NO LIABILITY FOR DIRECTOR IN CASE OF CHEQUE DISHONOR, IF THE COMPANY IS EXCLUDED: SUPREME COURT
Category: Negotiable Instruments Act
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INTRODUCTION
The Supreme Court of India in a significant judgment has stated that a director is not personally liable under Section 138 of the Negotiable Instruments Act, 1881, for a cheque issued on behalf of the company, which is itself not arraigned as an accused in the case. This reinforces the concept that the dishonor of duty law should rest on the entity primarily that has to do with the cheque.
BACKGROUND
A complaint was instituted under Section 138 of the Negotiable Instruments Act, which had provisions making bad cheques punishable where there were insufficient funds or other reasons to make them good. In the matter before the court, the complaint had been preferred by the complainant solely against the director of the company without impleading the company as an accused. Hence, the director contended that the proceedings were untenable without the company being party to the proceedings.
KEY POINTS
The company was not mentioned: The complaint against the director did not name the company as an accused party issuing the cheque.
Director's argument: The director said that on that ground, prosecution under Section 138 would not lie for the reason that the principal offender, the company itself, had not been arraigned.
Legal Precedent: The Supreme court relied on the established principles of law that a company was considered as the primary offender under Section 138 and only in cases where the company was proceeded against would directors be held vicariously liable.
Procedural Lapse: The court pointed out that the complainant had failed to comply with the statutory provisions to be followed procedurally.
RECENT DEVELOPEMENTS
A bench within the Supreme Court has confirmed the already established legal position in Section 138 that having an establishment is the drawer of the cheque and, as a result, the principal offender. Only if the company is brought before the court as an accused will the directors or any other officer be held liable, when shown to be in charge of and responsible for the conduct of the company's business.
"It is the prosecution of the company as a primary offender that makes vicarious liability of the directors or officers stand under Section 141 of the Negotiable Instruments Act," the bench said.
In addition, the court laid further clarifications that behind the legislative intent in Sections 138 and 141 of the Act was to ensure that directors or officer would not be prosecuted indiscriminately but rather would be proven that of the liability of the corporation first before them. Thus, it touched upon the aspect of procedural observance by complaining parties in such cases.
CONCLUSION
The decision of the Supreme Court reaffirms the relevance of procedural preciseness and methodology as prescribed by statute in cases of dishonored cheques. Such a judgment, putting up a bar on the complainant holding the directors liable before prosecuting the company, clears the point while strengthening the fairness implicit in corporate liability.
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WRITTEN BY: ADV AYANTIKA MONDAL
