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The honesty and integrity of the parties involved in a commercial transaction is crucial for its smooth operation. When a bank dishonors a check, it causes significant loss, injury, and inconvenience to the payee, and undermines the credibility of the business transaction. A company, being an artificial person, acts through its directors and officers who are responsible for its day-to-day operations. Generally, criminal law does not hold one person responsible for the actions of another, a concept known as vicarious liability. However, certain provisions, such as those in Section 141 of the Negotiable Instruments Act of 1881 (hereinafter NI Act), that applies to companies, are exceptions to this rule. In this case, the directors of the company may be held vicariously liable for the bouncing of checks issued by the company.

But if a person is to be held liable under Section 141 of the NI Act, it is pertinent to mention that the liability of that person should exists under Section 138 of the NI Act. Section 138 provides that if a cheque is returned unpaid either due to insufficiency of funds or because the amount mentioned in the cheque exceeds the amount that is to be paid from that account because of an agreement made with the bank. There are also three conditions precedent before an offence can be made out under this section, namely:

a.     the cheque has been presented to the bank within a period of six months from the date on which it was drawn or within the period of its validity,

b.     the payee has made a demand within 30 days of receiving the information,

c.     and the drawer of the cheque fails to pay within 15 days of receiving such notice.

Once a person has been held liable then under Section 138 of the NI Act thereafter the liability of the person arises under Section 141 of the act, if the person therein under section 138 is an artificial person.

Further, According to Section 141 of the NI Act, directors may be held liable for offenses committed by the company. The section states that "every person who, at the time when offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly."

Thus, when a company's check is returned unpaid, the following individuals, along with the company, may be held responsible and face prosecution and punishment:

i.        Anyone who was responsible for managing the company's business at the time the offense was committed

ii.      Any director, manager, secretary, or other officer of the company who authorized or helped carry out the violation of Section 138.

iii.    Any director, manager, secretary, or other officer of the firm whose carelessness resulted in the commission of the section 138 violation by the company.

Under Section 141 of the Negotiable Instruments Act, anyone who was in control of and responsible for the company's operations at the time of the offense may be held criminally liable for the dishonor of a check. However, directors of the company who were not in charge of or responsible for the company's business at the relevant time will not be held liable for a criminal offense. To hold a director accountable for the company's violations of Section 141, there must be specific allegations against them that demonstrate their responsibility for the conduct of the company's operations.

Under Section 141, a firm is also included in the definition of a company. If a partner of the firm was responsible for managing the firm's business at the time of the offense, or if it can be demonstrated that the offense was committed with their consent or connivance or as a result of their negligence, they may be held responsible for the offense committed by the firm.

Defenses Available to Directors:

1.     The accused director may claim that he was not responsible for managing the company's daily activities at the time the bounced check was issued.

2.     The accused director may assert the exceptions provided in Section 138, such as that he had no knowledge of the offense or exercised due diligence to prevent the check from bouncing.

3.     The complaint has not have been filed in accordance with Section 138 or 141

Landmark Judgments:

The Hon’ble Supreme Court has been a torch bearer for each and every law that exist in the Republic of India and through its catena of judgments have more or less clarified the ambit of the above-referred provisions. The apex court in the case of SMS Pharmaceuticals v. Neeta Bhalla and Anr., ((2007) 3 SCC 693), ruled that:

1.     The complaint must specify that the director was in charge of the company at the time the check was issued.

2.     A director of a company is not automatically liable simply because they are a designated director, they must also be responsible for managing the company.

3.     The signatory of the check will be held responsible and liable.

Furthermore, in the case of Saroj Kumar Poddar v. State (NCT of Delhi) ((2007) 3 SCC 70), the apex court emphasized the need for the requirements of Section 141 to be clearly defined and for the complainant to provide in the complaint specific details and reasoning for holding the director vicariously liable.

Moreover, in the case of K.K. Ahuja v. V.K. Vora & Anr.,((2009) 10 SCC 48), the court held that managing directors of a company can be assumed to be liable for the dishonor of a check due to the nature of their role and responsibility for the company's daily operations whereas in case of Gunmala Sales Pvt Ltd v. Navkar Infra Projects Pvt Ltd, (Criminal Appeal Nos.2261-2265 of 2014), the Supreme Court ruled that directors will only be exempted from liability if there is incontrovertible evidence of their lack of involvement in the company's affairs due to prolonged illness, resignation, or other circumstances.

Lastly, in the most recent case of Sunita Palita v. Panchami Stone Quarry; ((2022) 10 SCC 152); the Supreme Court iterated that non-executive directors of a company cannot be held liable in a check bounce case and cannot be subject to criminal proceedings because they are not involved in the day-to-day affairs of the company or in the running of its business.

References:

https://www.mondaq.com/india/directors-and-officers/1159446/liability-of-directors-in-case-of-dishonor-of-cheque

https://blog.ipleaders.in/section-138-directors-liability-cheque-bounce/

https://www.financialexpress.com/industry/non-executive-directors-not-liable-in-cheque-bounce-case-sc/2614104/