Can a Company Director Be Held Liable for Cheque Bounce Under Section 138?

Vicarious Liability Under Section 141 of the NI Act

When a cheque issued by a company is dishonoured, the question of who can be prosecuted becomes critical. Section 141 of the Negotiable Instruments Act provides for vicarious liability of persons responsible for the conduct of the company’s business. This section has been the subject of extensive judicial interpretation, and understanding its scope is essential for both complainants and accused persons.

Who Can Be Prosecuted?

Under Section 141, every person who was in charge of, and responsible for, the conduct of the business of the company at the time of the commission of the offence, as well as the company itself, can be prosecuted. Additionally, any director, manager, secretary, or other officer of the company can be prosecuted if the offence was committed with their consent, connivance, or is attributable to their neglect.

The Supreme Court in the landmark case of SMS Pharmaceuticals Ltd. v. Neeta Bhalla clarified that for making a director liable, there must be specific averments in the complaint that the director was in charge of and responsible for the conduct of the business of the company. Mere designation as a director, without more, is insufficient to attract liability.

Key Legal Principles

The complaint must contain specific allegations establishing the role and responsibility of each person arraigned as an accused. The signatory of the cheque is deemed to be in charge of the affairs of the company and can be prosecuted without additional averments about their role. Non-signatory directors require specific averments about their involvement in the day-to-day affairs of the company.

Nominee directors and independent directors have successfully challenged prosecution under Section 138 where they can demonstrate that they had no active role in the management of the company’s financial affairs.

Practical Implications Under BNS and BNSS

Under the Bharatiya Nyaya Sanhita (BNS) and Bharatiya Nagarik Suraksha Sanhita (BNSS), the general principles of vicarious liability remain applicable. Section 318 BNS (replacing IPC Section 420 on cheating) can be invoked in conjunction with Section 138 where the issuance of a dishonoured cheque involves dishonest intent. Directors and officers must be aware that their liability extends beyond the NI Act when criminal intent is established.