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Liability of Companies for Dishonour of Cheques

Info: 4798 words (19 pages) Law Essay
Published: 7th Aug 2019

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Jurisdiction(s): UK LawIndian law


A cheque is said to be dishonoured when the payment is not made on its presentment to the bank. Before 1988, no liability was incurred in case of dishonour of cheque, but the insertion of Section 138 in the Negotiable Instruments Act, 1881 (hereinafter referred to as the Act) imposed collective liability of a criminal as well a civil nature, by way of short-term imprisonment and fine, provided a cheque is dishonoured. The rationale behind said insertion was to create and develop the faith of cheque as a valid monetary instrument among the populace.

Currently nearly all the banks, whether public or private, issue cheques for the transfer of money and usage of the same has been augmented to a large extent since before. In these circumstances, cases involving dishonour of cheque were bound to increase, which prompted the legislature to examine the idea of providing remedy by affixing civil and criminal liability to such offence. The newly incorporated provisions to some extent created apprehension of punishment in the mind of the drawer of the cheque to not issue cheques without having sufficient amount of money in their accounts. However, the evil was far from eradicated, which is evident from the huge bulk of cases involving dishonour seeking judicial relief even at present. There are certain ingredients enunciated by the judiciary and provided in the Act itself that must be fulfilled in order to hold liable a drawer for the dishonour of cheques. The main object of the Act is to legalize the system by which instruments contemplated by it can pass from hand-to-hand by negotiation like any other good. [1]

Understanding Cheques and Dishonour of Cheques

A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. This definition includes the electronic image of a truncated cheque and a cheque in the electronic form. [2] It is an unconditional order in writing, written by one person to another (the latter being a banker), signed by the person giving it, entailing the banker for whom it is written, pay on demand a sum definite in money to or to the order of a specified person, or to bearer. [3]

A cheque is said to be dishonoured when it is refused to be accepted or paid when presented to the bank. [4] It refers to a cheque that is drawn by a bank customer on his bank, which cheque has been dishonoured by the bank upon presentation by the payee of the cheque or the payee’s authorized agent, ostensibly, because there was either outright lack of funds or insufficiency of funds in the account on which the cheque was drawn. Further, Section 92 of the Act defines, a cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same. In the case of K. Venkatasubbaya vs. P.R. Rao Tobacco Co., [5] the court, in accordance with the said Section, held that a promissory note, Bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the Bill or drawee of the cheque makes default in payment upon being duly required to pay the same.

Legal Framework of Dishonour of Cheque

To ensure prompt remedy against defaulters and to make sure of credibility of the holders of negotiable instruments, a criminal remedy of penalty was inserted in the Act, in form of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 that inserted Sections 138 to 147 in the Act, which were further modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002. The issue of dishonour of cheque is dealt under Sections 138 to 147 of the Act, which provide for remedies and various forms of punishment in case of dishonour of cheque. Section 138 of the Act pertains to dishonour of cheque for insufficiency of funds in the account. It provides that a person shall be punishable for two years imprisonment or with fine, if the cheque issued by drawer is returned by the bank unpaid. The cheque must be issued in discharge of whole or part of any debt or other liability. A presumption is drawn against the drawer and in favour of the holder under Section 139 [6] of the Act that cheque is received by the holder in discharge of whole or in part of any debt or other liability. Further, Section 140 [7] of the Act provides that a person drawing a cheque cannot take up the defence that when he drew the cheque he had no idea of the insufficiency of credit balance in his account.

Section 141(1) of the Act introduces a singular concept of offence, viz. those committed by bodies corporate. It provides that if a person committing an offence is a company, every person who at the time said offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Section 142 [8] of the Act states that the cognizance of an offence can be taken under Section 138, upon a complaint in writing which must be made within one month by the payee or holder in due course from the date on which the cause of action arises under clause (c) of the proviso to Section 138. [9] If there is no proof of service of the notice of demand as required under Section 138, the prosecution of the drawer is not permissible. [10] The summary trial of cases has been provided under Section 143 of the Act, notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974) (hereinafter referred to as code). All offences under this chapter shall be tried by a judicial magistrate of the first class or by a metropolitan magistrate and the provisions of Sections 262 to 265 of the code shall, as far as may be, apply to such trials. Further under Section 144 of the Act, mode of service of summons has been provided. Section 145 deals with the evidence on affidavit. Section 146 [11] perceives bank’s slip as prima facie evidence of certain facts and Section 147 [12] states that all the offences punishable under the Act shall be compoundable.

Company’s Power to Issue Negotiable Instruments

This power to issue negotiable instruments is to be found in the Companies Act itself. In Oriol Industries v. Bombay Mercantile Bank Ltd. [13] , the Supreme Court of India referred to Section 26 [14] of the Act and held that this Section does not purport to make any provision of substantive or procedural law. The later part of the Section merely brings out that a company cannot claim authority to issue a cheque under its first part. The law is in regard to the relevant provisions of the English Companies Act itself as discussed in the present case. Therefore, a look at Section 89 [15] of the Companies Act is pertinent at this juncture.

It is clear that in order for a company to be bound by a negotiable instrument it has to have been issued on its behalf and two conditions ought to be satisfied:

That the instrument must be drawn, made, accepted or endorsed in the name of/ by/ on behalf of/account of the company.

The person making, drawing, endorsing or accepting such instrument must have the authority given to him by the company in that regard. This authority can either be express or implied.

In other words, unless the plain tenor of the cheque on its face satisfies the relevant requirement, the cheque cannot be validly treated as an instrument drawn by the company. This position is not disputed. The importance of this requirement can be illustrated by a Privy Council decision in Sadasuk Janki Das v. Sir Kishan Pershad [16] which had occasion to reflect on a similar requirement under Section 27 of the Act. The said Section provides that “every person capable of binding himself or of being bound, as mentioned in Section 26, may so bind himself or be bound by a duly authorised agent acting in his name”. Herein the PC held that the name of the person(s) or the firm to be charged upon a negotiable document should be stated clearly on the face or on the back of the documents that the responsibility is made plain and can be instantly recognized as the document passes from hand-to-hand. According to the PC:

“Sections 26, 27 and 28 of the Negotiable Instruments Act contained nothing inconsistent with the principles just set out, and there was nothing to support the contention urged before it that in an action on a bill of exchange or promissory note against a person whose name properly appears as a party to the instrument it is open either by way of claim or defence to show that the signatory was in reality acting for an undisclosed principle.” [17]

This decision is no doubt given under Section 27 of the Act, but the principle enunciated in it applies equally to a negotiable instrument issued under Section 89 of the Companies Act.

The inevitable consequence of this requirement is that wherever a negotiable instrument is issued without complying with the said requirement, it would not bind the company in any manner whatsoever. In The Bank of Bombay v. H. R. Cormack, [18] it was held by the Bombay High Court that in order to make a company liable on a bill or note it must appear on the face of such bill or note that it was intended to be drawn, accepted or made on behalf of the company, and no evidence dehors the bill or note is admissible under Section 47 of the Indian Companies Act, 1956 (Section 89 of the present Act). In support of this decision Sargent, C.J., had cited the observations of Lord Justice James in Miles’ Claim “that it is the law of this country, and always has been the law of this country, that nobody is liable upon a bill of exchange, unless his name, or the name of some partnership, or body of persons of which he is one, appears either on the face or the back of the bill”. [19] Thus there can be no doubt that the failure to comply with the essential requirements of Section 89 must necessarily mean that the negotiable instrument in question defectively issued cannot be enforced against the company.

Liability of Companies for Dishonour of Cheques—Some Issues

Section 141 of the Act provides the provisions for liability of officers of a company in case of commission of offences of dishonour of cheques by companies. A reading of explanation (a) to the Section will indicate that the expression ‘company’ means a body corporate and includes a firm or ‘other association of individuals’. The latter term is especially problematic because it cannot be understood to refer to informal understanding between individuals. The principle of ejusdem generis has to be attracted. The term ‘association of individuals’ should be of similar nature as companies and partnership firms. [20] Hence, an ‘association of individuals’ cannot be held to be the engagement in business of a husband and wife. If such a contention were to be accepted, then every member of the family of a person in a particular business could be brought within the ambit of ‘association of individuals’. [21] Where a cheque in discharge of a debt or liability is drawn by a person in his individual capacity, such a person alone can be liable under Section 138 of the Act. But where the offence is committed by a company, then by virtue of Section 141, the persons mentioned under the Section will also be liable of the offence provided the conditions mentioned therein are satisfied. A cheque drawn by a person in charge of and responsible to the firm binds such person as well as the firm who are deemed to be guilty of the offence. Thus unlike in the case of an individual drawing a cheque which subsequently is dishonoured, in the case of a cheque drawn by a person in charge of and responsible to the firm, criminal liability is fastened not only on the de facto drawer of the cheque but also on the firm as well as any partner, manager, secretary or other officer of the firm, provided that such person is guilty of the act of omission referred to in Section 141(2) of the Act. Thus vicarious liability has been fastened on those who are in charge of and responsible to the company for the conduct of its business. For the purpose of Section 141, a firm comes within the ambit of a company. Section 141 does not make all partners liable for the commission of the offence, because there might be sleeping partners who are not actively involved in the day to day running of the business. [22] The primary responsibility is on the complainant to make necessary averments in the complaint so as to bring the accused within the net of vicarious liability. There is no presumption that every partner knows about the transaction. The obligation for the officers to prove they were not in charge or were not responsible to the firm for the conduct of business of the firm, would arise only if the complainant had made necessary averments in the complaint and had established the fact. [23]

To decipher the meaning of the ‘persons in charge’ as defined in Section 141(1) of the Act, we may have to examine the provisions of Companies Act, 1956—the law relating to and regulating the companies. A company, though a legal entity, can act only through its board of directors. Section 291 of the Companies Act provides that subject to the provisions of this Act, the board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do. A director may be attending meetings of the Board of Directors of the Company where usually they decide policy matters and guide the course of business of a company. It may happen that the Board appoints subcommittees consisting of one or two directors out of the Board, who may be made responsible for day-to-day functions of the Company. These are matters, which form part of resolutions of the Board. Nothing is oral. What emerges from this is that the role of a director in a company is a question of fact depending on the peculiar facts in each case. There is no universal rule that a director of a company is in charge of its everyday affairs. [24]

A combined reading of Sections 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 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. [25]

In N. Radhakrishnan v. A. C. Thomas, [26] the Kerala High Court observed that Section 141 is only an enabling provision. Where the drawer of a cheque is a partner, he cannot be allowed to contend that he was not the drawer of the cheque or that he was not maintaining any account with the bank. The petitioner contended that he was a mere signatory on behalf of the firm and therefore no prosecution could lie against him. It was held however that the petitioner’s status as Managing Director had not been disputed; the mere fact that the account was operated by him in the name of the firm would not mean that he was not the drawer of the cheque. Though the firm had also committed the offence, it is not essential to prosecute the firm also before the person in charge is sought to be prosecuted. The offence committed by the company is the sine non qua for convicting the other persons. It was held in S. Kumar v. Saptagiri Investments [27] that without prosecuting the form action could be initiated against the partners under Section 138—such officers would not escape liability just because the company was not prosecuted as a result of some legal impediment.

It must be mentioned here that a proprietary concern is not a firm or company within the meaning of Section 141. The proprietor is merely a person who does the business but for trading convenience, the business is done in the name of the concern. The proprietary concern has no separate legal existence in the eye of the law—it can neither initiate proceedings nor can it be sued in its own name. [28]

Under Section 141, where the offence under Section 138 has been committed by a company, 3 categories of people are responsible for the offence, viz:-

The company itself which is a juristic person

Every person who was in charge of and was responsible to the company for the conduct of the business of the company at the time of commission of offence

Any other person who is a director, manager or a secretary or officer of the company with whose consent or connivance the offence was committed or on account of negligence attributable to him, the offence was committed by the company.

In respect of the second category, a defence is allowed insofar as the offence was committed without their knowledge or despite due diligence exercised by them to prevent the commission of such an offence. No such defence is however granted to the third category of people. This difference between liabilities is thus a fiction of law as under Section 141 when the promisor of the cheque which has bounced later is a juristic person. The Act does not envisage a vicarious liability, however a deemed liability has been secured under Section 141, when the promisor happens to be a juristic person like a company, firm or other association. Directors, managers and other officers of a company come under this category as can be seen from aforesaid section. [29]

It is vital that the complaint shows how the Directors of a company were made liable for an offence committed by the company under Section 138 of the Act. This is because, only if the liability is mentioned would the accused know what line of defence needs to be adopted by him/her. If it so happens that there is no sufficient averment in the complaint to show how the Directors were liable for the company, then the proceedings against such directors would fail. [30] One may wonder why the complainant needs to specifically aver in a complaint, since in the absence of such an averment, as held by the Supreme Court in the three judge decision of S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Anr., [31] Section 141 cannot be invoked. The Supreme Court’s logic [32] in requiring such specific averments before any corporate director/officer can be held liable is that the liability under Section 141(1) is raised by legal fiction, such that even though a person is not personally liable, he will be held liable vicariously and hence a clear case connecting the accused with the commission of the crime, as required under Section 141(1), has to be spelled out in the complaint through specific factual averments. However, the obvious disadvantage the complainant suffers when he has to specifically aver that a certain director or officer was in-charge is that, being an outsider, he might not know exactly how the internal business of the accused company is organized i.e., who are its principal executive officer bearers and who are only involved in business policy making. This is easy when dealing with the Managing Director and the signatories of the cheque, but beyond that it is unclear.

To sum up, there is almost unanimous judicial opinion that necessary averments ought to be contained in a complaint before a person can be subjected to criminal process. A liability under Section 141 of the Act is sought to be fastened vicariously on a person connected with a company, the principal accused being the company itself. It is a departure from the rule in criminal law against vicarious liability. A clear case should be spelled out in the complaint against the person sought to be made liable. Section141 of the Act contains the requirement for making a person liable under the said provisions. That the respondent falls within the parameters of Section 141 has to be spelled out. A complaint has to be examined by the Magistrate in the first instance on the basis of averments contained therein. If the Magistrate is satisfied that there are averments which bring the case within Section 141, he would issue the process. Merely being described, as a director in a company is not sufficient to satisfy the requirement of Section 141. Even a non-director can be liable under Section 141 of the Act.

This brings us to an interesting issue. Hypothetically speaking, if a non-executive director who is a financial expert and a past banker, sits on the Board of a company which has issued certain cheques which have been dishonoured. By merely being a non-executive director he is most likely not one of the officers responsible for the conduct of the business of the company, nor is he in-charge of the business of the company. Hence, in the absence of special circumstances, as per KK Ahuja, [33] such a non-executive director will probably not be held liable under Section 141(1). However, the scope of Section 141(2) is wide open. In case such a director votes in favor of a resolution, which provides for payment of a certain sum of money, from one of the several bank accounts of the company, to a supplier/contractor and that cheque bounces—is the director liable? Can his consent be interpreted from his “yes” vote? I would argue that the case then depends upon how the executive director went about doing his job. Did he ask relevant questions, did he try to inquire if the company had sufficient funds in that particular account, especially if he had reason to believe otherwise? In fact, in U.S., the Delaware Chancery Court, while reviewing In Re Emerging Communications, Inc.., [34] found that a director who used to be an investment banker with relevant experience in the particular industry should be subjected to a higher standard of inquiry than non-expert directors when he failed to apply his “specialized financial expertise”, when evaluating a going-private transaction. The case was uniformly held to have qualified directors, especially the non-executive and independent ones, not to simply rely on information either given by the management or outside professionals particularly when they were themselves experts in the relevant field.

Concluding Remarks

In the concluding part of this research project, the researcher would simply seek to indicate that the analysis hereinabove is by no means whatsoever to be perceived as an exhaustive compendium regarding the offence of dishonour of cheques by companies. Nor does the researcher claim to have traced even a substantial number of the complex contours of the manner in which the said subject-matter has been treated by the Negotiable Instruments Act. The primary aim of the project has chiefly been to draw attention to the rationale justifying the separate treatment of the concept of dishonour by individuals and bodies corporate. Such aim gains further significance in the light of the attachment of both civil and criminal liabilities along with the offence that is caused by a cheque being dishonoured under the statutorily prescribed circumstances. Given the widely differing views regarding the varying nature and dominion of the companies and the oft-raised confusion in respect of identifying the persons at the helm of the affairs of the corporate entity, an effort such as the one undertaken in course of this project is of paramount importance in the legal and commercial domains of the modern world. The necessity for such a separate treatment for corporate bodies is perhaps best voiced in the words of Hazlitt: “Corporate bodies are more corrupt and profligate than individuals, because they have more power to do mischief, and are less amenable to disgrace or punishment. They neither feel shame, remorse, gratitude nor goodwill.” [35]

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