Amongst the pending disputes in commercial and financial dealings, cheque bounce cases have emerged as a significant legal concern. Cheques are commonly used as a mode of payment to settle financial obligations, but disputes arise when a cheque issued for the discharge of a debt or liability gets dishonoured due to insufficient funds, signature mismatch, or other reasons. The dishonour of a cheque not only creates financial hardships for the payee but also leads to legal consequences under the Negotiable Instruments Act of 1881 (NI Act).
Section 138 of the NI Act holds the drawer of the cheque liable for prosecution. In recent times, an increasing number of cases have been filed against company directors under Section 138 and Section 141 of the NI Act, where cheques have been issued on behalf of the company to settle corporate liabilities. This raises a crucial legal question—can a director be held personally liable in a cheque bounce case? While Section 141 of the NI Act provides for the liability of directors responsible for the company’s day-to-day affairs, judicial interpretations have clarified that not all directors can be automatically held accountable. This article delves into the legal nuances surrounding cheque bounce cases, examining the liability of directors and the evolving judicial stance on this matter.
Director as an Authorised Signatory
In case the Director is the Authorised Signatory of the Cheque and is not actively managing the company’s daily operations. Thereby, can the Director be held liable. In accordance with the Hon’ble Supreme Court of India, in Susela Padmavathy Amma Vs. Bharti Airtel Limited decided on 15.03.2024 that it was held that the Director, merely the Authorised Signatory of the Cheque, cannot be held liable. The case was that the Complainant made an allegation against the accused that the Appellant, along with the second accused, had no intention to pay the dues owed to the Complainant, and the second accused was the authorised signatory and responsible for the company’s day-to-day affairs. The court held that these averments were insufficient to invoke Section 141 of the NI Act against the appellant. This ruling underscores that even an authorised signatory cannot be held liable if they are not actively managing the company’s daily operations.
Acting on Behalf of the Principal
Whether the person is the agent or employee of the company can be held liable for the Cheque Bounce acting on behalf of the Principal as an agent or not. In accordance with the Supreme Court of India judgement in Bijoy Kumar Moni Vs. Paresh Manna and Ors. decided on 20.12.2024, the court reiterated that only the drawer of the cheque could be held liable under Section 138 of the NI Act. The ruling emphasised that an authorised signatory acting on behalf of the principal is not deemed the “drawer” of the cheque on an account maintained by them under Section 138. This decision further limits liability to those directly accountable for issuing dishonoured cheques. Consequently, this ruling underscores that the Agent acting on behalf of the Principal for issuing the Cheque cannot be held liable.
Independent Director Liability
Further, whether the Independent Director, being the one who is a non-executive board member with no financial or material ties to the company, is merely ensuring impartiality and promoting good corporate governance can be held liable under Section 138 of the NI Act. In accordance with the judgement of the Hon’ble High Court of Delhi, in the case of Preeti Vs. State and Ors. decided on 02.11.2022, has examined that an independent or non-executive director could not be vicariously liable for dishonouring cheques they did not sign. The court found that the petitioner, an independent director, had no role in the company’s transactions or daily business affairs. Since the petitioner was neither a signatory to the cheques nor aware of their issuance, the court ruled that mere allegations against all directors being responsible for day-to-day affairs were insufficient to establish liability. Consequently, this ruling underscores that the independent or non-executive director cannot be held liable in the Cheque Bounce matter under the Negotiable Instruments Act.
Resigned Director Liability
Furthermore, can the Director be held liable in the scenario where, after signing the cheque, the Director resigned from the office for a number of reasons? Can the directors be held liable? In accordance with the Supreme Court of India judgement in S.M.S. Pharmaceuticals Ltd. Vs. Neeta Bhalla and Ors decided on 20.09.2005. has clarified that Section 141 of the NI Act applies only to individuals who were in charge of and responsible for the company’s business at the time of the offence. The phrase “every person” in the provision does not indiscriminately include all directors but only those actively overseeing business operations when the offence occurred. This interpretation shields former directors from liability for offences committed after their resignation. However, the court held that in order to bring a case within Section 141 of the Act, the complaint must disclose the necessary facts that make a person liable.
Cheque Dishonour and the Corporate Insolvency Resolution Process (CIRP)
A critical issue in cheque dishonour cases arises when a company undergoes insolvency proceedings after issuing the cheque. In Ganesh Chandra Bamrana and Ors. Vs. Rukmani Gupta, the Delhi High Court dated 17.12.2024 ruled that since the dishonoured cheques were presented post-imposition of the moratorium under the Insolvency and Bankruptcy Code (IBC), the accused directors could not be held vicariously liable under Section 138 of the NI Act.
A similar viewpoint was reinforced in Vishnoo Mittal Vs. M/S Shakti Trading Company by the Supreme Court of India on 17.03.2025, where the court held that a director suspended due to the initiation of CIRP loses control over the company’s financial decisions. Since bank accounts operate under the instructions of the Insolvency Resolution Professional (IRP) after the moratorium, the suspended director cannot be held accountable for cheque dishonour.
Conclusion
Judicial interpretations of Sections 138 and 141 of the NI Act highlight the necessity of distinguishing between various categories of directors. Courts have consistently ruled that only directors actively involved in a company’s daily affairs can be held liable. Furthermore, insolvency proceedings provide an additional layer of protection when control shifts to an IRP. These legal advancements ensure fairness by imposing liability only where justified, reinforcing the need for corporate stakeholders to remain informed about evolving jurisprudence to mitigate legal risks effectively.
Author: Akhand Pratap Singh Chauhan, Partner
Co- Author: Sachin Sharma, Assessment Intern
