-DR.

RAM MAHOHAR LOHIYA NATIONAL LAW UNIVERSITY-BANKING& INSURANCE LAW FINAL DRAFT-

DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

LUCKNOW

ACADEMIC SESSION 2017-18

FINAL DRAFT ON:

“Dishonour of Cheques: Director’s Liability in case of Dishonour”

Under the guidance of: Submitted by:

Dr. Aparna Singh Parimal Bhatt

(Assistant Professor) 150101095

Department of Law, Section B
Dr. RML National Law University,
Lucknow

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ACKNOWLEDGEMENT

This draft would not have been possible without the kind support and help of many
individuals. I would like to extend my sincere thanks to all of them. I are highly indebted to
Dr. Aparna Singh for her guidance and constant supervision. I are grateful to my colleagues
who helped me out in its development and all the other people who have willingly helped me
out with their abilities.

Yours sincerely,

Parimal Bhatt

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Table of Contents
ACKNOWLEDGEMENT ...................................................................................................................... 2
PART I: Cheques-Position of Law ......................................................................................................... 4
[A] Origin of Cheques as System of Payment .................................................................................... 4
[B] Definition of Cheque ................................................................................................................... 5
[C] Requirements of a Cheque vis-à-vis Bill of Exchange ................................................................. 6
[D] Types of Cheques ......................................................................................................................... 6
PART II: Dishonour of a Cheques- Section 138..................................................................................... 7
[A] Object of incorporation of Chapter XVII in Negotiable Instruments Act .................................... 8
[B] The Amendment Act of 2001 ...................................................................................................... 9
[C] Constitutionality of Laws Under Chapter XVII of the Act .......................................................... 9
[D] Ingredients of the Offence under Section 138 ............................................................................ 11
[E] Grounds for Dishonour of Cheque ............................................................................................. 12
[G] Criminal Liability in Dishonour of Cheques .............................................................................. 15
PART III: Section 141: Offence by Companies (Dishonour of Cheque) ............................................. 17
[A] Companies Act read conjunctively with the N.I Act .................................................................. 17
[B] Director and His Position .......................................................................................................... 18
[C] Vicarious Liability ...................................................................................................................... 18
PARTIV: Cases..................................................................................................................................... 19
[A] National Small Industries Corp. Ltd. Versus Harmeet Singh Paintal & Anr. ............................ 19
[B] Anita Malhotra v. Apparel Export Promotion Council and Anr................................................ 21
[C] Aneeta Hada v. Godfather Travels and Tours Pvt. Ltd. ............................................................. 22
[D] A.K.Singhania v. Gujarat State Fertilizer Company Ltd. and Anr. ............................................ 23
PART V:Conclusion ............................................................................................................................. 25
[A] RBI Guidelines: cheque-writing guidelines and Impact of Dishonour ...................................... 25
[B] Impact of the new guideline ...................................................................................................... 25
[C] Summary of the Learning ........................................................................................................... 26

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PART I: Cheques-Position of Law

[A] Origin of Cheques as System of Payment
The word cheque has been derived from the Persian word ‘check’, a written vow to pay for
goods when they were delivered to avoid money having to be transported across dangerous
terrain.1 During the 1st century AD, banks in Persia and surrounding regions issued letters of
credit known as Sakks, which are believed to have been the basis of the modern cheque.2

Up till about 1770s, bankers adhered to the original method of issuing promissory notes,
payable to the bearer on demand.3 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 giving
them their promissory notes payable to bearer on demand, they wrote down the value of the
value of the bill to the credit of their customers in their books. They then gave them books
containing a number of printed forms. These forms were called “cheques”, and were bills of
exchange, drawn upon the banker, payable to bearer on demand.4

Payment instruments and mechanisms have a very long history in India. The earliest payment
instruments known to have been used in India were coins.5 An instrument in use during the
Muslim period was the “Pay order”. Pay orders were issued from the Royal Treasury on one
of the District or Provincial treasuries. They were called Barattes and were akin to present
day drafts or cheques.6

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
stock bank established in 1770.7 The Calcutta Clearing Banks’ Association, which was the
largest bankers’ association at that time, adopted clearing house rules in 1938.8 After the
setting up of Reserve Bank of India in 1935, the Clearing Houses in the Presidency towns
were taken over by the Reserve Bank of India.9

1
R.N Chaudhary, Laws Relating to Cheques: New Horizons, Digital Signature, E-cheques and Dishonour of
Cheques as Penal Offence, Deep & Deep Publications Pvt. Ltd., New Delhi, at pp. 1
2
http://www.infosys.com/finacle/solutions/thought-papers/Documents/Evolution-of-cheques-and-paper-based-
clearing-in-India.pdf,
3
Henry Dunning Macleod, The Theory and Practice of Banking, Ed. Second, Vol. I, 1866, at pp. 120.
4
Ibid.
5
http://www.rbi.org.in/scripts/PublicationsView.aspx?id=155,
6
Ibid.
7
Ibid.
8
Kanhaiya Singh & Vinay Dutta, Commercial Bank Management, McGraw Hill Education (India) Pvt. Ltd.,
New Delhi, at pp. 140.
9
Ibid.

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Over the centuries, innovations increased the sophistication of cheques. This sophistication is
perhaps surprising given the cheque’s apparently simple nature: a piece of paper with a few
“magic words” such as “pay to the order of” written across it.10

[B] Definition of Cheque

The term ‘cheque’ has been defined under Section 6 of the Indian Negotiable Instruments
Act, 1882 (the ‘Act’). According to this section, a cheque is a bill of exchange drawn on a
specified banker not expressed to payable otherwise than on demand.

Section 73 of the British Bills of Exchange Act, 1882, embodies a similar definition of
cheque. It is ‘a bill of exchange drawn by a banker payable on demand’.

The same words have been used to define ‘cheque’ in Section 165 (1) of the Canadian
Statute.

The Uniform Civil Code, published in 1952 defines ‘check’ as:

a draft, other than a documentary draft, payable on demand and drawn on a bank; or

a cashier’s check or teller’s check.

An instrument may be a check even though it is described on its face by another term, such as
“money order.” Inherent in its definition, a cheque is a promise to pay which can be taken by
the bearer or indorsee and cashed or converted on demand into federal reserve notes equaling
the value stated on the cheque.

Cheque is a species of Bills of Exchange. On a conjoint reading of Section 5 of the Act which
defines Bills of Exchange and Section 6, a more detailed definition of ‘cheque’ can be found
to be:

“A cheque is an unconditional order in writing, signed by the person giving it, requiring the
bank to whom it is addressed to pay on demand a certain sums of money to, or to the order of,
a specified person or to bearer”.11

10
M.L Tannan, Banking: Law and Practice in India, Ed. 22nd, 2010, LexisNexis Butterworths Wadhwa,
Nagpur, at pp. 20.
11
Revised by Justice Ranganath Mishra, Bhashyam & Adiga’s: The Negotiable Instruments Act, Bharat Law
House, New Delhi, at pp. 117.

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

While a cheque has many features in common with bills and is in many respects governed by
the same rules and principles and is often taken to be included in the general term ‘bill’ in
enactments, it has several distinct characteristics that differs from bills.

A cheque must always be drawn on bank or a banker, and is payable immediately on demand
without any days of grace. A bill of exchange is a negotiable instrument in writing containing
an instruction to a third party to pay a sum of money at a designated future date or on
demand. A cheque, on the other hand, is a bill of exchange drawn on a bank by the holder of
an account payable on demand. Thus, a cheque under section 6 of the Act is also a bill of
exchange but it is drawn on a banker and is payable on demand. It is, thus, obvious that even
though a bill of exchange is drawn on a banker, if it is not payable on demand, it is not a
cheque.12

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, who
cannot, therefore, sue the bank on dishonour.

A cheque is supposed to be drawn upon funds in the hands of the banker.

The drawer of a cheque is not discharged by failure of the holder to present it in due time
unless the drawer has sustained damage by delay.

A cheque is not noted or protested for dishonour and is generally inland.

In respect of crossed cheques, there is protection given to the baker which is peculiar to these
instruments.

[D] Types of Cheques

Bearer Cheque: A cheque which has no named payee and made ‘payable to .. or bearer’ is
called a bearer cheque. If a bearer cheque is lost, the finder can cash it, unless the bank is
notified in time to stop the payment.

12
S.P. Sen Gupta, Dishonour of Cheque And Electronic Banking: Law and Practice relating to Electronic Funds
Transfer, Kamal Law House, Kolkata, at pp. 429.

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Order Cheque: A cheque, payable to the payee or as ordered by him through his endorsement,
is called an order cheque.13

Uncrossed/ Open Cheque: A cheque which does not have a crossing and therefore is payable
on demand at the counters of the bank and branch on whom it is drawn.14

Crossed Cheque: When a cheque bears across its face an addition of the words “and
company” or any abbreviation thereof, between two parallel transverse lines, or of two
parallel transverse lines simply, either with or without the words “Not negotiable”, that
addition shall be deemed crossing and the cheque shall be deemed to be crossed.

Ante-dated Cheque: A cheque which bears a date before the date of issue is an ante-dated
cheque.

Post-dated Cheque: A post-dated cheque is an instrument which bears a date later than the
date of issue.15

Stale Cheque: If a cheque is presented for payment after six months from the date of issue of
the cheque, it is called a stale cheque. A stale cheque is not honored by the bank.

PART II: Dishonour of a Cheques- Section 138

The present day economies of the world which are functioning beyond the international
boundaries are relying to a very great extent on the mechanism of the negotiable instruments
such as cheques and bank drafts. Since business activities have increased, the attempt to
commit crimes and indulge in activities for making easy money have also increased.

Chapter XVII Of Penalties in Case of Dishonour of Certain Cheques for Insufficiency of

Funds in the Accounts] containing Sections 138 to 142 was inserted by the Banking, Public
Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988. The
operative portion of Chapter XVII contained in Section 138 [Dishonour of cheque for
insufficiency, etc., of funds in the account] came into effect from April 1, 1989.

13
Mark Hapgood QC, Paget’s Law of Banking, Indian Reprint, Ed. 12th, LexisNexis Butterworths, at pp. 261.
14
Margaret Tan, E-Payments: The Digital Exchange, Singapore University Press, NUS Publishing, at pp. 76
15
S.N. Gupta, Dishonour of Cheques: Liability Civil & Criminal, Ed. Third, Universal Law Publishing Co. Pvt.
Ltd, at pp. 286.

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[A] Object of incorporation of Chapter XVII in Negotiable Instruments Act

The laws enacted in Chapter XVII exclusively deal with penal consequences which the
drawer of a cheque will face in the event of dishonour of the cheque issued by him.

Earlier to the enactment of this Chapter, the aggrieved person was without any remedy.
Before 14th February, 1956, there was a chapter, being Chapter XVII in the Act. It contained
two sections- Section 138 and 139. Section 138 related to ‘power to appoint notaries public”
and Section 139 dealt with ‘power to make rules for notaries public’. But with the
introduction of the Notaries Act, 1952, both sections 139 and 139 became redundant.

Chapter XVII was reintroduced by the Banking, Public Financial Institutions and Negotiable
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. This new chapter contained five sections, namely, sections 139, 139, 140,141 and
142. It was incorporate with a specified object of making a special provision by
incorporating a strict liability so far as the cheque, as a negotiable instrument, is concerned.

To safeguard the honest and genuine bank customers, the Amendment Act directed that the
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.

With this amendment, the Negotiable Instruments Act acquired a double character. Earlier it
was an enactment falling exclusively under civil law confined to civil liability, henceforth; it
will also have a penal provision.

The provision does not punish the act of taking loan but it penalizes a person who proposed
to repay the loan by issuance of a cheque and the cheque is not encashed due to shortage of
funds in the account.16

These provisions have been incorporated in the larger public interest. There are inbuilt
safeguards for the honest drawers such as:

The cheque has been presented to the bank within a period of six months from the date on
which it is drawn or within the period of its validity, whichever is earlier;

16
M.S. Parthasarathy, Cheques in Law and Practice, Universal Law Publishing Pvt. Ltd., at pp. 89.

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The payee or the holder in due course of the cheque, as the case may be, makes a demand for
the payment of the said amount of money by giving a notice, in writing to the drawer of the
cheque, within fifteen days of the receipt of information by him from the bank regarding the
return of the cheque as unpaid; and

The drawer of such cheque fails to make the payment of the said amount of money to the
payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of
the receipt of the said notice.

[B] The Amendment Act of 2001

After the addition of Section 138-142 in the Act, the Parliament again passed an Act known
as “Repealing and Amending Act, 2001 (Act 30 of 2001)” with effect from 3-9-2001. The
said act received the assent of the President on 3-9-2001 and was published in Gazette of
India Extra. As per the said Act 30 of 2001, a number of Central Acts were repealed in whole
or in part. The Act, “Banking, Public Financial Institutions and Negotiable Instruments Laws
(Amendment) Act, 1988 Act 66 of 1988)” was wholly repealed by “Repealing and Amending
Act, 2001 (Act 30 of 2001)” as per Section 3 and the First Schedule of the said Act.

However, the provision providing for punishment of one year imprisonment for bouncing of
cheques continues to be in the statute book. Only the 1988 amendment in the principal Act of
1881 has been repealed. Accordingly, the dishonour of cheques for insufficiency, etc. of
funds in the account continues to be an offence under Sections 138 to 142 (both inclusive) of
the Negotiable Instruments Act, 1881. Section 6A of the General Clauses Act, 1897 makes
the position amply clear.

The clarification was given after the ‘Bounced Cheque Victims Grievances Forum’ brought
to 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, 1988 by the Repealing and Amending Act, 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
passed by a State Legislature alone by virtue of Article 246 (3) read with Entry 30 of List II

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of the Seventh Schedule of the Constitution. In the circumstance it is of utmost importance to

decide whether section 138 of the Act can be equated with money-lending or activities
concerned with money-lending. This very question fell for decision in the case of M. Mohan
Krishna v. Union of India where it was held by Justice M.N. Rao that:

“The nature of the offence created by section 138 of the Act although, incidentally, affects
the relations between a debtor and a creditor, in its true nature and character – pith and
substance – it does not encompass money-lending and money-lenders envisaged by entry 30
of List II. It does not concern, in general, either the business of money-lending or persons
who carry on the business of money-lending. A statutory offence is created by section 138 of
the Act when a person issues a cheque for the discharge in whole or in part of any debt or
other liability and if it is returned by the bank unpaid either because the amount of money
standing to the credit of the account of the drawer is insufficient or the amount covered by the
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 money-lenders. The section concerns dishonour of cheques in certain
circumstances and the resultant consequences. Banking and cheques (entries 45 and 46 of
List I) are thus primarily the matters covered by section 138. Although, incidentally, the
impugned legislation trenches upon the debtor and creditor relationship, which is but an
aspect of money-lending and money-lenders, it cannot be said that in its true nature and
character, the legislation concerns money-lenders and money-lending.”

Section 138 to 142 of the Act are not ultra vires and Parliament had power and competence to
enact Chapter XVII containing Sections 138-142 under Entry 45 and 46 of List First of the
Seventh Schedule.

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

The laws enacted and incorporated in Chapter XVII of the Act are not violative of Articles 14
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 element

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of mens rea has been excluded in the larger public interest to curb the instances of
dishonouring of cheques and to lend greater credibility to the commercial transactions which
are vital for trade, business and industry in general and for internal business transactions in
particular.”

[D] Ingredients of the Offence under Section 138

To constitute an offence under Section 138 of the Act, the following ingredients needs to be
fulfilled:

Cheque should have been issued for the discharge, in whole or part, of any debt or other
liability.

The cheque should have been presented within the period of six months or within the period
of its validity, whichever is earlier. Note: The cheque may be presented any number of times
for collection within its validity.

The payee or the holder in due course should have issued a notice in writing to the drawer
within thirty (fifteen prior to 2002 amendments) days of the receipt of information by him
from the bank regarding the return of the cheque as unpaid.

After the receipt of the said notice by the payee or the holder in due course, the drawer should
have failed to pay the cheque amount within fifteen days of the receipt of the said
notice.Notice: Notice of dishonour is unnecessary when the party entitled to notice cannot
after due search be found.

On non-payment of the amount due on the dishonoured cheque within fifteen days of the
receipt of the notice by the drawer, the complaint should have been filed within one month
from the date of expiry of the grace time of fifteen days, before a Metropolitan Magistrate or
not below the rank of a Judicial Magistrate of the first class. The cognizance of a complaint
may be taken by the Court after the prescribed period, if the complaint satisfies the Court that
he had sufficient cause for not making a complaint within such period.

The offence under the Act is compoundable (inserted by the 2002 Amendment).

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

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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
issuance of cheque.

[E] Grounds for Dishonour of Cheque

The Black’s Law Dictionary defines dishonour as: “An instrument is dishonoured when a
necessary or optional presentment is duly made and due acceptance or payment is refused, or
cannot be obtained within the prescribed time, or in case of bank collections, the instrument
is reasonably returned by the midnight deadline; or presentment is excused and the
instrument is not duly accepted or paid”.

The word “dishonour” has not been used in the statutes, though it is frequently used by the
judges and the jurists. The word “dishonour”, whenever used in the context of the provisions
contained in Chapter XVII of the Act, means return of the cheque unpaid by the bank, when
presented either at the counter or through a clearing Bank.

A banker may dishonour a cheque for various reasons and the reasons for such dishonour
normally appear in ‘return memo’, i.e., the communication slip attached to the dishonoured
cheque.

Some of these reasons are:

“Refer to Drawer”: This expression has been explained as “used while returning cheques for
want of funds in the drawer’s account, or because of service of a garnishee order”.In bank
parlance, it means that the cheque has been returned for want of funds in the account of the
drawer of the cheque. The endorsement ‘refer to drawer’ is an euphemistic way of informing
the payee that the drawer of the cheque has got no amount to his credit to honour the
cheque.[l] When the cheque is returned with a simple endorsement ‘refer to drawer’, the
proceedings cannot be quashed at the threshold.

Exceeds arrangement: The endorsement “exceeds arrangement” denotes nothing but the fact
that the cheque was given for an amount which was not credited in the account in which the
cheque has been drawn. In other words, the cheque amount is more than the balance amount
in that account. It amounts to insufficiency of fund.

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Account closed: An offence in terms of section 138 is committed even if the cheque is
returned on the ground of `closure of the account’.

Closing of the account after issuing a cheque by the account holder and return of the cheque
with the remarks “Account Closed” is not a solution or escape from the penal consequences
and a person is liable to be prosecuted for the offence after compliance with the other
requirements of law.

Dishonour of the cheque on the ground that the account is closed is the consequence of the
act of the drawer rendering his account to a cipher. If section 138 was held not 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 penal consequences of section
138.

Banker’s remark “account operation jointly, other Director’s signature required”: A clear
reading of section 138 leaves no doubt that the circumstances under which the dishonour of
cheque took place are required to be totally ignored. The law only takes a note of the fact that
the payment has not been forthcoming and it matters little that any 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 section as exceptions, not constituting an
offence. No such intention can be read into section 138 as none exists. Thus, the return of the
cheque unpaid with the advice “account operation jointly, other Director’s signature
required” amounts to dishonour of the chequewithin the meaning of section 138.

Material Alterations: Section 87 of the Act makes it clear that any material alteration of 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 same can be termed as
material alteration. In other words, when the date is changed, that too in an invalid cheque
after the expiry of the period of validity, it is certainly material alteration since it affects the
parties.

Some of the other reasons for returning the cheque that does not attract the provisions of
Section 138 are:

Account transferred to our …….. Branch

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Drawer deceased

Amount in words and figure differs

Not drawn on the Bank

Drawn on non-resident account. Form A. 7(c) approved by Reserve Bank of India required

Revenue stamp required

Alteration date/ figure/ words requires drawers full signature

Multilated

Crossed account payee only

Payment stopped by the drawer

Payees indorsement incomplete/required

Contain extraneous matter

Collecting banker’s confirmation requires clearing bank’s guarantee

Crossed, please present through a bank

Crossed to two banks.

[F] Civil Liability in Dishonour of Cheque

Generally, in case of dishonour of cheque, the payee or holder in due course, as the case may
be, has two remedies:

To file a civil suit

To bring a criminal prosecution under Section 138’

A civil suit for recovery of money as well as a complaint under Section 138 is maintainable.
Civil liability of dishonour of cheque is not taken away or curtailed because of incorporation
of Chapter XVII in the Act. Note

Mere launching of a prosecution under Section 138 or even obtaining conviction under
Section 138 against the drawer would not prevent the complainant from taking a civil action

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for recovery of the cheque amount or any part of it. It would not offend the rule against
double jeopardy. The Supreme Court has held that pendency of the criminal matters would
not be an impediment to the proceedings with the civil suits. Both remedies may be
simultaneously possible.

[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
prosecution under the general for the offence of ‘cheating’ is maintainable. The offence under
S.138 of the Act and S.420 of the IPC are different in nature, therefore conviction of offence
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 post-dated
cheque, he impliedly represents to the payee that in the ordinary course of events, the cheque
on its presentation to the bank would be met. In such a circumstance, even with the
introduction of S.138 of the Act, prosecution under S.420 IPC is maintainable if dishonest
intention at the time of the issuance of the cheque is established.

A criminal liability is provided under section 138 of the Act, which provides imprisonment
for two years or with fine which may extend to twice the amount of the cheque, or with both.

In case of dishonour of cheque the drawer of it may be prosecuted under sections 417 and
420 of the Indian Penal Code, 1960 (IPC). However, it all depends on the circumstances of
each case. Every dishonour of cheque is not cheating.

In A Veerbhadra Rao vs. Government of A.P., it has been held by the Andhra Pradesh High
Court that where the accused issues a post-dated cheque with knowledge that the funds in his
account are insufficient and such cheque would be dishonoured; he commits offence of
cheating under section 420 of IPC.

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 cheque
gets dishonoured.

a. Exceptions to Criminal Liability

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Cheque issued in Discharge of Liability: It is must that the cheque which is given should be
in discharge, in whole or in part of any debt or other liability of the drawer towards the payee.

In K. Kumar vs. Bapsons Foot Wear, a complaint was filed for the dishonour of a cheque, 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 requirement for
an offence under section 138 of the Act that the cheque must be drawn for discharge in whole
or in part of any debt or other liability has not been fulfilled as according to the allegation in
the complaint the cheque was issued in the course of their business by the 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 maker of the
cheque is not liable for prosecution. If the cheque is given by way of gift or present and if it is
dishonoured by the bank, the maker of the cheque is not liable for prosecution. Unless the
two conditions set out in section 138 were satisfied, no criminal liability can be fastened.

b. Mens Rea Not Essential

Section 138 excludes mens rea by creating a strict liability, as is explicit from the words
“such person shall be deemed to have committed an offence”. The returning of the cheque by
the bank for one of the two reasons stated in the section is the necessary condition creating
strict liability. If the cheque is dishonoured on any other ground, the offence is not made out.
The offence under Section 138 carries its own statutory requirements excluding the
application of the doctrine of mens rea.

c. Defence that may be taken

If the matter is examined critically, then the following may be a set of defence that may be
taken are as follows[lxiii]:-

Absence of a legally enforceable debt or liability.

Cheque was not returned for the reasons constituting an offence.

Complaint is not as per time period provided in sections 138 and 142, i.e., the plea of
limitation.

Absence of legal notice of 15 days.

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Lack of Jurisdiction.

No return of cheque to the payee.

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,
dishonour of a cheque by the bank causes incalculable loss, injury and inconvenience to the
payee and the entire credibility of the business transactions within and outside the country
suffers a serious setback. A company, being an artificial person created by law, acts through
its directors and officers who are responsible for the conduct of the business of the company.
A criminal liability on account of dishonour of cheque primarily falls on the drawer company
and is extended to officers of the Company. The normal rule in the cases involving criminal
liability is against vicarious liability, that is, no one is to be held criminally liable for an act of
another. This normal rule is, however, subject to exception on account of specific provision
being made in statutes extending liability to others. Section 141 of the Negotiable Instrument
Act,1881 (“NI Act”) regulates offences by companies.

When a cheque issued by a company is dishonoured. In addition to the Company, the

following persons are deemed to be guilty of the offence and shall be liable to be proceeded
against and punished:

Every person, who at the time the offence was committed, was in-charge of and was
responsible to the company for the conduct of the business of the company;

Any Director, Manager, Secretary or other officer of the company with whose consent and
connivance, the offence under section 138 had been committed; and

Any Director, Manager, Secretary or other officer of the company whose negligence resulted
in the offence under section 138 being committed by the company.

[A] Companies Act read conjunctively with the N.I Act

A visit to some provisions of Companies Act,1956 shall enable us to appreciate the role and
functions of certain key managerial personnel as engaged by companies.

A combined reading of section 5 and 291 of the Companies Act read with the definitions in
clauses (24), (26), (30), (31) and (45) of section 2 of that Act would show that the following

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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 the provisions
(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 is so specified, all the directors.

[B] Director and His Position

The word ‘director’ is defined in Section 2 (13) of the Companies Act, 1956 as: “Director
includes any person occupying the position of director, by whatever name called.”

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
depends upon respective roles assigned to the officers in a company. A company may have
Managers or Secretaries for different departments, which means, it may have more than one
Manager or Secretary. These officers may also be authorised to issue cheques under their
signatures with respect to affairs of their respective departments.

[C] Vicarious Liability

In the Black’s Law Dictionary, the term ‘vicarious liability’ is defined as:

“The imposition of liability on one person for the actionable conduct of another, based solely
on a relationship between the two persons. Indirect or imputed legal responsibility for acts of
another, for example, the liability of an employee for the acts of an employer, or, a principal
for torts and contracts of an agent.”

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Section 141 of the Act makes a natural person vicariously liable for the offence under section
138 of the Act committed by the company provided such person has some nexus with the
crime. The nexus of the person charged with the offence may arise in the following ways:

Either he is in-charge of, and was responsible to, the company;

The offence has been committed with the consent or connivance of, or is attributable to, or
due to any neglect on the part of, any director, manager secretary or other officer of the
company.

PARTIV: Cases
[A] National Small Industries Corp. Ltd. Versus Harmeet Singh Paintal & Anr.
Facts: National Small Industries Corporation Ltd. had filed 12 criminal complaints under
Section 138 read with Sections 141 and 142 of the Act against M/s Jay Rapid Roller Limited,
a Company incorporated under the Companies Act, its Managing Director – Shri Sukhbir
Singh Paintal, and its Director – Shri Harmeet Singh Paintal. It is the claim of the appellant
that so as to make the Managing Director and Director of 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 financing of bill integrated market support program.
It was also stated that the accused persons had issued cheques which were dishonored on
presentation against which the appellant had filed criminal complaints under the provisions of
the Act against all the respondents. It is their further case that all the accused persons
accepted their liability and delivered various cheques, which are the subject matter of the
present appeals.

DCM Financial Services Ltd., entered into a hire purchase agreement on 25.02.1996 with M/s
International Agro Allied Products Ltd. At the time of entering into the contract, the
Company handed over post-dated cheques to the appellant towards payment of monthly
hire/rental charges. Respondent No.1 – Dev Sarin was one of the Directors of the said
Company. The cheque issued by International Agro and Allied Products Ltd. in favour of the
appellant was duly presented for payment on 28.10.1998 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 under Section 138 of the Act informing them about the dis-
honouring of the cheque in question. Despite the service of the notice, the Company did not

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make the payment to the appellant. The appellant, on 11.01.1999, filed a complaint before the
Metropolitan Magistrate, New Delhi against respondent No.1 and others under Section 138
read with Section 141 of the Act.

Decision of the lower Court: By order dated 04.02.1999, the Metropolitan Magistrate, New
Delhi, after recording evidence, summoned the accused persons including respondent No.1.
Respondent No.1 filed an application before the Additional Sessions Judge, Delhi for
dropping of proceedings against him. By order dated 08.09.2004, the Metropolitan Magistrate
dismissed the said application. Aggrieved by the said order, 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 averments against respondent No.1 are
unspecific and general and no particular role is assigned to the appellant, quashed the
summoning order insofar as it concerned to him.

Judgment: As per the Judgment written by His Lordship Mr Justice P.Sathasivam J the
following principles of Law emerge from the Apex Court for fixing the liability of Directors
under Section 141 of the Act for prosecuting them for an action under under Section 138 of
the Act:

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 about the transaction.

Section 141 does not make all the Directors liable for the offence. The criminal liability can
be fastened only on those who, at the time of the commission of the offence, were in charge
of and were responsible for the conduct of the business of the company.

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 averred in the
complaint/petition, are made so as to make accused therein vicariously liable for offence
committed by company along with averments in the petition containing that accused were in-
charge of and responsible for the business of the company and by virtue of their position they
are liable to be proceeded with.

Vicarious liability on the part of a person must be pleaded and proved and not inferred.

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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 they are liable to be
proceeded with.

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.

The person sought to be made liable should be in charge of and responsible for the conduct of
the business of the company at the relevant time. This has to be averred as a fact as there is
no deemed liability of a Director in such cases.

[B] Anita Malhotra v. Apparel Export Promotion Council and Anr.

Facts: The Appellant, who was a non-executive Director on the Board of M/s Lapareil
Exports (P) Ltd. resigned from the Directorship on 31.08.1998. On 20.11.1998, recording the
resignation of the Appellant, the Company filed statutory Form 32 with the Registrar of
Companies. A notice dated 10.12.2004 was issued to the Appellant regarding dishonor of
alleged cheques under Section 138 of the Act by the Respondents. The Appellant, vide letter
dated 15.12.2004, replied to the said notice informing the Respondents that she had resigned
from the Directorship of the Company long back in 1998. By letter dated 17.12.2004, the
Respondents sought for certain information/documents from the Appellant relating to the
Company. On 18.12.2004, the appellant replied to the aforesaid letter reiterating that after her
resignation she had nothing to do with the Company and as such she was not in a position to
give the information sought for. The Respondents filed a complaint under Section 138 of the
Act being in the Court of ACMM, New Delhi against the Company arraying the Appellant as
accused No. 3. The Appellant filed a petition before the High Court of Delhi for quashing of
the complaint pending in the Court of ACMM, New Delhi.

Decision of the Lower Court: The High Court, by impugned judgment dated 16.12.2009,
dismissed the Appellant’s petition. Aggrieved by the said judgment, the Appellant filed an
appeal by way of special leave before the apex Court.

Judgment: There is a statutory requirement under Section 159 of the Companies Act, 1956
that every Company having a share capital shall have to file an annual return with the
Registrar of Companies which includes details of the existing Directors. Provisions of the
Companies Act require annual return to be made available by a Company for inspection
under Section 163 as well as Section 610 which entitles any person to inspect documents kept

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by the Registrar of Companies. The High Court committed an error in ignoring Section 74 of
the Indian Evidence Act, 1872. Sub-section (1) of Section 74 refers to public documents and
Sub-section (2) provides that public documents include “public records kept in any State of
private documents”. A conjoint reading of Sections 159, 163 and 610(3) of the Companies
Act, 1956 read with sub-section (2) of Section 74 of the Indian Evidence Act, 1872 makes it
clear that a certified copy of annual return is a public document and the contrary conclusion
arrived at by the High Court cannot be sustained. Thus, as the certified copy of the annual
return is a public document, Appellant was held to be as validly resigned from the
Directorship of the Company and hence cannot be held responsible for the dishonour of the
cheques issued in the year 2004.

[C] Aneeta Hada v. Godfather Travels and Tours Pvt. Ltd.

Facts: The Appellant, Anita Hada, an authorised signatory of International Travels Limited, a
company registered under the Companies Act, 1956, issued a cheque dated 17th January,
2011 for a sum of Rs. 5,10,000/- in favour of the Respondent, namely, M/s. Godfather
Travels & Tours Private Limited, which was dishonoured as a consequence of which the said
Respondent initiated criminal action by filing a complaint before the concerned Judicial
Magistrate under Section 138 of the Act. In the complaint petition, the Company was not
arrayed as an accused. However, the Magistrate took cognizance of the offence against the
accused Appellant. Being aggrieved by the said order, she invoked the jurisdiction of the
High Court under Section 482 of the Code of Criminal Procedure for quashing of the criminal
proceeding.

Decision of the High Court: The High Court, considering the scope of Sections 138 and 139
of the Act and various other factors, opined that the ground urged would be in the sphere of
defence of the accused and would not strengthen the edifice for quashing of the proceeding.
While assailing the said order before the two-Judge Bench, the substratum of argument was
that as the Company was not arrayed as an accused, the legal fiction created by the legislature
in Section 141 of the Act would not get attracted. It was canvassed that once a legal fiction is
created by the statutory provision against the Company as well as the person responsible for
the acts of the Company, the conditions precedent engrafted under such deeming provisions
are to be totally satisfied and one such condition is impleadment of the principal offender.
S.B. Sinha, J. dissected the anatomy of Sections 138 and 141 of the Act. V.S. Sirpurkar J.,
referring to Section 141(2) of the Act, opined that even if the liability against the Appellant is

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vicarious on account of the offence having alleged to have been committed by M/s.
International Travels, it would be presumed that the Appellant had also committed the
offence and non-arraying of M/s. International Travels as an accused would be of no
consequence.

Judgment: Section 141 of Act 1884, deals with offences by companies. If a person who
committed offence under Section 138 of Act 1881, was a company, then Company as well as
every person in charge of and responsible to company for conduct of business of company at
time of commission of offence was deemed to be guilty of offence. Section 139 of Act 1881,
created a presumption in favour of holder. Section 140 of Act 1881, stipulated defence which
might not be allowed in a prosecution under Section 138 of Act 1881. Thus, there was a
deemed fiction in relation to criminal liability, presumption in favour of holder, and denial of
a defence in respect of certain aspects. Section 141 of Act 1881, used term ‘person’ and
referred it to a company. Company was a juristic person. Concept of corporate criminal
liability was attracted to a corporation and company. Company could have criminal liability
and, if a group of persons that guided business of companies had criminal intent that would
be imputed to body corporate. Words “as well as company” appearing in Section 141 of Act
1881, made it clear that, when company could be prosecuted, then only persons mentioned in
other categories could be vicariously liable for offence subject to averments in Petition and
proof thereof. Hence, for maintaining prosecution under Section 141 of Act 1881, arraigning
of a company as an Accused was imperative. Other categories of offenders could only be
brought in dragnet on touchstone of vicarious liability because same had been stipulated in
provision itself.

[D] A.K.Singhania v. Gujarat State Fertilizer Company Ltd. and Anr.

Facts: The accused, Esslon Synthetics Ltd., is a Limited Company registered under the
Companies Act, 1956. The accused No. 1, A.K. Singhania, is Managing Director and accused
No. 2, Vikram Prakash, is Deputy Managing Director of Esslon Synthetics Ltd. All the
business and financial affairs of the accused company are decided, organized, administered
by the Managing Director and Deputy Managing Director, Chairman, Whole Time Director,
and Finance Director with consultation of other Directors. So accused Nos. 1 to 12 and
accused No. 13 are also responsible for all the transactions and business affairs done on
behalf of the Company and are responsible for all the financial affairs and administration of
the Company. Several complaints were filed by Gujarat State Fertilizer Company against

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Esslon Synthetics Ltd., its Chairman, Managing Director and other Directors including
aforesaid A.K. Singhania and Vikram Prakash alleging commission of an offence under
Section 138.

Decision by the Lower Court: Taking into account the allegations made in the complaints, the
learned Magistrate took cognizance of the offence, issued process to the accused aforesaid
besides other accused to face trial for commission of the offence under Section 138 of the
Act. Vikram Prakash, aggrieved by the order issuing summons to face trial under Section 138
of the Act in different complaints, filed applications under Section 482 of the Code of
Criminal Procedure for quashing the order taking cognizance and issuing process. The High
Court, by its common order dated, January 20, 2012 allowed all the applications and quashed
his prosecution. It held that on the ground that applicant was non-Executive Director of the
Company on the board of the company, which is not disputed by the complainant, the
applicant cannot be prosecuted for the offence under Sections 138 r/w 141 of Act and cannot
be held vicariously liable for the offence alleged to have been committed by the accused No.
14 company.

A.K. Singhania also, aggrieved by the order issuing process under Section 138 of the Act,
filed separate applications for quashing the entire prosecution including the aforesaid order
under Section 482 of the Code of Criminal Procedure. All the applications filed by A.K.
Singhania were taken together by the High Court for consideration and by the impugned
order the applications filed by him have been dismissed. The Court held that he, in the
capacity of Director, was responsible for business affairs and he was in-charge of the
Company. Not only that but nowhere it can be said that he was non-Executive Director.
Gujarat State Fertilizer Company Ltd. and A.K. Singhania, aggrieved by the common order,
preferred special leave petitions to the Supreme Court.

Judgment: With respect to executive and non-executive Directors, the apex court held that
every person who at the time the offence was committed is in charge of and responsible to the
Company shall be deemed to be guilty of the offence under Section138 of the Act. In the case
of offence by Company, to bring its Directors within the mischief of Section 138 of the Act,
it shall be necessary to allege that they were in charge of and responsible to the conduct of the
business of the Company. It is necessary ingredient which would be sufficient to proceed
against such Directors. If reading of the complaint shows substance of accusation discloses
necessary averments, then that would be sufficient to proceed against such of the Directors
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and no particular form is necessary. However, it may not be necessary to allege and prove
that, in fact, such of the Directors have any specific role in respect of the transaction leading
to issuance of cheque. Section 141 of the Act makes the Directors in charge and responsible
to Company “for the conduct of the business of the Company” within the mischief of Section
138 of the Act and not particular business for which the cheque was issued.

PART V:Conclusion
[A] RBI Guidelines: cheque-writing guidelines and Impact of Dishonour
One should change his cheque-writing behaviour as the RBI’s new cheque writing Guideline
has become effective on and from the 1st July, 2010. Section 1.8 of the RBI Circular
DPSS.CO.CHD.No.1832/04.07.05/2009-2010 dated February 22, 2010 specifically deals in
“Prohibiting alterations / corrections on cheques”.

The Section is reproduced hereunder:

“Prohibiting alterations / corrections on cheques: No changes / corrections should be carried

out on the cheques (other than for date validation purposes, if required). For any change in
the payee’s name, courtesy amount (amount in figures) or legal amount (amount in words),
etc., fresh cheque forms should be used by customers. This would help banks to identify and
control fraudulent alterations.”

As such, the bank will return or reject a cheque having alteration on: (i) Payee’s name, (ii)
Amount in figures and (iii) Amount in words. However, in terms of the said Section, the date
alteration will be allowed.

[B] Impact of the new guideline

One must be very careful in writing a cheque, as any casual mistake will result in
dishonouring of the cheque by the bank and such dishonour will result in loss, both in terms
of time and money.

In the case of the dishonouring of a cheque under certain circumstances, Section 138
(Dishonour of cheque for insufficiency of funds in the accounts etc.) of the Ac tis attracted.
The Section provides for punishment to the drawer of the cheque being dishonoured under
the circumstances specified in the Section.

Now this is to see whether the dishonouring of a cheque by the bank in view of the aforesaid
guideline also attracts Section 138 or not.

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[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
Instruments Act, 1881 unless he is a Managing Director or Joint Managing Director or he is a
signatory to the Cheque. The directors can establish the fact that they are not guilty either by
undergoing the trial before the Magistrate Court in which the complaint is filed or by
approaching the High Court under section 482 at the earliest before the commencement of the
trial in order to quash the proceedings against him as he is no way connected to the
proceedings initiated before the Magistrate Court under section 138 read with Section 141 of
the Negotiable Instruments Act, 1881.

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