Skip to main content

Director’s liability in cheque bouncing matters

 Cheques are a widely used means of payment, especially in business transactions involving Companies. A cheque is said to bounce when it is returned by the bank without being encashed.


The question that arises is when cheques issued by Companies are bounced, who is held liable, the Company or its Directors? The article deals with this question and explains the punishments and legal remedies and why you would require a cheque bounce lawyer. 

 


When Does Cheque Bouncing Occur?

Cheques are bounced or dishonoured due to any defect in them, which may have been caused intentionally by the issuer of a cheque to escape payment. The several reasons leading to bouncing of cheques are:


Insufficient funds


Presenting of cheque to the Bank after 3 months


Alterations or overwriting in cheque


Mismatch in account number


Crossed cheque


Closed Account


Insolvency, insanity, or death of the customer


Stopping of payment by account holder


Non-matching of signature, etc

 


However, it is an offence under the Negotiable Instruments Act, 1881 if the unpaid cheque is returned by the bank when:


Funds in the bank account are insufficient, or


The amount on the cheque exceeds the amount to be paid in agreement with the Bank


Issuer of cheque instructs his bank to “Stop cheque payment”

 


Consult : Top Cheque Bounce Lawyers in India 



Penalties for Cheque Bouncing Matters: 

Punishment for Cheque Bouncing, which is a criminal offence under Section 138 of the Negotiable Instruments Act, 1881 can be:


Imprisonment extending up to two years, or


Fine which may extend to double the amount on the cheque, or


Both of the above

 


Is The Director Liable When Cheque Issued By Company Is Dishonoured? 

When the person who commits the offence of cheque bouncing is a Company which is an artificial entity, how does it face the punishments, especially imprisonment? The Directors are appointed to control and manage the affairs of a Company. Hence, the Directors can be accountable for the misdeeds of the Company.


Directors may be held liable when the Company has committed the offence of cheque bouncing, under Section 141 of the Negotiable Instruments Act, 1881. According to this Section, every person who was in charge of the Company and responsible for its business, at the time the offence was committed will be liable, along with the Company.


Even a manager, secretary, or officer of the Company can be accountable in matters where the offence of cheque bouncing was committed due to the consent or neglect of such persons.

 


Legal Remedies Available To Payee If A Cheque Issued By A Company Is Dishonoured

Reason for issuance of the cheque:


The cheque must have been issued for discharge of a debt or liability, to invoke Section- 138.

 


Time Limit to submit cheque: the cheque should have been submitted to the Bank within three months from when it was drawn/issued.

 


Legal Notice: When the cheque is returned unpaid by the bank, the payee (receiver of the money) must send a legal demand notice to the drawer (Company). This legal notice must demand the amount to be paid by the Company, and must also state that the Company will be prosecuted in case it fails to do so, within 15 days. It is advisable that the payee gets the draft of the notice vetted by a lawyer specialising in cheque bouncing cases before sending it to the Company.

 


Filing of Complaint: If the Company has yet again failed to pay the amount of the cheque, or reply to payee within fifteen days from the legal notice, the payee should then file the complaint in a court of appropriate jurisdiction with the help of a cheque bounce lawyer, within a stipulated time period of 30 days. The complaint should be accompanied by the following documents:


·         The original cheque with the “memo of return” from the bank


Copy of the demand notice sent to the company


Affidavit



Specific Statement to be made in the Complaint:  It should be specifically stated in the complaint how and in what manner the accused Director was in charge of and responsible for the conduct of the business of the Company at the time the cheque was bounced. However, the Apex Court has held that in certain situations, as given below, one need not specifically state the responsibility of the accused person in the complaint:


When the accused is the Managing Director or a Joint Managing Director of the Company


When the accused Director signed that specific cheque on behalf of the Company



When and if the Company is found guilty in the case, and if it is proved that the Director was in charge of the business of the Company, he will have to bear the punishments as directed by the Court.

 


Consult : Top Cheque Bounce Lawyers in India 



Situations When Directors Are Not Liable

The Director would not be held liable for the acts of the Company if he is able to prove the following:


That when the offence was committed he had no knowledge regarding it, and


That he applied due diligence, or


That there is proof beyond doubt, that the director due to his prolonged illness, was not involved in the proceedings


That the complaint has not been made in accordance with Section 138 or 141 of the Act, or


That before the cheque got dishonoured, he resigned from his post

 


Only when a person is responsible for the Company and was in charge of the conduct of its business, he could be held liable. Hence, the reason to hold a person guilty of a cheque bouncing case cannot solely be based on the fact that he is a Director of a Company.


Comments

Popular posts from this blog

Section 58B of The Advocates Act - Special provision relating to certain disciplinary proceedings

 Section 58B The Advocates Act Description (1) As from the 1st day of September, 1963, every proceeding in respect of any disciplinary matter in relation to an existing advocate of a High Court shall, save as provided in the first proviso to sub-section (2), be disposed of by the State Bar Council in relation to that High Court, as if the existing advocate had been enrolled as an advocate on its roll. (2) If immediately before the said date, there is any proceeding in respect of any disciplinary matter in relation to an existing advocate pending before any High Court under the Indian Bar Councils Act, 1926 (38 of 1926), such proceeding shall stand transferred to the State Bar Council in relation to that High Court, as if it were a proceeding pending before the corresponding Bar Council under clause (c) of sub-section (1) of section 56: Provided that where in respect of any such proceeding the High Court has received the finding of a Tribunal constituted under section 11 of the Indian B

Case Laws related to Defamation in favour of ClaimantCase Laws related to Defamation in favour of Claimant. TOLLEY Vs, J.S FRY & SONS LTD – (1931) Facts The defendants were owners of chocolate manufacturing company. They advertised their products with a caricature of the claimant, who was a prominent amateur golfer, showing him with the defendants’ chocolate in his pocket while playing golf. The advertisement compared the excellence of the chocolate to the excellence of the claimant’s drive. The claimant did not consent to or knew about the advertisement. Issue The claimant alleged that the advertisement suggested that he agreed to his portrait being used for commercial purposes and for financial gain. He further claimed that the use of his image made him look like someone who prostituted his reputation for advertising purposes and was thus unworthy of his status. At trial, several golfers gave evidence to the effect that if an amateur sold himself for advertisement, he no longer maintained his amateur status and might be asked to resign from his respective club. Furthermore, there was evidence that the possible adverse effects of the caricature on the claimant’s reputation were brought to the defendants’ attention. The trial judge found that the caricature could have a defamatory meaning. The jury then found in favor of the claimant. Held The House of Lords held that in the circumstances of this case – as explained by the facts – the caricature was capable of constituting defamation. In other words, the publication could have the meaning alleged by the claimant. The Lords also ordered a new trial limited to the assessment of damages. NEWSTEAD V LANDON EXPRESS NEWSPAPER LTD, (1939) Facts: A newspaper published a defamatory article about Harold Newstead. However, another person with this name brought an action in libel. He claimed that the article had been misunderstood as leading to him. The defendant newspaper recognised that they published the article. Also, they denied that they had the intention of being defamatory of him. Consequently, the claimant argued that the newspaper was under a duty. The duty was to give a clear and complete description of the correct person. Moreover, the claimant argued that the defendants were in breach of the duty. Issues: The issue in Newstead v London Express Newspaper, was if the reasonable persons would have understood the words complained of to refer to the plaintiff. Held: The Court of Appeal stated that in accordance with the current law on libel, liability for libel does not depend on the intention of the defamer; but on the fact of the defamation. Accordingly, a reasonable man, in this case a newspaper publisher, must be aware of the possibility of individuals with the same name and must assume that the words published will be read by a reasonable man with reasonable care.

  Case Laws related to Defamation in favour of Claimant.  TOLLEY  Vs,  J.S FRY & SONS LTD – (1931) Facts The defendants were owners of chocolate manufacturing company. They advertised their products with a caricature of the claimant, who was a prominent amateur golfer, showing him with the defendants’ chocolate in his pocket while playing golf. The advertisement compared the excellence of the chocolate to the excellence of the claimant’s drive. The claimant did not consent to or knew about the advertisement.   Issue The claimant alleged that the advertisement suggested that he agreed to his portrait being used for commercial purposes and for financial gain. He further claimed that the use of his image made him look like someone who prostituted his reputation for advertising purposes and was thus unworthy of his status. At trial, several golfers gave evidence to the effect that if an amateur sold himself for advertisement, he no longer maintained his amateur status and might be aske

Rules as to delivery of goods

                             Rules as to delivery of goods Section 2(2) of Sale of Goods Act defines ‘delivery’ as a ‘voluntary transfer of possession from one person to another.’ Thus, if the transfer of goods is not voluntary and is taken by theft, by fraud, or by force, then there is no ‘delivery. Moreover, the ‘delivery’ should have the effect of putting the goods in possession of the buyer. The essence of the delivery is a voluntary transfer of possession of goods from one person to another. There is no delivery of goods where they are obtained at pistol point or theft. 1. Mode of Delivery: According to Section 33, delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorized to hold them on his behalf. Delivery of goods may be actual, symbolic or constructive. 2. Expenses of Delivery: According to Section 36(5), unless otherwise agree