CRITICAL ANALYSIS OF THE LIABILITY OF A COMPANY FOR DISHONOUR OF
CHEQUE UNDER SECTION 138 & 141 OF THE NEGOTIABLE INSTRUMENTS ACT,
1881
– Rahul Rathore323
ABSTRACT
Cheque is an important medium for business transactions as it is very convenient for the people to carry & execute a small piece of paper called cheque as compared to carrying the currency worth the value of cheque. In India, with the rapid increase in business activities, the usage of cheque is also increased. Chapter XVII (section 138 to 148) of the Negotiable Instruments Act, 1881 deals with the provisions regarding the penalties in case of dishonour of certain cheques for insufficiency of funds in the account of the drawer of the cheque. Section 138 of Negotiable Instruments Act, 1881 deals with the dishonour of cheque due to insufficiency, etc., of funds in the account of the drawer of the cheque. Section 141 of the said Act makes provisions regarding the dishonour of cheque by companies. In case of dishonour of cheque by company, the main issue which arises is who shall be held liable for it as the company is an artificial person which acts through its officers. Thus, in this paper, the critical analysis of the liability of a company for dishonour of cheque under section 138 & 141 of the Negotiable Instruments Act, 1881 has been done.
Keywords: cheque, dishonour, company, vicarious liability, directors.
INTRODUCTION
A cheque may be defined as an acknowledged bill of exchange that is readily accepted in lieu of payment of money. It is a negotiable instrument. It has been developed as a mode of making payments without the need to carry huge amount of money. It is an important medium for business transactions as it is very convenient for the people to carry & execute a small piece of paper called cheque as compared to carrying the currency worth the value of cheque. Dealings through cheque play an important role in the commercial world & in the development of the economy of the country as payment through cheques makes the monetary transactions much easier.
In India, with the rapid increase in business activities, the usage of cheque is also increased. A cheque is said to be dishonoured when it is refused to be accepted or paid upon presentation by the payee of the cheque or the payee’s authorized agent to the bank because of insufficiency of funds in the account on which the cheque was drawn.
Dishonour of cheques is one of the biggest problems in the smooth functioning of the cheque system. As the cheque plays a vital role in monetary transactions, dishonour of cheque threatens the credibility of this negotiable instrument. Dishonour of cheque hinders smooth monetary transactions. Thus, dishonour of cheque adversely affects the economy of the country. For business to flourish, it was required that some law, which could ensure credibility to the holder of this negotiable instrument, should be enacted.
The great hardship is faced by a person if a cheque issued in his favour is dishonoured because of insufficiency of funds in the account of the drawer of the cheque. To prevent this, the act of dishonour of certain cheques has been made an offence by an amendment of the Negotiable Instruments Act, 1881 by the Banking, Public Financial Institutions and Negotiable Instrument Laws (Amendment) Act, 1988.
Through this amendment a new chapter, that is, Chapter XVII comprising of section 138 to 142 has been incorporated in the Negotiable Instruments Act, 1881 for penalties in case of dishonour of certain cheques for insufficiency of funds in the account of the drawer of the cheque, which came into force on 1st April, 1989. Before such commencement, a criminal charge could be brought against the drawer of a cheque only if the doctrine of mens rea was established as required by Section 415 & 420 of the Indian Penal Code, 1860.
Thus, there was no effective legal provision to prevent people from issuing cheques without having sufficient funds in their account or any stringent provision to punish them on cheque being dishonoured by their bankers & returned unpaid.
The amendment makes provisions for prosecution for dishonour of certain cheques per se without restricting the aggrieved party’s right to prosecute under the aforesaid sections of the Indian Penal Code, 1860. Another remedy, in case a cheque was not honoured on presentment, was to file a suit for recovery of money which was civil in nature. Such remedy was dilatory and did not have a desired deterrent effect on offenders & cheques started losing their credibility. Thus, to ensure a prompt remedy against defaulters & to ensure credibility of the cheque, a criminal remedy of penalty was incorporated in Negotiable Instruments Act, 1881.
Thus, the object of such amendment appears to be, to encourage the culture of use of cheques & to enhance the credibility of the cheque in commercial transactions. The Negotiable Instruments Act, 1881 has been amended several times to incorporate more stringent provisions to deal with dishonour of cheque. The Negotiable Instruments Act, 1881 extends to the whole of India. Section 138 of the Negotiable Instruments Act, 1881 creates an offence of dishonour of cheque for insufficiency of funds in the account maintained by a person with the banker. Section 141 of the said Act makes provisions regarding the dishonour of cheque by companies & also defines the term “company” for the purposes of Section 141 of the said Act.
A company is considered as an artificial or a legal person or legal entity, separate from, & capable of surviving beyond the lives of its members. Thus, a company can sue and be sued in its own name. Since a company is an artificial person, it is not capable of committing any offence personally. A company acts through its directors & officers who are responsible for the conduct of the business of the company. Thus, if certain offences are committed by its officials in the name of the company, then in such circumstances a company is said to have committed those offences.
This paper deals with the analysis of the liability of the company for dishonour of cheque. In case of dishonour of cheque by company, the main issue which arises is who shall be held liable for it as the company is an artificial person which acts through its officers. This paper discusses this issue in detail in the light of the law regarding the dishonour of cheque and in the light of the cases decided by the Hon’ble Supreme Court of India.
DISHONOUR OF CHEQUE UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881
The Chapter XVII (section 138 to 148) of the Negotiable Instruments Act, 1881 deals with the provisions regarding the penalties in case of dishonour of certain cheques for insufficiency of funds in the account of the drawer of the cheque. Initially when, in 1988, the Chapter XVII was inserted in the Negotiable Instruments Act, 1881, it contained sections 138 to 142 only. But after further amendments in the Negotiable Instruments Act, 1881, new sections, that is, Section 143 to 148 also have been inserted in the Negotiable Instruments Act, 1881.
Section 6 of the Negotiable Instruments Act, 1881 defines “Cheque” as a bill of exchange drawn on a specified banker & not expressed to be payable otherwise than on demand & it includes the electronic image of a truncated cheque & a cheque in the electronic form.
Explanation I of section 6 of the said Act provides that for the purposes of Section 6, the expressions-
(a) “a cheque in the electronic form” means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometrics signature) and asymmetric crypto system or with electronic signature, as the case may be;
(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
Explanation II of Section 6 of the said Act provides that for the purposes of section 6, the expression clearing house means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.
Explanation III of Section 6 of the said Act provides that for the purposes of this section, the expressions “asymmetric crypto system”, “computer resource”, “digital signature”, “electronic form” and “electronic signature” shall have the same meanings respectively assigned to them in the Information Technology Act, 2000.
Section 138 of Negotiable Instruments Act, 1881 deals with the dishonour of cheque due to insufficiency of funds in the account of the drawer of the cheque. It provides that where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both:
Provided that nothing contained in Section 138 of the said Act shall apply unless-
(a) 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;
(b) 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 thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;
(c) 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.
Section 138 of the said Act further provides that for the purposes of section 138, debt or other liability means a legally enforceable debt or other liability.
Thus, to constitute the offence under Section 138 of the Negotiable Instruments Act, 1881, following conditions are required to be fulfilled:
1) The cheque in question should have been issued by a person on an account maintained by him with a banker for payment to another person from out of that account for discharge, in whole or in part, of any legally enforceable debt or other liability;
2) The cheque in question should have been presented within the period of three months or within the period of its validity, whichever is earlier;
3) The cheque in question should have been returned unpaid;
4) The payee or the holder in due course should have issued a notice to the drawer within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; &
5) After the receipt of the said notice, the drawer should have been failed to pay the cheque amount within fifteen days of the receipt of the said notice.
LIABILITY OF A COMPANY FOR DISHONOUR OF CHEQUE UNDER SECTION 138 & 141 OF THE
NEGOTIABLE INSTRUMENTS ACT, 1881- ANALYSIS
Section 141 of Negotiable Instruments Act, 1881 deals with offences by companies. Section 141(1) of the said Act provides that if the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, & 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:
Provided that nothing contained in the sub-section (1) of Section 141 of the said act shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence:
Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under the Chapter XVII of the said Act.
Section 141(2) of the said act provides that notwithstanding anything contained in sub-section
(1) of Section 141 of the said act, where any offence under the said act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Section 141 of the said act further provides that for the purposes of Section 141, (a) company means any body corporate and includes a firm or other association of individuals; & (b) director, in relation to a firm, means a partner in the firm.
Section 141 of the said Act begins with a reference to Section 138 of the said act. Thus, the scope of Section 141 extends to the offences committed by a company in regard to dishonour of cheque.
The inter-relationship between Section 138 & 141 has been clearly explained in SMS Pharmaceuticals v. Neeta Bhalla324. In this case, it was held by the Court that section 138 of the said Act casts criminal liability punishable with imprisonment or fine or with both on a person who issues a cheque towards the discharge of a debt or liability as a whole or in part & the cheque is dishonoured by the bank on presentation. Section 141 of the said Act extends such criminal liability in case of a company to every person who at the time of the commission of the offence, was incharge of & was responsible for the conduct of the business of the Company. Such a person is vicariously liable to be held guilty for the offence under section 138 of the Act & punished accordingly.
In Assistant Commissioner, Assessment- II, Bangalore and Ors. v. Velliappa Textiles Ltd. and Ors.325, the Hon’ble Supreme Court of India introduced the concept of ego & alter ego in relation to the employee & the employer corporation. The Court held that in order to fix corporate criminal liability for the actions of the employee (who must generally be liable himself), the actor-employee who physically committed the offence must be the ego, the center of the corporate personality, the important organ of the body corporate, the alter ego of the employer corporation or its directing mind.
As the company or corporation has no mind of its own, its active & directing will must, as a result, be sought in the person of somebody who for some purposes may be called as an agent, but who is really the directing mind & will of the company or corporation, the very ego and center of the personality of the corporation. To this extent, in Indian law, the criminal liability on a company can be easily fixed.
Thus, to fix the criminal liability on a company in case this offence is committed by the company, Section 141 of the Act provides that every person in charge of the company and who was responsible to the company for the conduct of the business shall be deemed to be guilty of the offence.
This concept of vicarious liability has been explained in Sabitha Ramamurthy v. RBS Channabasavaradhya326. In this case, it was held that Section 141 of the Act creates a legal fiction. So, by reason of the said provision, a person although is not personally liable for commission of such an offence would be vicariously liable. Thus, such vicarious liability can be inferred so far as a company registered or incorporated under the Companies Act, 1956 is concerned, only if the requisite statements, which are required to be averred in the complaint petition, are made so as to make the accused therein vicariously liable for the offence committed by the company. Before a person can be held vicariously liable, strict compliance of the statutory requirements would be insisted.
In Monaben Ketanbhai Shah v. State of Gujarat327, it was held that the criminal liability has been imposed on those who, at the time the offence was committed, was in charge of & was responsible to the firm for the conduct of the business of the firm.
The person in charge or responsible to the company could be the managers, directors, secretaries or other officers of that company. However, it doesn’t mean that just by holding a directorial position, the person would be liable under Section 141 of the Act. This has been held in the landmark case of SMS Pharmaceuticals v Neeta Bhalla328.
In this case, it was held that there is nothing which suggests that simply by being a director in a Company, one is supposed to discharge particular functions on behalf of a company. What a Board of Directors has the right to do in relation to a particular company depends upon the role and functions assigned to Directors as per the Memorandum & Articles of Association of the company. The key words which have been used in section 141 of the Act are “every person”. These are general words and take every person connected with a company within their meaning.
It is only those persons who were in charge of & responsible for conduct of business of the company at the time the offence was committed, who will be liable for the offence. Thus, a director of a Company, who was not in charge of and was not responsible for the conduct of the business of the company at the relevant time, shall not be liable under section 141 of the Act. The liability arises from being in charge of and responsible for conduct of the business of the company at the relevant time when the offence was committed and not on the ground of merely holding a designation or office in a company.
In K. K. Ahuja v V.K. Vora329, it was held that a combined reading of Sections 5 and 291 of the Companies Act, 1956 with the definitions in clauses (24), (26), (30), (31), (45) of Section 2 of that Act would indicate 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:
(a) The managing directors;
(b) The whole-time directors;
(c) The manager;
(d) The secretary;
(e) Any person in accordance with whose directions or instructions, the Board of directors of the company is accustomed to act;
(f) Any person charged by the Board with the responsibility of complying with that provision & who has given his consent in that behalf to the Board; &
(g) 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, all the directors.
Thus, other employees of the company cannot be said to be persons who are responsible to the company, for the conduct of the business of the company.
Also there must be a specific averment in the complaint that at the time the offence was committed, the person accused was in charge of & responsible for the conduct of the business of the company. There must be the inclusion of the names of all those whom the complainant considers responsible, or whom the complainant wishes to be held responsible to be specifically mentioned in the complaint.
In S.M.S Pharmaceuticals v. Neeta Bhalla330, it was held that it is necessary to specifically aver in a complaint under section 141 of the Negotiable Instruments Act, 1881 that at the time the offence was committed, the person accused was in charge of, and responsible for the conduct of business of the company. This averment is an essential condition of the section 141 of the Act & has to be made in a complaint. Without this averment being made in a complaint, the conditions of the section 141 of the Act cannot be said to be fulfilled.
It was further held that even in the absence of such a specific averment, the signatory of the cheque and/or the Managing Directors or Joint Managing Directors shall be liable under section 141 of the Act by virtue of the office they hold (as Managing or Joint Managing Directors). These persons are covered under section 141 of the Act as persons in charge of and responsible for the conduct of the business of the company.
In N Rangachari v. Bharat Sanchar Nigam Limited 331 , it was held that a person in the commercial world having a transaction with a company has the right to presume that the directors of the company are in charge of the affairs of the company. If any restrictions on their powers are imposed by the Memorandum or Articles of the company, it is for the directors to establish it at the trial. It is in that context that section 141 of the Act provides that when the offender is a company, every person, who at the time when the offence was committed was in charge of and was responsible to the company for the conduct of the business of the company, shall also be deemed to be liable for the offence along with the company.
Thus, an allegation in the complaint that the named accused are directors of the company would itself indicate of their acting for and on behalf of the company and of their being in charge of the company.
Under Section 138 of the Act, the punishments for breaches of the section include fine (up to twice the amount of the cheque) or imprisonment, or both. A fine can be imposed on the company or corporation for a breach of this section, but in case, the punishment of imprisonment is to be imposed then it means that those sentences for imprisonment could be imposed upon the individuals who are held as ‘those in charge of and responsible to the company’ as the company is an artificial person.
ANEETA HADA V. M/S. GODFATHER TRAVELS & TOURS PVT. LTD.332
In this case, it was held that if a group of persons that guide the business of the companies have the criminal intent that would be imputed to the body corporate. In this context, section 141 of the Act has to be understood. The said provision clearly provides that when a person who is a company commits an offence, then certain categories of persons in charge as well as the company would be deemed to be liable for the offences under section 138 of the Act. Also the directors or the other officer of a company cannot be prosecuted alone which means arraigning the company as accused is a condition precedent for their prosecution.
STANDARD CHARTERED BANK V. STATE OF MAHARASHTRA AND OTHERS ETC.333
In this case, it was held that a Director cannot get a complaint under section 138 of the Negotiable Instruments Act, 1881 against him quashed under section 482 of the Code of Criminal Procedure, merely on the ground that apart from the basic averment no particulars are given in the complaint about his role.
ASHOKE MAL BAFNA V. M/S. UPPER INDIA STEEL MFG. & ENGG. CO. LTD.334
In this case, it was held that before summoning an accused under section 138 of the Act, the Magistrate is required to examine the nature of allegations made in the complaint & the evidence both oral & documentary in support thereof & then to proceed further with the proper application of mind to the legal principles on the issue. Impliedly, it is necessary for the courts to ensure strict compliance of the statutory requirements as well as settled principles of law before making a person vicariously liable.
Also for making a Director of a Company liable for offences committed by the company under section 141 of the Act, there must be specific averments against the Director indicating as to how & in what manner the Director was responsible for the conduct of the business of the company.
Thus, in the light of various legislative provisions, especially under Chapter XVII of the Negotiable Instruments Act, 1881 which contains the provisions relating to dishonour of cheque, & the judicial interpretation of those provisions, the concept of holding a company criminally liable for its acts has become an established legal position.
CONCLUSION
As a company is an artificial person, it acts through its officials. Thus, in case of dishonour of cheque by a company, all those persons who were in charge of & responsible for conduct of business of the company at the time of commission of that offence, will be liable for the offence. Thus, a director of a Company, who was not in charge of and was not responsible for the conduct of the business of the company at the relevant time, shall not be liable under section 141 of the Negotiable Instruments Act, 1881. The liability arises from being in charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed and not on the ground of merely holding a designation or office in a company.