Dishonour of Cheque of a Company – Will The Director be Liable even after his Resignation
How to Calculate Limitation Period
The Negotiable Instruments Act, 1881 was originally drafted to consolidate the law relating to promissory notes, bills of exchange and, cheques. Thus, its main object was to regulate the system by which negotiable instruments such as cheque, bills of exchange, could be used by various individuals and companies through negotiation like any other goods. Another purpose of the Act was to encourage the culture of use of cheques and other negotiable instruments and enhancing the credibility of such instruments.
After careful considerations by the legislature, Sections 138 to 142, were inserted in the Negotiable Instruments Act with a view to further regulate negotiable instruments and provides for remedies in case of a breach. N.I. Act provides for various negotiable instruments, however, the most widely accepted form of instrument is cheque. Furthermore, these Sections were inducted to provide broad coverage to N.I. Act and include the offences being committed by companies as well.
CHEQUE UNDER NI ACT
CHEQUE – Section 6 of the N.I. Act defines a cheque as ‘a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in electronic form.’
Explanation I: For the purpose of this section the expression
- a) ‘a cheque in the electronic form’means a cheque that is the exact replica of the original cheque and is being generated online and bears electronic signatures (with or without biometrics) and asymmetric cryptosystem.
- b) a ‘truncated cheque’ meansa cheque that is cut off during the course of a bank’s clearing cycle; the clearing cycle can either be done by the clearing house or by the bank, which involves both paying and receiving payment.
Explanation II: For the purposes of this section, the expression ‘clearing house’ means the clearing house managed by the Reserve Bank of India or a clearing house recognized as such by the Reserve Bank of India.
COMPUTING THE LIMITATION PERIOD UNDER N.I. ACT
Supreme Court in the case of Saketh India Ltd. v. Indian Securities Ltd (1999) 3 SCC 1, held that in computing the ordinary period, the rule which is being majorly observed is to exclude the first day and to include the last day, and the period of ‘one month’ will be reckoned from the day immediately following the day on which the period of 15 days from the date of receipt of notice by the drawer expires. The last day i.e. the 15th day from when the cheque was issued, has to be excluded for counting the period of one month.
Since the cheque is the majorly used negotiable instrument for transacting between the businesses, legislation felt the need for involving offences by the company under N.I. Act as well.
Even today, the widely used medium for making payment by the businesses are cheques. However, with wide use comes repercussions as well. And it has been time and again observed by various courts of the country that a non-working director was being made a party to the complaint even though they cease to be the director of the company.
Therefore, Delhi High Court in the case of Alibaba Nabibasha v. Small Farmers Agri-Business Consortium & Ors. clarified this position and held that when an accused has resigned from the company and cheques are subsequently issued and dishonored, it cannot be said that the accused was responsible for the day-to-day affairs of the company, as contemplated under Section 141 NI Act. Therefore, a mere repetition of Section 141 NI Act is not sufficient and the complainant has to show that accused was in–charge of and responsible for the day-to-day affairs of the company.
Furthermore, in the case of Sunita Palta & Ors. V. M/s KIT Marketing Pvt. Ltd. held that every person who is connected with the company shall not fall within the ambit of Section 141 NI Act and therefore, cannot be held responsible for the conduct of the business of the company at the time of the commission of an offence.
The liability arises from being in charge of the conduct of the business of the company at a relevant time when the offence was committed and not based on merely holding a designation in the company.
Court also stated that the case of a director, secretary, or manager under Section 5 (e) and (f) of the Companies Act, an averment is necessary for the complaint that the director was in-charge of the conduct of the business of the company to bring the complaint under Section 141 NI Act.
On the point of vicarious liability of the non-executive director, the court further observed that the director is the custodian of the company but is not involved in day-to-day affairs of the company. Simply because a person is a director, does not make him liable under NI Act.
Under Section 141, it is not sufficient to make a bald statement in a complaint that the director is in charge of the company but rather show how he was responsible to the complainant for the conduct of its business.
Thus, Delhi High Court had clarified that when a cheque has been dishonored and a person who ceases to be the director of the company before the cheque was issued, cannot be held liable for the same and thus, not to be inducted as a party to the complaint.
Furthermore, it is not always sufficient to induct a director as a necessary party to the complaint. The complaint must also show that the director was responsible for the day-to-day affairs of the company when the cheque was issued.
CONCLUSION
Section 138 N.I. Act has been the most discussed and interpreted Section. Every decision comes with a different interpretation However, with the passage of time, various courts have come up with different interpretations, thereby setting them as precedents for the lower courts.
In the recent judgments of the Delhi High Court, it had made clear that for inducting a director as a necessary party to the complaint, it is necessary to show in the complaint that he was responsible for day-to-day affairs of the company.
Furthermore, if a person ceases to be the company’s director before the cheque was issued, he cannot be made liable for the same.
