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SC narrows down directors' liability in cheque bouncing cases

TNN, 16 February 2010, 02:58am IST

NEW DELHI: The Supreme Court on Monday (14/02/2010) significantly narrowed down the liability of directors who have been hounded under the Negotiable Instruments Act for dishonour of a cheque issued by the company. 

Upholding the quashing of summons and case against a director initiated by National Small Industries Corporation, a Bench comprising Justices P Sathasivam and Justice H L Dattu said not all directors were liable under Section 141 of the NI Act. 

"Only those persons who were in-charge of and responsible for the conduct of the business of the company at the time of commission of an offence will be liable for criminal action," said the Bench. 

"It follows from the fact that if a director of a company who was not in-charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable for a criminal offence under the provisions," said Justice Sathasivam writing the judgment for the Bench. 

After discussing the vicarious liability of the managing director and other directors in cheque bouncing cases, the Bench laid down guidelines, the broad contours of which are: 

* It is a complainant's responsibility to explain how a director was vicariously liable. There is no presumption that every director knows about the issuance of the cheque that bounced. 

* Under Section 141, criminal liability can be fastened only on those directors who, at the time of the commission of the offence, were in charge of and responsible for the conduct of the business of the company. 

* Vicarious liability on the part of a person must be pleaded and proved and not inferred. 

* If the accused is managing director or joint managing director, then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with.