Director's Liability in matters of Dishonour of Cheque (Cheque Bounce)

By Bharti Harsana


Bharti Harsana


In the modern times, Cheques have become an essential part of financial life as they are used in almost all transactions, like guarantee of loans, rent agreements, tenders, payment of salary to employees, payments of bills etc. Cheques have also become an integral ingredient of business transactions as they ensure evidence of transactions. Due to this wide spread use of cheques, legislature enacted the Negotiable Instruments Act, 1881 which provide regulations for matters relating to the use of cheques.


Section 6 of the Indian Negotiable Instruments Act, 1882 defines the term 'cheque' as a bill of exchange not payable otherwise than on demand, drawn on a specific banker. The person being paid is known as the payee or drawee and the person paying through cheque is known as the drawer or payer.

"A cheque is an unconditional order in writing, signed by the person giving it, requiring the bank to whom it is addressed to pay on demand a certain sum of money to, or to the order of, a specified person or to bearer".[1]

Dishonour of Cheque (Cheque Bounce):

Chapter XVII of the Negotiable Instruments Act i.e., Sections 138 to 147, deal with the subject of dishonour of cheque and provides the remedies and penalties in case of dishonour of cheque. Dishonour of a Cheque is a criminal offence under Section 138 of the Negotiable Instruments Act, 1881.

A cheque is said to be dishonoured, commonly termed as cheque bounce, when it is refused to be paid or returned unpaid when presented to the bank. It has been defined in Section 138 Negotiable Instruments Act, 1881, as any cheque drawn by a person in payment to another person, which is returned to the bank unpaid because the amount exceeds the prescribed limit or there are insufficient funds in the account.It can be described as a situation where a person paid in the form of a cheque is unable to cash the cheque.

The Black's Law Dictionary defines dishonour as: "An instrument is dishonoured when a necessary or optional presentment is duly made and due acceptance or payment is refused, or cannot be obtained within the prescribed time, or in case of bank collections, the instrument is reasonably returned by the midnight deadline; or presentment is excused and the instrument is not duly accepted or paid".[2]

A communication slip is attached to the dishonoured cheque called the 'return memo' which states the reasons for the dishonour of cheque. A Cheque may be dishonoured by the banker for varied reasons, such as -

         Insufficient Funds

         Non-Applicability of Funds

         Irregular Signature

         Alterations in the Cheque

         Post-dated Cheque

         Stale Cheque

         Frozen Account

         Account Closed

The drawer of a dishonoured cheque can only be legally prosecuted by the payee if the amount stated in the cheque is for clearance of a debt or any other liability of the drawer towards payee. The drawer cannot be sued if the cheque was granted as a gift, for a loan,or for any unlawful purposes.

When a cheque is dishonoured, the payee generally has two remedies:

         civil suit for recovery of money

         criminal complaint under Section 138

The complainant is not barred from filing a civil suit for recovery of cheque amount even after launching prosecution against or obtaining conviction of drawer under Section 138 of Negotiable Instruments Act. The drawer can even be prosecuted under sections 417 and 420 of IPC in cases involving cheating. The offence under Section 138 of the Act and Section 420 of the IPC are different in nature, therefore conviction of offence under one provision does not bar prosecution under the other.

Section 138 of Negotiable Instruments Act, 1881:

Following are ingredients of Section138 of the Actwhich are necessary to amount an offence under the Section:

1.      Cheque must be issued for the discharge of any debt or other liability.

2.      The cheque must be presented within the period of 6 months (now 3 months - RBI Guidelines) or within the period of its validity, whichever is earlier.

3.     The payee should, within 30 days of receiving information from the bank concerning dishonour of the cheque, issue a notice to the drawer in writing about the same and to make the payment within 15 days. When the party entitled to notice cannot, after due search be found, the notice of dishonour is not necessary.

4.      The drawer must fail to make the payment of the cheque amount within 15 days of receiving notice from the payee.

5.      A complaint must be filed before a Metropolitan Magistrate or a Judicial Magistratenot below the rank of a Judicial Magistrate of First Class, within 1 month of the date of expiry of the time of fifteen days on non-payment of the amount due on the dishonoured cheque by the drawer. The court may take cognizance of a complaint even after the prescribed period, if the Court is satisfied that the complainant had sufficient cause for not making a complaint within prescribed period.

6.      The offence under the Act is compoundable

Punishment-The punishment for dishonour of cheque may vary from imprisonment for a term up to two years or with fine up to twice the amount of the cheque, or both.

Dishonour of Cheque by Company:

A company runs through its directors and officers who are in charge of the conduct of the commerce of the company as it is an unnatural person created by law. The company becomes criminally liable for dishonour of cheque when a cheque drawn by the company is dishonoured, but because of the company being an artificial person, this liability is extended to the company's officers as well. The offence must actually be committed by the company for the officers of the company to be held liable.

The offence of dishonour of cheque by companies is regulated by Section 141 of the Negotiable Instrument Act,1881

Director's Liability:

The directors of a company are the persons employed to manage and control the business of the company, they may be designated as director or by any other name. Section 141(2)(a) of Negotiable Instruments Act 1881 also includes the partners of a firm as directors for the purpose of this section.

The rule of vicarious liability is often applied in cases concerned with criminal liability, which says that no one is to be held criminally liable for an act of another. Vicarious liability is put on natural person who have some nexus with the crime under section 141 of the Act.

Black's Law Dictionary defines the term 'vicarious liability'as:

"The imposition of liability on one person for the actionable conduct of another, based solely on a relationship between the two persons. Indirect or imputed legal responsibility for acts of another, for example, the liability of an employee for the acts of an employer, or, a principal for torts and contracts of an agent."[3]

Section 141 of the Negotiable Instrument Act,1881:

The following persons, in addition to the Company,are held liable for dishonour of cheque by a Company:

  1.  All persons who were in-control of and accountable to the company for running the business of the company at the time the offence was committed;
  2. All Directors, Managers, Secretaries and other officers of the company with whose consent and connivance, the offence was committed; and
  3. All Directors, Managers, Secretaries and other officers of the company whose negligence led to the offence being committed by the company.

Note: A director who was not responsible or in charge of the company at the time of the offence would not be liable even if he is named director of the company.


The Director will not be held liable for dishonour of cheque by the company if:

1.      The offence occurred without his knowledge

2.      He exercised due diligence in order to avoid the offence.


The Court, in the case of SMS Pharmaceuticals v. Neeta Bhalla and Anr[4]held that:

.         The complaint must specify that at the time the cheque was issued, the director was in-charge of the company.

.         The director must actually be responsible for running the company and would not be liable for simply being designated as a director.

.         The signatory of the cheque will also be held liable.

In Saroj Kumar Poddar v. State (NCT of Delhi)[5] the court adjudged that the circumstances of the offence and reasons for holding director vicariously liable must be specified in the complaint, emphasizing that there must be strict construction of Section 141 of the Act.

In the case of SMS Pharmaceuticals v. Neeta Bhalla,[6]the court observed that only the directors who were in charge of the business of the company when the cheque was drawn up would be held liable if there are a large no. of directors in a company. Other directors cannot be held liable simply for being directors if they do not take any part in the offence.

The court, in the case of K.K. Ahuja v. V.K. Vora &Anr.,[7] held that the Managing Directors of a company can be assumed to be liable for dishonour of cheque simply by the nature of their office, as they are responsible for the day-to-day affairs of the company.


A person cannot be held guilty in case of dishonour of cheques just because he is the director of the Company. Section 141 of the Act, makes all the people connected with the company vicariously liable, thus a precise case should be constructed against the person who is sought to be made liable in the complaint. In order to hold the director liable, the complainant must prove that the director is in control of the functioning of the daily affairs of the company. In case of lack of specific allegations in the complaint no director is liable under section 138 and 141 of the Act, other than a Managing Director or Joint Managing Director or a signatory to the Cheque.

The director can prove his innocence in two ways, either by going through the trial before the Magistrate Court in which the complaint is filed or he can seek abashment of the proceedings against him by approaching the High Court under section 482 at the earliest before the commencement of the trial establishing that he is not connected to the proceedings initiated before the Magistrate Court.

[1]M.L Tannan, Banking: Law and Practice in India, Ed. 22nd, 2010, LexisNexis Butterworths Wadhwa, Nagpur, at pp. 20.

[2]Bryan A. Garner, Black's Law Dictionary, Ed. Eight, at pp. 357.

[3]Bryan A. Garner, Black's Law Dictionary, Ed. Eight, at pp. 1023.

[4](2005) 8 SCC 89

[5](2007) 3 SCC 693

[6](2007) 4 SCC 70

[7](2009) 10 SCC 48

About the Author:

Law Student

Other Publications By the Bharti Harsana

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What happens when a person is declared a Proclaimed Offender?

Director's Liability in matters of Dishonour of Cheque (Cheque Bounce)


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