforcertain
information/documentsfromtheAppellantrelatingtotheCompany.On18.12.2004,the
appellantrepliedtotheaforesaidletterreiteratingthatafterherresignationshehad
nothingtodowiththeCompanyandassuchshewasnotinapositiontogivethe
informationsoughtfor.TheRespondentsfiledacomplaintunderSection138oftheAct
beingintheCourtofACMM,NewDelhiagainsttheCompanyarrayingtheAppellantas
accusedNo.3.TheAppellantfiledapetitionbeforetheHighCourtofDelhifor
quashingofthecomplaintpendingintheCourtofACMM,NewDelhi.
DecisionoftheLowerCourt:TheHighCourt,byimpugnedjudgmentdated
16.12.2009,dismissedtheAppellantspetition.Aggrievedbythesaidjudgment,the
AppellantfiledanappealbywayofspecialleavebeforetheapexCourt.
Judgment:ThereisastatutoryrequirementunderSection159oftheCompaniesAct,
1956thateveryCompanyhavingasharecapitalshallhavetofileanannualreturnwith
theRegistrarofCompanieswhichincludesdetailsoftheexistingDirectors.Provisions
oftheCompaniesActrequireannualreturntobemadeavailablebyaCompanyfor
inspectionunderSection163aswellasSection610whichentitlesanypersonto
inspectdocumentskeptbytheRegistrarofCompanies.TheHighCourtcommittedan
errorinignoringSection74oftheIndianEvidenceAct,1872.Subsection(1)ofSection
74referstopublicdocumentsandSubsection(2)providesthatpublicdocuments
includepublicrecordskeptinanyStateofprivatedocuments.Aconjointreadingof
Sections159,163and610(3)oftheCompaniesAct,1956readwithsubsection(2)of
Section74oftheIndianEvidenceAct,1872makesitclearthatacertifiedcopyof
annualreturnisapublicdocumentandthecontraryconclusionarrivedatbytheHigh
Courtcannotbesustained.Thus,asthecertifiedcopyoftheannualreturnisapublic
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document,AppellantwasheldtobeasvalidlyresignedfromtheDirectorshipofthe
Companyandhencecannotbeheldresponsibleforthedishonourofthecheques
issuedintheyear2004.
[C] Aneeta Hada v. Godfather Travels and Tours

Pvt. Ltd.[lxx]
Facts:TheAppellant,AnitaHada,anauthorisedsignatoryofInternationalTravels
Limited,acompanyregisteredundertheCompaniesAct,1956,issuedachequedated
17thJanuary,2011forasumofRs.5,10,000/infavouroftheRespondent,namely,
M/s.GodfatherTravels&ToursPrivateLimited,whichwasdishonouredasa
consequenceofwhichthesaidRespondentinitiatedcriminalactionbyfilinga
complaintbeforetheconcernedJudicialMagistrateunderSection138oftheAct.Inthe
complaintpetition,theCompanywasnotarrayedasanaccused.However,the
MagistratetookcognizanceoftheoffenceagainsttheaccusedAppellant.Being
aggrievedbythesaidorder,sheinvokedthejurisdictionoftheHighCourtunder
Section482oftheCodeofCriminalProcedureforquashingofthecriminalproceeding.
DecisionoftheHighCourt:TheHighCourt,consideringthescopeofSections138
and139oftheActandvariousotherfactors,opinedthatthegroundurgedwouldbein
thesphereofdefenceoftheaccusedandwouldnotstrengthentheedificeforquashing
oftheproceeding.WhileassailingthesaidorderbeforethetwoJudgeBench,the
substratumofargumentwasthatastheCompanywasnotarrayedasanaccused,the
legalfictioncreatedbythelegislatureinSection141oftheActwouldnotgetattracted.
Itwascanvassedthatoncealegalfictioniscreatedbythestatutoryprovisionagainst
theCompanyaswellasthepersonresponsiblefortheactsoftheCompany,the
conditionsprecedentengraftedundersuchdeemingprovisionsaretobetotally
satisfiedandonesuchconditionisimpleadmentoftheprincipaloffender.S.B.Sinha,J.
dissectedtheanatomyofSections138and141oftheAct.V.S.SirpurkarJ.,referringto
Section141(2)oftheAct,opinedthateveniftheliabilityagainsttheAppellantis
vicariousonaccountoftheoffencehavingallegedtohavebeencommittedbyM/s.
InternationalTravels,itwouldbepresumedthattheAppellanthadalsocommittedthe
offenceandnonarrayingofM/s.InternationalTravelsasanaccusedwouldbeofno
consequence.
Judgment:Section141ofAct1884,dealswithoffencesbycompanies.Ifaperson
whocommittedoffenceunderSection138ofAct1881,wasacompany,thenCompany
aswellaseverypersoninchargeofandresponsibletocompanyforconductof
businessofcompanyattimeofcommissionofoffencewasdeemedtobeguiltyof
offence.Section139ofAct1881,createdapresumptioninfavourofholder.Section
140ofAct1881,stipulateddefencewhichmightnotbeallowedinaprosecutionunder
Section138ofAct1881.Thus,therewasadeemedfictioninrelationtocriminal
liability,presumptioninfavourofholder,anddenialofadefenceinrespectofcertain
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aspects.Section141ofAct1881,usedtermpersonandreferredittoacompany.
Companywasajuristicperson.Conceptofcorporatecriminalliabilitywasattractedtoa
corporationandcompany.Companycouldhavecriminalliabilityand,ifagroupof
personsthatguidedbusinessofcompanieshadcriminalintentthatwouldbeimputed
tobodycorporate.WordsaswellascompanyappearinginSection141ofAct1881,
madeitclearthat,whencompanycouldbeprosecuted,thenonlypersonsmentionedin
othercategoriescouldbevicariouslyliableforoffencesubjecttoavermentsinPetition
andproofthereof.Hence,formaintainingprosecutionunderSection141ofAct1881,
arraigningofacompanyasanAccusedwasimperative.Othercategoriesofoffenders
couldonlybebroughtindragnetontouchstoneofvicariousliabilitybecausesamehad
beenstipulatedinprovisionitself.
[D] A.K.Singhania v. Gujarat State Fertilizer

Company Ltd. and Anr.[lxxi]
Facts:Theaccused,EsslonSyntheticsLtd.,isaLimitedCompanyregisteredunderthe
CompaniesAct,1956.TheaccusedNo.1,A.K.Singhania,isManagingDirectorand
accusedNo.2,VikramPrakash,isDeputyManagingDirectorofEsslonSyntheticsLtd.
Allthebusinessandfinancialaffairsoftheaccusedcompanyaredecided,organized,
administeredbytheManagingDirectorandDeputyManagingDirector,Chairman,
WholeTimeDirector,andFinanceDirectorwithconsultationofotherDirectors.So
accusedNos.1to12andaccusedNo.13arealsoresponsibleforallthetransactions
andbusinessaffairsdoneonbehalfoftheCompanyandareresponsibleforallthe
financialaffairsandadministrationoftheCompany.Severalcomplaintswerefiledby
GujaratStateFertilizerCompanyagainstEsslonSyntheticsLtd.,itsChairman,
ManagingDirectorandotherDirectorsincludingaforesaidA.K.SinghaniaandVikram
PrakashallegingcommissionofanoffenceunderSection138.
DecisionbytheLowerCourt:Takingintoaccounttheallegationsmadeinthe
complaints,thelearnedMagistratetookcognizanceoftheoffence,issuedprocessto
theaccusedaforesaidbesidesotheraccusedtofacetrialforcommissionoftheoffence
underSection138oftheAct.VikramPrakash,aggrievedbytheorderissuing
summonstofacetrialunderSection138oftheActindifferentcomplaints,filed
applicationsunderSection482oftheCodeofCriminalProcedureforquashingthe
ordertakingcognizanceandissuingprocess.TheHighCourt,byitscommonorder
dated,January20,2012allowedalltheapplicationsandquashedhisprosecution.It
heldthatonthegroundthatapplicantwasnonExecutiveDirectoroftheCompanyon
theboardofthecompany,whichisnotdisputedbythecomplainant,theapplicant
cannotbeprosecutedfortheoffenceunderSections138r/w141ofActandcannotbe
heldvicariouslyliablefortheoffenceallegedtohavebeencommittedbytheaccused
No.14company.
A.K.Singhaniaalso,aggrievedbytheorderissuingprocessunderSection138ofthe
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Act,filedseparateapplicationsforquashingtheentireprosecutionincludingthe
aforesaidorderunderSection482oftheCodeofCriminalProcedure.Allthe
applicationsfiledbyA.K.SinghaniaweretakentogetherbytheHighCourtfor
considerationandbytheimpugnedordertheapplicationsfiledbyhimhavebeen
dismissed.TheCourtheldthathe,inthecapacityofDirector,wasresponsiblefor
businessaffairsandhewasinchargeoftheCompany.Notonlythatbutnowhereitcan
besaidthathewasnonExecutiveDirector.GujaratStateFertilizerCompanyLtd.and
A.K.Singhania,aggrievedbythecommonorder,preferredspecialleavepetitionstothe
SupremeCourt.
Judgment:WithrespecttoexecutiveandnonexecutiveDirectors,theapexcourtheld
thateverypersonwhoatthetimetheoffencewascommittedisinchargeofand
responsibletotheCompanyshallbedeemedtobeguiltyoftheoffenceunder
Section138oftheAct.InthecaseofoffencebyCompany,tobringitsDirectorswithin
themischiefofSection138oftheAct,itshallbenecessarytoallegethattheywerein
chargeofandresponsibletotheconductofthebusinessoftheCompany.Itis
necessaryingredientwhichwouldbesufficienttoproceedagainstsuchDirectors.If
readingofthecomplaintshowssubstanceofaccusationdisclosesnecessary
averments,thenthatwouldbesufficienttoproceedagainstsuchoftheDirectorsand
noparticularformisnecessary.However,itmaynotbenecessarytoallegeandprove
that,infact,suchoftheDirectorshaveanyspecificroleinrespectofthetransaction
leadingtoissuanceofcheque.Section141oftheActmakestheDirectorsincharge
andresponsibletoCompanyfortheconductofthebusinessoftheCompanywithin
themischiefofSection138oftheActandnotparticularbusinessforwhichthecheque
wasissued.
PART V:Conclusion
[A] RBI Guidelines: cheque-writing guidelines and
Impact of Dishonour
OneshouldchangehischequewritingbehaviourastheRBIsnewchequewritingGuideline
has become effective on and from the 1st July, 2010. Section 1.8 of the RBI Circular
DPSS.CO.CHD.No.1832/04.07.05/20092010[lxxii] dated February 22, 2010 specifically
dealsinProhibitingalterations/correctionsoncheques.
TheSectionisreproducedhereunder:
Prohibitingalterations/correctionsoncheques:Nochanges/correctionsshouldbecarried
outonthecheques(otherthanfordatevalidationpurposes,ifrequired).Foranychangein
thepayeesname,courtesyamount(amountinfigures)orlegalamount(amountinwords),
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etc.,freshchequeformsshouldbeusedbycustomers.Thiswouldhelpbankstoidentifyand
controlfraudulentalterations.
As such, the bank will return or reject a cheque having alteration on: (i) Payees name, (ii)
Amountinfiguresand(iii)Amountinwords.However,intermsofthesaidSection,thedate
alterationwillbeallowed.
[B] Impact of the new guideline

One must be very careful in writing a cheque, as any casual mistake will result in
dishonouringofthechequebythebankandsuchdishonourwillresultinloss,bothinterms
oftimeandmoney.
In the case of the dishonouring of a cheque under certain circumstances, Section 138
(Dishonourofcheque for insufficiency of funds in the accounts etc.) oftheActisattracted.
TheSectionprovidesforpunishmenttothedrawerofthechequebeingdishonouredunder
thecircumstancesspecifiedintheSection.
Nowthisistoseewhetherthedishonouringofachequebythebankinviewoftheaforesaid
guidelinealsoattractsSection138ornot.
[C] Summary of the Learning

It is a settled law that not all the directors of a company are liable in case of dishonour of
cheques. The onus is on the complainant to prove that a director is responsible for the
conduct of the affairs of the company in order to hold him liable and in the absence of a
specific averment in the complaint no director is liable under section 138 of the Negotiable
InstrumentsAct,1881unlessheisaManagingDirectororJointManagingDirectororheisa
signatorytotheCheque.Thedirectorscanestablishthefactthattheyarenotguiltyeitherby
undergoing the trial before the Magistrate Court in which the complaint is filed or by
approachingtheHighCourtundersection482attheearliestbeforethecommencementof
the trial in order to quash the proceedings against him as he is no way connected to the
proceedingsinitiatedbeforetheMagistrateCourtundersection138readwithSection141of
theNegotiableInstrumentsAct,1881.
EditedbyKanchiKaushik
[i]R.NChaudhary,LawsRelatingtoCheques:NewHorizons,DigitalSignature,Echeques
andDishonourofChequesasPenalOffence,Deep&DeepPublicationsPvt.Ltd.,New
Delhi,atpp.1.
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[ii]http://www.infosys.com/finacle/solutions/thoughtpapers/Documents/Evolutionofcheques
andpaperbasedclearinginIndia.pdf,lastvisitedon26thMarch,at5:05p.m.,IST.
[iii]HenryDunningMacleod,TheTheoryandPracticeofBanking,Ed.Second,Vol.I,1866,
atpp.120.
[iv]Ibid.
[v]http://www.rbi.org.in/scripts/PublicationsView.aspx?id=155,lastvisitedon26thMarch,at
7:35p.m.,IST.
[vi]Ibid.
[vii]Ibid.
[viii]KanhaiyaSingh&VinayDutta,CommercialBankManagement,McGrawHillEducation
(India)Pvt.Ltd.,NewDelhi,atpp.140.
[ix]Ibid.
[x]StephenQuinns&WilliamRoberds,TheEvolutionoftheCheckasaMeansofPayment:
AHistoricalSurvey,EconomicReview,FederalReserveBankofAtlanta,Number4,2008,at
pp.1.
[xi]Section6,NegotiableInstrumentsAct,1882ofIndia.
[xii]Section73,BillsofExchangeAct,1882ofU.K.
[xiii]Section165(1),BillsofExchangeAct,1985,Canada.
[xiv]Article3104,UniformCivilCode.
[xv]CorpusJurisSecundum,Volume10,atpp.118.
[xvi]Section6,NegotiableInstrumentsAct,1882.
[xvii]M.LTannan,Banking:LawandPracticeinIndia,Ed.22nd,2010,LexisNexis
ButterworthsWadhwa,Nagpur,atpp.20.
[xviii]RevisedbyJusticeRanganathMishra,Bhashyam&Adigas:TheNegotiable
InstrumentsAct,BharatLawHouse,NewDelhi,atpp.117.
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[xix]RamSarupv.Hardeo,AIR1928All68.
[xx]AnilKumarSawhneyv.GulshanRai,(1994)79CompCas150(SC)
[xxi]Section84,NegotiableInstrumentsAct,1881.
[xxii]Section123131A,NegotiableInstrumentsAct,1882.
[xxiii]S.P.SenGupta,DishonourofChequeAndElectronicBanking:LawandPractice
relatingtoElectronicFundsTransfer,KamalLawHouse,Kolkata,atpp.429.
[xxiv]SupraatNote16,pp.2321
[xxv]Ibid.
[xxvi]Section123,NegotiableInstrumentsAct,1882.
[xxvii]MarkHapgoodQC,PagetsLawofBanking,IndianReprint,Ed.12th,LexisNexis
Butterworths,atpp.261.
[xxviii]Section2(r),InformationTechnologyAct,2000.
[xxix]SupraatNote23,atpp.933.
[xxx]MargaretTan,EPayments:TheDigitalExchange,SingaporeUniversityPress,NUS
Publishing,atpp.76
[xxxi]Ibid.
[xxxii]Section4,Banking,PublicFinancialInstitutionsandNegotiableInstrumentsLaws
(Amendment)Act,1988.
[xxxiii]SupraatNote23,atpp.13.
[xxxiv]SupraatNote18,atpp.718.
[xxxv]RajinderSteelsLtd.v.UnionofIndia,2000CriLJ625(Del).
[xxxvi]Section3,RepealingandAmendingAct,2001.
[xxxvii]http://pib.nic.in/archieve/lreleng/lyr2002/rjan2002/23012002/r230120022.html,last
th
23/30
8/9/2016
visitedon26thMarch,at4:35p.m.,IST.
[xxxviii]M.MohanKrishnav.UnionofIndia,1996CriLJ(AP)636.
[xxxix]MayuriPulseMillsAndOrs.v.UnionOfIndia,(1994)96BomLR953.
[xl]S.N.Gupta,DishonourofCheques:LiabilityCivil&Criminal,Ed.Third,UniversalLaw
PublishingCo.Pvt.Ltd,atpp.286.
[xli]MSRLeathersv.S.Palaniappan&Anr,(2013)10SCC568
[xlii]Section98,TheNegotiableInstrumentsAct,1881.
[xliii]MathiasPackagingLimitedandOrs.v.HindalcoIndustriesLimited,2000CriLJ4836.
[xliv]PatriMaheshS/olateGanapathiv.StateofAndhraPradesh,2012(2)ALD(Cri)803.
[xlv]Sankaralingamv.UnionofIndia,(1996)86ComCas709(Mad).
[xlvi]BryanA.Garner,BlacksLawDictionary,Ed.Eight,atpp.357.
[xlvii]SupraatNote23,atpp.115.
[xlviii]M.S.Parthasarathy,ChequesinLawandPractice,UniversalLawPublishingPvt.Ltd.,
atpp.89.
[xlix]FaridulAlamv.TheStateandAnr.,(2007)27BLD140.
[l]R.Jayalaskhmiv.Rashida,1993BankJ378(Mad).
[li]Rajanv.Shrafudheen,III(2003)BC263(Ker)
[lii]BimalKumarv.StateofUttarPradesh,2006CriLJ2611(All).
[liii]G.Venkataramanaiahv.SillakolluVenkateswarlu,(1998)97CompCas13.
[liv]Ibid.
[lv]N.E.P.C.MICONLtd.v.MagmaLeasingLtd.,AIR1999SC1952.
[lvi]VinodThakurv.ZaheerSiddiqui,I(2002)BC223(Bom).
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[lvii]D.PurshotamaReddyv.Sateesh,(2008)8SCC503.
[lviii]SupraatNote23,atpp.18.
[lix]StateofRajashthanv.KalyanSundaramCementIndustries,(1996)86CompCas433.
[lx]AVeerbhadraRaovs.GovernmentofA.P.,1994BankJ652.
[lxi]K.Kumarvs.BapsonsFootWear,(1995)83CompCas172(Mad.).
[lxii]G.Bukkumaniv.K.Rajendran,(2002)1BC316(Mad).
[lxiii]KodyElecotLtd.vs.DownTownHospital,(1991)71CompCas125(Mad).
[lxiv]G.PSahi,VicariousLiabilityOfDirectorsAndOfficersOnBouncingOfCheques.
[lxv]CompaniesAct,1956.
[lxvi]S.M.S.PharmaceuticalsLtd.v.NeetaBhallaandAnr.,[(2005)8SCC89]
[lxvii]BryanA.Garner,BlacksLawDictionary,Ed.Eight,atpp.1023.
[lxviii]NationalSmallIndustriesCorp.Ltd.v.HarmeetSinghPaintal&Anr.,(2010)2SCR
805
[lxix]AnitaMalhotrav.ApparelExportPromotionCouncilandAnr.,AIR2012SC31.
[lxx]AneetaHadav.GodfatherTravelsandToursPvt.Ltd.,AIR2012SC2795.
[lxxi]A.K.Singhaniav.GujaratStateFertilizerCompanyLtd.andAnr.,2013(12)SCALE673.
[lxxii]http://rbidocs.rbi.org.in/rdocs/notification/PDFs/CBCF220210F.pdf,lastvisitedon27th
Match,2014,at2:30p.m.,IST.

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Dishonour of Cheques - Director's Liability in Case of Dishonour - Academike

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Dishonour of Cheques: Directors

PART I: Cheques-Position of Law

[B] De nition of Cheque

[C] Requirements of a Cheque vis--vis Bill of

[D] Types of Cheques

PART II: Dishonour of a Cheques- Section

[A] Object of incorporation of Chapter XVII in

[B] The Amendment Act of 2001

[C] Constitutionality of Laws Under Chapter XVII

b. Laws relating to dishonour of cheques, if ultra vires:

[D] Ingredients of the Offence under Section 138

[E] Grounds for Dishonour of Cheque

Exceeds arrangement: The endorsement exceeds arrangement denotes nothing but

[F] Civil Liability in Dishonour of Cheque

[G] Criminal Liability in Dishonour of Cheques

a. Exceptions to Criminal Liability

b. Mens Rea Not Essential

b. Mens Rea Not Essential

c. Defence that may be taken

PART III: Section 141: Offence by

[A] Companies Act read conjunctively with the

[B] Director and His Position

[C] Vicarious Liability

[B] Anita Malhotra v. Apparel Export Promotion

[C] Aneeta Hada v. Godfather Travels and Tours

[D] A.K.Singhania v. Gujarat State Fertilizer

[B] Impact of the new guideline

[C] Summary of the Learning

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