How the courts have interpreted the liability of directors, partners and other persons for dishonoured cheques
Cheque bounce cases are one of the most common types of criminal cases in India. Under Section 138 of the Negotiable Instruments Act, 1881, a person who issues a cheque that is dishonoured by the bank for insufficient funds or any other reason is liable to be punished with imprisonment or fine or both. However, the question arises whether the person who issued the cheque is the only one who can be held liable for the offence or whether other persons who are associated with him or her can also be held vicariously liable.
Vicarious liability is a legal doctrine that holds a person responsible for the acts or omissions of another person, based on their relationship or position. For example, an employer can be held vicariously liable for the negligence of his or her employee, a principal can be held vicariously liable for the torts of his or her agent, and a partner can be held vicariously liable for the debts of his or her partnership firm.
In cheque bounce cases, the issue of vicarious liability often arises when the cheque is issued by a company, a partnership firm, a trust, a society or any other legal entity. In such cases, the courts have to decide whether the directors, partners, trustees, members or other persons who are in charge of or responsible for the affairs of the entity can also be prosecuted along with the entity itself.
The legal provisions on vicarious liability in cheque bounce cases
The Negotiable Instruments Act does not explicitly provide for vicarious liability in cheque bounce cases. However, Section 141 of the Act states that if an offence under Section 138 is committed by a company, then every person who was in charge of and responsible for the conduct of the business of the company at the time when the offence was committed shall also be deemed to be guilty of the offence. The section also states that if it is proved that the offence was committed with the consent or connivance of or was attributable to any neglect on the part of any director, manager, secretary or other officer of the company, then such person shall also be deemed to be guilty of the offence.
Similarly, Section 142 of the Act states that if an offence under Section 138 is committed by a partnership firm, then every partner who was in charge of and responsible for the conduct of the business of the firm at the time when the offence was committed shall also be deemed to be guilty of the offence. The section also states that if it is proved that the offence was committed with the consent or connivance of or was attributable to any neglect on the part of any partner, then such partner shall also be deemed to be guilty of the offence.
These sections create a presumption of guilt against certain persons who are associated with a company or a partnership firm that issues a dishonoured cheque. However, this presumption is rebuttable and such persons can escape liability by proving that they had no knowledge of or were not involved in the transaction that led to the issuance of the cheque.
The judicial interpretation of vicarious liability in cheque bounce cases
The courts in India have interpreted and applied the concept of vicarious liability in cheque bounce cases in various ways. Some of the important judicial pronouncements on this issue are as follows:
- In S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla1, the Supreme Court held that Section 141 does not make all directors liable for an offence committed by a company under Section 138. It only makes those directors liable who were in charge of and responsible for the conduct of business at relevant time. The court also held that Section 141 does not require specific averments to be made against each director in order to make them liable. It is enough if general averments are made against all directors and then it is for them to prove their innocence.
- In Standard Chartered Bank v. State Of Maharashtra2, the Supreme Court held that Section 141 applies not only to companies but also to other legal entities such as trusts and societies. The court also held that Section 141 does not require mens rea (guilty mind) as an essential ingredient for imposing criminal liability on persons associated with an entity that issues a dishonoured cheque. It is sufficient if they were in charge of and responsible for its affairs at relevant time.
- In N.K. Wahi v. Shekhar Singh3, the Supreme Court held that Section 141 does not create an absolute bar on filing complaints against directors who have resigned from their positions before issuance of cheque. The court held that such directors can still be held liable if it is shown that they were in charge of and responsible for the affairs of the company at the time when the cheque was issued or when the liability arose.
- In Aneeta Hada v. Godfather Travels & Tours Pvt. Ltd., the Supreme Court held that Section 141 does not create a joint liability of the company and its directors or other persons. It creates a separate and distinct liability of each of them. The court also held that a complaint under Section 138 can be filed against a company without impleading its directors or other persons as accused. However, if such persons are also sought to be made liable, then they have to be impleaded as accused in the same complaint.
- In Gunmala Sales Pvt. Ltd. v. Anu Mehta, the Supreme Court held that Section 142 does not make all partners liable for an offence committed by a partnership firm under Section 138. It only makes those partners liable who were in charge of and responsible for the conduct of business at relevant time. The court also held that Section 142 does not require specific averments to be made against each partner in order to make them liable. It is enough if general averments are made against all partners and then it is for them to prove their innocence.
The conclusion on vicarious liability in cheque bounce cases
The concept of vicarious liability in cheque bounce cases is based on the principle of collective responsibility of persons who are associated with an entity that issues a dishonoured cheque. However, this concept is not absolute and does not make every person associated with such entity liable for the offence. The liability depends on the nature and extent of involvement of such person in the affairs of the entity and the transaction that led to the issuance of the cheque. The burden of proof also shifts from the complainant to the accused depending on the facts and circumstances of each case.
The concept of vicarious liability in cheque bounce cases is aimed at ensuring that justice is done to the aggrieved party who has been cheated by a dishonoured cheque and also at deterring such fraudulent practices by entities and their associates. However, this concept also has to be balanced with the rights and interests of innocent persons who may have no role or knowledge in the offence. Therefore, the courts have to apply this concept with caution and care, keeping in mind the facts and circumstances of each case.
References
1: S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89 2: Standard Chartered Bank v. State Of Maharashtra, (2016) 6 SCC 62 3: N.K. Wahi v. Shekhar Singh, (2007) 9 SCC 481 : Aneeta Hada v. Godfather Travels & Tours Pvt. Ltd., (2012) 5 SCC 661 : Gunmala Sales Pvt. Ltd. v. Anu Mehta, (2015) 1 SCC 103
