Director Liability in a Company Cheque Bounce Case

How Section 141 works

The offence of dishonour of a cheque under Section 138 is committed by the drawer. When the drawer is a company, Section 141 extends liability to the people who ran it: every person who, when the offence was committed, was in charge of, and was responsible to the company for, the conduct of its business. Section 141(2) adds any director, manager, secretary or other officer whose consent, connivance or neglect led to the offence.

The section is not a list of everyone on the board. It is a description of a role, and the complaint has to show that each person named fitted that role at the relevant time.

What the complaint has to say

The Supreme Court has set out the requirement in a long line of cases, starting with SMS Pharmaceuticals v. Neeta Bhalla (2005):

• Directors generally. The complaint must specifically aver that the director was in charge of, and responsible for, the conduct of the company’s business at the time. Saying only that the person was a director is not enough.
• Managing and whole-time directors. A managing director or joint managing director is, by the nature of the office, in charge of the business, and the signatory of the cheque is responsible for it. K.K. Ahuja v. V.K. Vora (2009) and National Small Industries Corporation v. Harmeet Singh Paintal (2010) explain this.
• Non-executive and independent directors. Pooja Ravinder Devidasani (2014) and Sunita Palita (2022) require facts showing their involvement in day-to-day affairs. A bare averment copied for every board member does not meet that standard.
• The company as accused. Aneeta Hada (2012) requires the company to be arraigned. Directors cannot be prosecuted alone.

Reading a complaint as a director

When summons arrive, we check:

1. the director’s position on the date the cheque was issued and on the date the offence was complete (when the drawer failed to pay within 15 days of the demand notice), using the company’s filings with the Registrar of Companies;
2. what the complaint says about that director’s role, and whether it is specific or a general sentence repeated for everyone;
3. whether the company is named as an accused and was served with the demand notice;
4. whether the statutory notice and limitation requirements were met at all, since a defect there helps the company and every director.

A director who resigned before the cheque was issued, as in Rajesh Viren Shah v. Redington (2024), or who was a nominee or independent director with no executive role, usually has a strong case for quashing on the face of the complaint.

Quashing, discharge or trial

Where the complaint does not plead what Section 141 needs, the director applies to the High Court under Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023 to quash the proceedings against them. The High Court decides on the complaint and on documents of unimpeachable character, such as the company’s statutory filings, and does not hold a mini-trial on disputed facts.

Where the complaint does contain the necessary averments, the defence moves to the trial court. There the director can show, under the proviso to Section 141(1), that the offence was committed without their knowledge or that they exercised due diligence. The presumption under Section 139 that the cheque was for a debt operates against the drawer company, and the defence may also challenge the debt itself.

The company’s insolvency

If the company is admitted into insolvency, the moratorium under Section 14 of the Insolvency and Bankruptcy Code stops the Section 138 case against the company, but P. Mohanraj v. Shah Brothers Ispat (2021) holds that it does not protect directors and signatories. Directors of a company in insolvency should plan their own defence. Our NCLT practice advises on the insolvency side.

Settlement

Most cheque disputes between businesses are about money owed, or disputed, under a supply or service contract. A settlement recorded before the court under Section 147 ends the case; our note on compounding a cheque bounce case explains how. Where the underlying debt is disputed, our commercial disputes team can run the civil side, and our corporate practice advises on board records, resignations and authorised signatories so that the next cheque does not reach the wrong person.

Speaking to us

Send the complaint, the summons, the demand notice, the cheque and return memo if you have them, and the company’s filings showing each director’s appointment and resignation. We tell you at the first meeting whether quashing is realistic for each person named. Call or WhatsApp 99115 44811, or email manujalawyers@gmail.com.