Dishonour of Cheque – Section 138 of the Negotiable instruments Act

WHAT IS A CHEQUE?

Section 6  of Negotiable Instruments Act defines cheque as:

6.   “Cheque“.-A “cheque” is a bill of exchange drawn on a specified banker and not expressed
to be payable otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque  in  the electronic form.  Explanation I.-For the purposes of this section, the
expressions-
(a)  “a  cheque in the electronic form” means a cheque which  contains  the  exact  mirror
image of a paper cheque, and is generated,  written  and  signed  in a secure system ensuring the
minimum safety  standards  with  the  use  of  digital  signature  (with  or  without  biometrics 
signature) and asymmetric crypto system;
(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.-For  the  purposes of this 
section,  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.’.
E-CHEQUE
  Electronic cheque (e-cheque) is the image of a normal paper cheque generated, written and
signed in a secure system using digital signature and asymmetric crypto system. Simply said an
electronic cheque is nothing more than an ordinary cheque produced on a computer system and
instead of signing it in ink, it is signed using the digital equivalent of ink. After the coming into
force of The Negotiable Instruments (Amendment And Miscellaneous Provisions) Act, 2002,
legal recognition has been accorded to e-cheques and they have been brought at par with the
normal cheques. Now, a ‘cheque’ includes an e-cheque.
SECTION 138 NEGOTIABLE INSTRUMENTS ACT 1881
 Section 138 Negotiable Instruments Act as it is at present after coming into force of
The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002:
138. Dishonour of cheque for insufficiency, etc., of funds in the account:

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 extend to  two  years, or with fine which may extend to
twice the amount of the cheque,  or with both: 
    Provided that  nothing contained in this section 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; and
             (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.
Explanation.-For  the  purposes of this section, “debt  or  other  liability” means a legally
enforceable debt or other liability.
 

INGREDIENTS OF OFFENCE UNDER SECTION 138

1. The cheque should have been issued for the discharge , in whole or part, of any debt or
other liability
2. The cheque should have been presented within a period of six months or within its
validity period whichever is earlier.
3. The payee or holder in due course should have issued a notice in writing to the drawer
within 30 days of the receipt of information by him from the Bank regarding the return of
the cheque as unpaid.
4. After receipt of the said notice from the holder in due course, the drawer should have
failed to pay the cheque within 15 days of receipt of the said notice.

GROUNDS FOR DISHONOUR OF CHEQUE

“Funds Insufficient”:
Section 138 describes the above ground of insufficient funds in the account of the drawer of the
cheque in the following words:

The amount of money standing to the credit of the account of the drawer on which the cheque is
drawn is insufficient to honour the cheque, or

1. The cheque amount exceeds the amount that can be paid by the bank under an
arrangement entered into between the bank and the drawer of the cheque.
However, besides the above, the Courts have also accepted some other heads which though
expressly do not say ‘insufficient funds’ but are implied to mean the same and a cheque
dishonoured on any of these grounds can be used for the purpose of prosecution under section
138 Negotiable Instruments Act. Some of theses grounds are:

1.     Account Closed: “ It is an offence under section 138 of the Act – Closure of account would
be an eventuality after the entire amount in the account is withdrawn –  It means that there was
no amount in the credit of ‘that account’ on the relevant date when the cheque was presented for
honouring the same”
This has been held by the Hon’ble Supreme Court of India in-

NEPS MICON LTD. AND OTHERS  VS.  MAGMA LEASING LTD.

1999 ISJ (BANKING) 0433; 1999 (1) APEX C.J. 0624; 1999 AIR (SCW) 1637
2.     ‘Stop Payment’ instructions:
“Once the cheque has been drawn and issued to the payee and the payee has presented the
cheque, ‘stop payment’ instructions will amount to dishonour of cheque.”

MAHENDR S. DADIA VS. STATE OF MAHARASHTRA

I (1999) BANKING CASES (BC) 133 (17/03/1998)              
3.     ‘Refer to drawer’:
“ …….. makes out a case under section 138 of the Negotiable Instruments Act, 1881 which
expression means that there were not sufficient funds with the bank in the account of the
respondent”

LILY HIRE PURCHASE LTD. VS. DARSHAN LAL,

(1997) 89 COMPANY CASES 663 (10/01/1997)
4.     ‘Not a clearing member”:
“Cheque returned with endorsement ‘not a clearing member’. To attract the provisions of section
138 NI Act, the cheque should be presented with the bank on which it I drawn- If the cheque is
not presented to the bank on which it is drawn, then provisions of sec 138 would not be attracted.
If bank on which the cheque is drawn is not a clearing member of the Reserve Bank of India –
unpaid return of the cheque would not attract section 138.”

CHAIRMAN, JAWAHAR COOPERATIVE URBAN BANK LTD. AND OTHERS  VS. 

RAMANJANEYA ENTERPRISES, HYD. AND ANOTHER
2005 (5) CRIMINAL REPORTED JUDGEMENTS (CRJ) 0591;

2005 (2) DISHONOUR OF CHEQUE REPORTER (DCR) 0169

5.     Effect of other endorsements:

It has been repeatedly held by courts that manifest dishonest intention of the drawer resulting in

dishonour of the cheque would lead to prosecution under section 138 Negotiable Instruments Act

regardless of the actual ground of dishonour.

OTHER NOTABLE ASPECTS OF OFFENCE UNDER 138 N.I. Act

COMPLAINTS AGAINST A COMPANY:

Section 141 of Negotiable Instruments Act says:

141. Offences by companies:

(1) 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, 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:

- Provided that nothing contained in this sub-section 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 this Chapter.

(2) Notwithstanding anything contained in sub-section (1), where  any  offence under this 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,

Explanation-For the purposes of this section,-

(a)”company” means any body corporate and includes a  firm  or other association of

individuals; and

(b) “director”, in relation to a firm, means a partner in the firm.

The Hon’ble Supreme Court has held that merely being a director of a company is not sufficient

to make a person liable under section 141 of the Act. A director in a company cannot be deemed

to be in charge of and responsible to the company for the conduct of its business. The
requirement of section 141 is that 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 and there is no deemed liability of a director in such cases.  AIR 2005 (SCW)

4740; AIR 2005 SC 3512, AIR 2007 SC 1682

Supreme Court has also held that for the directors of the company to be made liable for an

offence under sec 138, the complaint must contain specific allegations against directors as to

how directors are in charge and responsible for conduct of business of company. Mere allegation

in complaint that accused persons are directors and responsible officers of the company is not

sufficient. AIR 2007 SC 1454

Section 141 in The Negotiable Instruments Act, 1881

[ 141 Offences by companies. —

(1) 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, 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: Provided that
nothing contained in this sub-section 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: 22 [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 this Chapter.]
(2) Notwithstanding anything contained in sub-section (1), where any offence under this 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. Explanation.— For the purposes of this section,—
(a) “company” means any body corporate and includes a firm or other association of individuals;
and
(b) “director”, in relation to a firm, means a partner in the firm.]
Director and Officer Liability for Dishonour of Cheques
(The following post has been contributed by Avirup Bose. Avirup is an Indian lawyer, who has
graduated from NUJS Kolkata and has an LL.M from the Harvard Law School)
On July 6, a Division Bench of the Supreme Court passed a judgment in K.K. Ahuja v. V.K.
Vora(MANU/SC/1111/2009, per R.V. Raveendran, J.) (“K.K. Ahuja”), where it considered the
particular question as to who can be said to be persons “in-charge of, and was responsible to the
company for the business of the company” under Section 141 of the Negotiable Instruments Act,
1881 (“NI Act”). Section 141 of the NI Act provides that when a company’s cheque is
dishonoured under Section 138 of the NI Act, then those who were in-charge of the conduct of
the business of the company, at the time the offence was committed, would be constructively
liable.

K.K. Ahuja, the appellant, had filed two criminal complaints, under Section 138 of the NI Act,
against M/S Motorol Speciality Oils Ltd. (the “Company”), and eight of its officers (Chairman,
four Directors, VP Finance, General Manager and Deputy General Manager (“DGM”)
respectively), in the Court of the Metropolitan Magistrate, Delhi, averring that at the time of the
commission of the offence, all the eight officers were in-charge of and responsible for the
conduct of the day-to-day business of the Company and thus deemed to be guilty under Section
138, read with, Section 141 of the NI Act. Next, the accused DGM moved to quash the
proceedings against him on the ground that as DGM of the Company he was not in-charge of the
conduct of the day-to-day business of the Company. This petition was allowed by the Delhi High
Court, which was then challenged before the Supreme Court in K.K. Ahuja.

The Supreme Court ruled in dicta that, “[]…. to be vicariously liable under Sub-section (1) of
Section 141, a person should fulfill the 'legal requirement' of being a person in law (under the
statute governing companies) responsible to the company for the conduct of the business of the
company and also fulfill the 'factual requirement' of being a person in charge of the business of
the company.” In other words, any corporate officer accused under Section 141(1) of the NI Act
has to: (1) be a person responsible to the company for the conduct of the business of the
company under the provisions of the Companies Act, 1956 and (2) be in-fact also a person in-
charge of the business of the company.

Requirements to satisfy the First Prong:

The Court, relying on Sections 5 and 291 read with clauses (24), (26), (30), (31) and (45) of
Section 2 of the Companies Act, 1956, lists the categories of persons who under the Companies
Act can be considered as persons who are responsible to the company for the conduct of the
business of the company. They are:

(a) the managing director/s;

(b) the whole-time director/s;

(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
(and who has given his consent in that behalf to the Board); and

(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.

The above list is exhaustive since the Supreme Court held that 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.

Requirements to Satisfy the Second Prong:

The Supreme Court, relying on past precedents, held that the words “person in charge of the
business of the company” refer to a person, who is in overall control of the day-to-day business
of the company. The Supreme Court further held that, since the question as to who is in “overall
control” is a fact specific one, specific averment in the complaint is required. This the Court felt
necessary since a person may be a Director and thus belong to the group of officers who are
involved in policy-making for the company, yet he may not be in-charge of the business of the
company.

Consequently, the Supreme Court provides a two-pronged test—the first prong is a legal, statute-
based test, where to prove that a person is responsible to the company for the conduct of the
business of the company, one needs to merely check if the accused person falls in any one of the
listed categories. The second prong is a fact-based test, where through specific averments the
complainant has to allege that the particular accused was in-fact in overall control of the day-to-
day business of the company. Both the prongs need to be complied with. Hence, if a person does
not satisfy the first prong, i.e., if he is not one of the above-mentioned officers as listed by the
Supreme Court, then he is neither required to meet the second prong nor can he be held liable
under Section 141(1).

However, if the accused falls under one of the categories listed by the Supreme Court, i.e., he is
under statute, the Companies Act 1956, a person responsible to the company for the conduct of
the business of the company, then the judgment provides for a sliding scale of averment that
needs to be made in the complaint, depending upon the particular category of the officer. These
are as tabularized:
ishonour of cheques : Section 141 of NI Act, 1881 does not make all the Directors liable for
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 on the part of a person must be pleaded and proved and not inferred.
 

SUPREME COURT OF INDIA

 

National Small Industries Corp. Ltd.v.Harmeet Singh Paintal

CRIMINAL APPEAL NOS. 320 - 337 OF 2010

 RELEVANT EXTRACTS :

**                **                **                **                **                **

Section 291 of the Companies Act provides that subject to the provisions of that 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 company, though a legal entity,
can act only through its Board of Directors. The settled position is that a Managing Director is
prima facie in-charge of and responsible for the company's business and affairs and can be
prosecuted for offences by the company. But insofar as other Directors are concerned, they can
be prosecuted only if they were in-charge of and responsible for the conduct of the business of
the company. A combined reading of Sections 5 and 291 of Companies Act, 1956 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:
 (a) the Managing Director/s;(b) the whole-time Director/s;

 (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 of Directors with the responsibility of complying with that
provision; Provided that the person so charged has given his consent in this 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:
 Provided that where the Board exercises any power under clause (f) or clause (g), it shall,
within thirty days of the exercise of such powers, file with the Registrar a return in the
prescribed form. But if the accused is not one of the persons who falls under the category of
"persons who are responsible to the company for the conduct of the business of the company"
then merely by stating that "he was in-charge of the business of the company" or by stating
that "he was in- charge of the day-to-day management of the company" or by stating that "he
was in-charge of, and was responsible to the company for the conduct of the business of the
company", he cannot be made vicariously liable under Section 141(1) of the Act. To put it clear
that for making a person liable under Section 141(2), the mechanical repetition of the
requirements under Section 141(1) will be of no assistance, but there should be necessary
averments in the complaint as to how and in what manner the accused was guilty of consent
and connivance or negligence and therefore, responsible under sub-section (2) of Section 141
of the Act.

From the above discussion, the following principles emerge :

(i) 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.
 

(ii) 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.

(iii) 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.

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

(v) If accused is Managing Director or 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

(vi) If 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 complaint.
(vii) 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.