Dishonoring Cheques, Section 138, Negotiable Instruments Act 1881, Amicus Services
The widespread use of checks as a commercial instrument requires clarity in the law relating to the refusal to honor cheques. The central law on negotiable instruments law is the Negotiable Instruments Act 1881 (“the Act”). The Supreme Court had notoriously observed that the law relating to negotiable instruments is the law of the commercial world, which was enacted to facilitate the activities of trade and commerce, made provisions to make sacred the instruments of credit which could be considered convertible into money and easily passed from one person to another. The Apex Court had observed that the purpose of the Act was to present an orderly and authoritative statement of the main rules of law relating to transferable securities implements. 
To achieve the objective of the law, the legislator, in his wisdom, saw fit to create special procedures in the event of non-execution of the obligation provided for by the instrument. The law, by its article 138, engages the criminal responsibility of the issuer of a check in the event of refusal to pay it resulting in a prison sentence of up to two years or a fine of up to double the amount or both. Default of payment
within the legal period despite receipt of the notification of the case of NSF, gives rise to a presumption of bad faith on the part of the issuer and suspicions as to the credibility of the negotiable instrument. To prevent this and maintain confidence in banking and business operations, Section 139 was incorporated into law. This provision creates a mandatory presumption that a check referred to in section 138 of the Act has been received by the holder of the check in full or partial satisfaction of a legally enforceable debt or obligation. A court must act on such a presumption, and it is up to the issuer to rebut the presumption and establish the contrary on the strength of the evidence. Since section 138 of the law creates an offense and the law relating to penal provisions must be interpreted strictly so that no one can ingeniously, insidiously or strategically be prosecuted.
The vicarious liability of directors and key management personnel in cases of dishonored checks for checks issued by a corporation is a matter of great importance Under section 141 of the Act, where a dishonored check is issued by a legal person, any person who was responsible and liable to the company for the conduct of its affairs as well as a person whose negligence led to the commission of the offense under article 138 of the law may be
held vicariously liable for the breach. However, if the accused successfully establishes that such an offense was committed without his knowledge or despite the exercise of due diligence, he will not be held liable for the offence.
In some recent pronouncements, the aspect of the presumption of debt and vicarious liability on key management personnel (“KMP”) of legal persons in check dishonor cases has been discussed, some of which are summarized below :
1. Sunil Todi c. Gujarat State [Crl. Appeal No. 446 of 2021 dated 03 December 2021 – Supreme Court]
The main issue before the Supreme Court in this appeal was whether the refusal to honor a check provided as “security” is an enforceable debt covered by the provisions of section 138 of the act.
The Supreme Court observed that the statutory requirement that section 138 embodies is that a check must be drawn by one person for the payment of a sum of money to another “for the discharge, in whole or in party, of any debt or other liability”. A check can be issued to facilitate a commercial transaction between the parties. When the parties have signed a commercial agreement and a check has been issued by one of the parties as security for the performance of the obligations provided for in the agreement, the issuer can easily consider presenting this check to a bank in due to a refund default by the issuer. In such a case, the check would be due for presentation and would therefore have been presented by its holder in settlement of a legally enforceable debt or obligation.
Dismissing the appeal and the challenge as to the nature of the cheque, the Court held that characterizing the check as a guarantee of a debt would not eliminate its intrinsic character as an instrument intended to honor a debt or a commitment legally enforceable.
2. Sanjay Gupta v. The State & Anr. [Crl. Rev. P. No. 326/2021 & Crl. M. (Bail) No. 1244/2021 dated 24 March 2022 – Delhi High Court]
Here, the issuer of the check had filed a motion for review challenging the conviction order and sentence imposed by the Ld. Further sessions ordering the accused to pay compensation to the plaintiff and, in the event of default, are punishable by imprisonment for three months.
In reviewing the trial court records, particularly the cross-examination of the accused, the Court observed that the accused had different versions regarding the background to the issuance of the check. Although the accused stated that the check was not issued by him in settlement of a debt, there was no evidence on file to prove that this was indeed the case.
The Court went on to hold that under the Act, the presumption of a legally enforceable debt is created in favor of the holder of the check upon admission by the accused of the issuance of the check and the signature. Thereafter, the onus is on the accused to rebut that presumption. Although the accused does not have to lead his own evidence and can rely on the elements submitted by the complainant, a simple statement by the accused would not be enough to rebut the presumption.
3. Dilip Hariramani v. Bank of Baroda [Crl. Appeal No. 767 of 2022 dated 09 May 2022 – Supreme Court]
In this case, the appellant challenged the order convicting him under section 138 of the Act for refusing to honor a check issued by the firm of which he was a partner when he was not the signatory. of the check. The general partnership was not indicted as an accused party in the complaint filed under section 138 of the act. In order to establish that the Appellant was vicariously liable, it was necessary to prove that at the time the check was issued he had control of the day-to-day business of the business, or that the check was issued with his consent or connivance or because of his negligence. However, the Supreme Court found that the appellant did not issue the cheque, either individually or as a partner in the firm. Furthermore, it could not be established that he was responsible for the conduct of the affairs of the company in view of issuing the check. Accordingly, the conviction was overturned.
The Court observed that laws such as the Partnerships Act 1932, the Indian Contracts Act 1872, the Collection of Debts Due to Banks and Financial Institutions Act 1993 and the Securitization Act 2002 and reconstruction of financial assets and enforcement of security appellant’s liability to discharge a legal debt, but for the appellant to be vicariously liable under section 141 of the Act , the accused:
- should be in charge and responsible for the day-to-day operations of the company or business; Where
- must be a director, director, secretary or other officer of the company with whose consent or connivance or by reason of whose negligence the offense was committed.
However, such vicarious liability only arises when the business or company commits the offense as the primary offender. Therefore, where the Complainant fails to establish the Section 138 offense against the Entity, the issue of vicarious liability, i.e. imposing liability on the Director or to KMP as an agent of this company would not arise.
4. Narinder Garg & Ors. V. Kotak Mahindra Bank Limited & Ors. [W. P. (C) No. 93/2022 dated 28 March 2022 – Supreme Court]
The petitioners/defendants applied to the Supreme Court for an order of mandamus to quash the criminal complaints filed against them under Section 138 of the Act. The basis of the writ was that the body corporate on whose behalf they had signed the checks had been admitted into insolvency under the Insolvency and Bankruptcy Code, 2016 (“the Code”) and the resolution plan as that the entity is approved by the Creditors Committee. The plaintiffs argued that the effect of accepting the resolution plan, which also provided for the dues due to the plaintiff, would be to erase any pending litigation under sections 138 and 141 of the act. Therefore, the petitioners/defendants also requested the cancellation of the criminal complaints against the former management and the director.
The Supreme Court dismissed the motions for an order and ruled that the moratorium under Section 14 of the Code applies only to the corporation against which the insolvency resolution process commences under the Code. The application of the moratorium does not protect the natural persons charged under Article 141 of the law, and they continue to be legally responsible under the provisions of the law. Thus, the management’s vicarious liability would not end with the resolution and revival of the corporation.
5. IR Vijay Kumar v. M/S IFCI Factors Limited & Ors. [Crl. M.C. 2358/2021 dated 20 December 2021 – Delhi High Court]
The special leave application was made by an accused director of the company challenging the High Court’s order in which the High Court refused to quash the claim against him under Section 138 of the Act. Said director had maintained that he was an inactive director of the accused company and that he was not responsible for the conduct of its day-to-day affairs. It was also argued that he was not a signatory to the dishonored check and therefore the complaint did not meet the necessary ingredients required under Section 138.
The Court observed that it appears from the evidence in the file that specific allegations were made against the director. Apart from the basic assertion that the Applicant was responsible for the day-to-day operations of the Accused Company, it was further asserted that the Applicant, as a director, was responsible for the financial decision-making of the Accused Company and that he had agreed to guarantee the reimbursement of all sums owed by the incriminated company to the plaintiff.
The Court therefore held that the mandate of Section 141 of the Act, being a criminal provision, must be interpreted strictly and that the question whether the conditions stipulated in Section 141 have been met in the present case must be judged.
KEY POINTS TO REMEMBER
- Section 138 of the Act applies even where there was no liability when the check was issued, but the debt arose after the check was issued and before it was presented – Supreme Court
- Although the defendant does not need to adduce evidence to rebut the presumption of an enforceable debt created in favor of the plaintiff and can rely on the plaintiff’s documents, a simple statement by the defendant is not sufficient. to rebut presumption of enforceable debt – Delhi Supreme Court
- Vicarious liability under section 141 of the Act cannot be imposed on a person merely because of civil liability under any other law – Supreme Court
- The moratorium only applies to the debtor legal entity; KMP continues to be liable under Section 138 of the Act – Supreme Court
- Specific allegations even against an inactive administrator suffice to satisfy the requirements of Section 141 of the Act and warrant a trial – Delhi High Court
Authors: Kinshuk Chatterjee (Partner – Insolvency and Arbitration) and Srishti Gupta (Senior Partner) at Amicus Services. Views are personal.
 Shri Ishar Alloy Steels Ltd. vs. Jayaswal Neco Limited (2001) 3 SCC 609