India: Directors' Liability In Cheque Bouncing Matters

The Supreme Court in the recent case of KIRSHNA TEXPORT & CAPITAL MARKETS LTD.V.ILA A. AGRAWAL & ORS, CRIMINAL APPEAL NO.1220 of 200 has ruled that the notice of dishonour of cheques to the company is sufficient, and there is no need to serve separate notices on the directors.   The Honourable Supreme Court overruled the Bombay High Court's view that separate notices to directors were essential. Allowing the appeal in the case of Krishna Texport and Capital Markets Ltd vs Ila Agrawal, the Apex court asked the Honorable High Court to reconsider its view regarding the trial of two directors. The court opined that the directors ought to know about the dishonour when the company gets the notice. It further stated that there is sufficient time, nearly 75 days, to find which directors are responsible for the fault and therefore, there is no need to prolong the process by serving notices on each director or partner.

According to section 138 of the Negotiable Instruments Act 1881 ("Act"), where any cheque drawn by a person on an account maintained by him is returned by the bank unpaid for reasons mentioned in the said section, such person shall be deemed to have committed an offence. The proviso to the section stipulates three conditions on the satisfaction of which the offence is said to be completed. The proviso inter alia obliges the payee to make a demand for the payment of said amount of money by giving a notice in writing to "the drawer of the cheque" and if "the drawer of the cheque" fails to make the payment of the said amount within 15 days of the receipt of said notice, the stages stipulated in the proviso stand fulfilled.

The notice under Section 138 is required to be given to "the drawer" of the cheque so as to give the drawer an opportunity to make the payment and escape the penal consequences. Clause b) of the proviso in clear terms states that the notice of demand for payment is to be given to "The drawer of the cheque." The plain language of Section 138 leaves no room for doubt or ambiguity as to the issuance of notice to anyone other than the drawer as it does not even remotely suggest the same.

Further, section 141 of the Act, states that if the person committing an offence under Section 138 is a Company, every director of such Company who was in charge of and responsible to that Company for conduct of its business shall also be deemed to be guilty. The reason for creating vicarious liability is plainly that a juristic entity i.e. a Company would be run by living persons who are in charge of its affairs and who guide the actions of that Company and if such juristic entity is guilty, those who were so responsible for its affairs and who guided actions of such juristic entity must be held responsible and ought to be proceeded against. Section 141 does not lay down any requirement that in such eventuality the directors must individually be issued separate notices under Section 138. The persons who are in charge of the affairs of the Company and running its affairs must naturally be aware of the notice of demand under Section 138 of the Act issued to such Company. It is precisely for this reason that no notice is additionally contemplated to be given to such directors. The opportunity by way of notice given to the 'drawer' Company is deemed as sufficient notice to those who are in charge of the affairs of such Company.

If any of the directors' contend that the offence was committed without their knowledge or that they had exercised due diligence to prevent such commission, it would be a matter of defence to be considered at the appropriate stage in the trial and certainly not at the stage of notice under Section 138.

If the requirement that such individual notices to the directors must additionally be given is read into the concerned provisions, it will not only be against the plain meaning and construction of the provision but will make the remedy under Section 138 wholly cumbersome. In a given case the ordinary lapse or negligence on part of the Company could easily be rectified and amends could be made upon receipt of a notice under Section 138 by the Company. It would be unnecessary at that point to issue notices to all the directors, whose names the payee may not even be aware of at that stage.

Under second proviso to Section 138, the notice of demand has to be made within 30 days of the dishonour of cheque and the third proviso gives 15 days' time to the drawer to make the payment of the amount and escape the penal consequences. Under clause (a) of Section 142, the complaint must be filed within one month of the date on which the cause of action arises under third proviso to Section 138. Thus a complaint can be filed within the aggregate period of seventy five days from the dishonour, by which time a complainant can gather requisite information as regards names and other details as to who were in charge of and how they were responsible for the affairs of the Company.

Therefore Section 138 of the Act does not admit any necessity or scope for reading into it the requirement that the directors of the Company in question must also be issued individual notices under Section 138 of the Act. Such directors who are in charge of the affairs of the Company or responsible for the affairs of the Company would be aware of the receipt of notice by the Company under Section 138.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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