Dishonor Of Cheques – An Offense Committed By Companies
The Negotiable Instruments Act (hereafter “the Said Act”) was enacted in 1881 to facilitate the expansion of banking and business transactions. The primary objective of this act was to legalize the Negotiable Instruments system. Section 141 of the said Act punishes violations of Section 138 of the said Act committed by corporations.
This section was inserted by Act No. 66 of 1988 as part of Chapter XVII of the said Act with an Amendment in 1988, to deal with the dishonouring of cheques. The second proviso to Sub-section 1 of Section 141 of the said Act (i.e., Where an individual is appointed as a Director of a company by virtue of his occupying an office or employment in the Central Government, State Government, or a Financial Corporation owned or controlled by either Government, he is exempt from prosecution under this section.) was inserted by Act No. 55 of 2002. It exempts certain directors of a company controlled or owned by the Central and State Governments.
The main objective of this chapter is to promote the efficacy of banking operations and to make business transactions more credible. The Supreme Court has adopted a broad interpretation of sections 138 and 141 of the said Act in order to accomplish the provision’s intended purpose. Furthermore, instances of dishonouring cheques due to “stop payment” and “account closed” have been added to the scope of the aforementioned provision.
The main objective of Section 141 of the said Act is to hold the companies liable for committing offences under Section 141 of the Said Act. The scope of this section includes two classes of persons liable to be prosecuted under section 138:
- The persons in charge and responsible to the company for conducting the business.
- The person with whose consent the offence can be attributed.
However, Apex Court in the case of Anil Hada V. Indian Acrylic Ltd. has pointed out that there can be three categories of persons within the purview of this Section:
- The company which committed the offence.
- Every individual who was in charge of and responsible to the company for the operation of the business.
- Any other person who is a director or a manager or a secretary or an officer of the company with whose negligence the company has committed the offence.
Furthermore, in Katta Sujatha V Fertilizers Chemicals, the Apex Court was of the opinion that a Person to be in charge, the person should be in overall control of the day-to-day business of the company or firm. Conse quently, this ruling excludes those people who do not fall within the meaning of being in-charge at the time of the commission of offences under section 141.
Doctrine Of Corporate Veil
The Corporate Veil is a shield that protects its members from the actions committed by a company. It protects the members from liabilities when the company violates laws.
Judicial Interpretation Of Lifting The Corporate Veil
In Salomon V. Salomon Co. Ltd. it was determined that a company is a legal entity with its own identity, distinct from its members and shareholders. Consequently, it is presumed that a Veil exists between the company and its members, shielding the members from legal liability when the company violates the law. This Veil is frequently misused by the members of the company to commit mischief and evade liabilities arising from violating laws and committing offences. In such a situation, the court has no choice but to lift the Corporate Veil in order to punish the true perpetrators. Thus, it is emphasized that the Corporate Veil is perhaps lifted when the court disregards the corporation and deals directly with its members or managers.
Company As A Juristic Person
In Salomon (supra) it was observed that the company has a corporate personality that enjoys rights of its own and has the power to sue or to be sued. This corporate personality gives companies the advantage of perpetual succession. According to the principle of perpetual succession, a company is considered independent and survives longer than any of its members, i.e., “members may come and go, but the company continues to exist until it is ensnared by legal process.”
The Apex Court in Anil Hada (Supra) has explained the liability of the company and its directors for committing the offence of dishonouring cheques. The Apex Court observed that, normally, an offence can be committed by human beings who are natural persons. Such an offence can be tried according to the procedure established by law. But often there are those offences which can be attributed to the juristic persons as well. For instance, if the drawer of the cheque is a juristic person such as a corporation, the offence will be punishable under Section 138 read with Section 141 of the aforementioned Act. Thus, if the drawer of a cheque falls within the ambit of Section 141 of the Act and is a natural person, a corporate entity, or even a corporation, then appropriate prosecution proceedings can be filed against such drawer.
The Apex Court made a similar observation in the case of Life Insurance Corporation of India V. Escorts Ltd. & Ors., where it was held “It was argued that the thirteen Caparo companies were only thirteen companies distinguished through their name only, however, in reality they were one, ran by single individual, i.e., Mr. Swraj Paul. Thus, it was only by lifting the corporate veil, one could discover Mr. Swraj Paul lurking beneath.”
Section 141 was specifically brought into statute to inculcate faith in the efficacy of banking operations and to make business transactions more credible. This Section punishes the offences committed by the Companies.
(Here, Company means any corporate body, as well as a firm or any other association of individuals and Director means a partner in the firm.)
Analysis Of Section 141
The sub- section (1) of Section 141 of the Act explains that every person in charge of and accountable to the company at the time of the offence under S. 138 of the Act, shall be subject to prosecution and appropriate punishment. This subsection also contains exceptions to the rule, such as:
- if the person has no knowledge; or
- he has proved to have exercised all due diligence to prevent such an offence, then in such cases then the proceedings may be quashed against such person.
The burden of proof, nevertheless, lies on the accused u/s 138 of the said Act.
However, the sub- section (2) of Section 141 provides an exception to liability for companies under Section 138, where the said person proves that the offence committed was without his knowledge or that he had exercised all due diligence yet failed to prevent the offence. It refers to those who did not commit the crime themselves but who contributed to its commission through gross negligence or a lack of due diligence. This section interprets that a person responsible for the business operations of a company may be held vicariously liable under the scope of this section. (The vicarious liability of such a person will be discussed below)
The Apex Court in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla explained the requirements under Section 141 as follows:
- A complaint under Section 141 must explicitly allege that, at the time the offence was committed, the accused was in charge of and responsible for the company’s business operations. This accusation is mandated by Section 141 and must be included in a complaint and without such assertion in a complaint, the requirements of Section 141 cannot be considered met.
- Section 141 of the Act does not require a person to be a director of a company in order to impose liability. A director of a company cannot be presumed to be in charge of and responsible for the company’s business operations. The Section 141 stipulates that the individual seeking to be held liable must have been in charge of, and responsible for the conduct of the company’s business at the relevant period. This must be asserted as a fact, as there is no liability presumed in such circumstances against a director.
- The managing director or joint managing director would be presumed to be in charge of the company and responsible for its business operations. When this is the case, section 141 of the Act makes holders of such positions in a company liable. By virtue of their position as managing director or joint managing director, these individuals are responsible for the business operations of the company. Consequently, they are protected under Section 141. Regarding the signer of a dishonoured cheque, he is certainly culpable for the incriminating action and will be prosecuted under subsection (2) of section 141.
The key point in this Section of the Act is that this section exempts those directors from prosecution who are nominated as directors of a company just by virtue of their holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by either of the governments, as the case may be.
Vicarious Liability Under Section 141
Vicarious liability, in a legal sense, means the liability of the master for the offence committed by his servants. Section 141 makes a natural person vicariously liable for any contravention committed by the company, provided that the said person has been involved with the commission of the said offence. This involvement is defined in Section 141 as the person either having prior knowledge of the commission of the offence or having been criminally negligent in exercising due diligence to prevent the offence from being committed. Although, the liability of the Master can be excused in exceptional cases where the servant merely acted on his own and unless there is some absolute duty cast upon the Master.
The Supreme Court on Vicarious Liability u/s. 141 has observed that the persons who are pursued to be held vicariously liable for an offence under the section must have been in charge of and responsible to the company for the conduct of its business at the time the offence was committed. However, this provision shall not apply to every individual associated with the company. Only those persons who were in charge of and responsible for the conduct of the business of the company at the time of the commission of the offence will be liable for criminal action. Hence, a complaint filed against a person who is not responsible for the conduct of business of the company is not maintainable.
However, in exceptional cases of joint holders, only the drawer will be held liable, and no vicarious liability will be on the wife of the said drawer for merely being a joint holder.
Directors Responsible For The Offence
The second proviso under Section 141 exempts certain nominated directors from prosecution, such as a person who does not participate in the day-to-day business of the company and may not be regarded as a person in-charge.
However, just like the designation does not necessarily imply liability under this section, the Managing Director of a company is prima facie presumed to be in-charge of the business of the company, by the nature of his very designation itself. Hence, a Managing Director would be held liable under sections 138 and 141, irrespective of the absence of specific allegations against such individuals. Merely being described as a director of a company is not enough to attract liability under section 141 of the said Act. There has to be a specific allegation against the person that he was in-charge of the day-to-day conduct of the business, or else such a complaint against the petitioner may be quashed.
Accountability Of The Resigning Person
There are instances in which the responsible party may resign either before or after the issuance of a dishonoured cheque. Previously it held by the Hon’ble High Court of Bombay, a case when there is a dispute as to date of resignation, whether it was of before the issuance of cheque or after issuance of cheque, can only be decided in trial and not in a petition under 482 of the CrPC. However, in a recent decision by the Hon’ble Supreme Court of India in the case of S.P. Mani and Mohan Dairy Vs. Dr. Snehalatha Elangovan has observed that a High Court can quash a Cheque Case only if it comes across some unimpeachable and incontrovertible evidence to indicate that the Director or a Partner of a firm could not have been concerned with the issuance of such Cheques.
The Hon’ble High Court of Andhra Pradesh has in the case of M.P. Murthy V. Sathyanarayan, also observed that when a person resigns or ceases to be the Chairman of a company well before the issuance of a dishonoured cheque, it is determined that no violation of section 138 of the act has been committed by that person. Hence, it goes without saying that the person who has resigned after the issuance of such cheque(s) will be held liable within the purview of Section 138.
A person may be held vicariously liable for the commission of an offence when he or she has resigned but was acting as “in-charge”, consented, or was negligent at the time of the violation.
Liability Of A Sleeping Partner
A Sleeping Partner is a person who does not have any active participation in the business of a company but only provides share capital for the business. Furthermore, a Sleeping Partner shares all the profits and losses incurred by the company.
In Biju Jacob V. Annie Mathew, the Kerala High Court has held that proceedings under section 138 of the said act cannot be permitted to continue against sleeping partners who have not resigned at the time of the issuance of such cheques.
The corporate personality nowadays is, so to speak, a far more complex creature, and as the financial world continues to contract, the issue of honesty and openness in financial transactions becomes of utmost importance. In the current context, it would be patently unjustified to exclude corporations from such criminal culpability. Simultaneously, the necessity of an effective penalty that would simultaneously deter unjustifiable damage and advance business interests cannot be minimized.
The current version of Section 141 has fairly accomplished this balance. This, together with additional provisions and elaborative precedents established by the judiciary in various judgments, has substantially increased the usefulness of this section.
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