Legal Article

Liability of Company Directors Under the Negotiable Instruments Act, 1881

Shivendra Pratap Singh

Advocate

High Court Lucknow

Article

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Published on: 21 Aug, 2023

The Negotiable Instruments Act, 1881, is a comprehensive statute that governs various forms of negotiable instruments, such as cheques, promissory notes, and bills of exchange. While individual drawers of cheques and endorsers of negotiable instruments are held accountable under this Act, company directors also bear significant liabilities, especially when a company is involved in financial misconduct like a cheque bounce. This article aims to clarify the liability of company directors under this Act.

Key Sections Pertaining to Directors

Section 138

This section states that the drawer of a dishonored cheque can be penalized with imprisonment up to two years, a fine double the amount of the cheque, or both.

Section 141

The liability of company directors comes under this section, which states that if an offense under Section 138 is committed by a company, then the people responsible for the company’s actions are also liable to be proceeded against and penalized accordingly.

Scenarios for Director Liability

  1. Active Involvement: Directors who are actively involved in the day-to-day activities of the company and are aware of the issuance of the dishonored cheque are typically held liable.
  2. Officer in Default: If it’s proven that the offense was committed with the consent or neglect of a director, he/she is considered an “officer in default” and can be held liable.
  3. Knowledge or Negligence: A director can also be held liable if it’s proven that he/she had knowledge of the misconduct or exhibited negligence in preventing it.
  4. Company Representation: Directors who signed the dishonored cheque or were otherwise representing the company in the transaction that led to the offense are likely to be held liable.

Exemptions and Defenses

  1. Non-Involvement: Directors can claim exemption if they can prove that they were not involved in the company’s operations during the time the offense was committed.
  2. Due Diligence: Directors can also be exempted if they can prove they had exercised all necessary due diligence to prevent the commission of the offense.
  3. Resigned Directors: Directors who had resigned before the commission of the offense and had duly informed the Registrar of Companies may escape liability.
  4. Absence of Mens Rea: A director can argue the absence of criminal intent (“mens rea”) if they were not aware of the actions leading to the offense.
  1. Legal Notice: Once the cheque is dishonored, the holder must issue a legal notice to the company within 30 days.
  2. Reply Period: The company, and by extension its directors, have 15 days to settle the payment or provide a reasonable cause for the dishonor.
  3. Legal Proceedings: Failing to address the issue within the stipulated time allows the holder to initiate legal proceedings against both the company and its directors.
  4. Penalties: Convicted directors could face imprisonment, hefty fines, or both, which could also impact their professional careers and personal lives significantly.

Conclusion

Understanding the liability of company directors under the Negotiable Instruments Act is essential for corporate governance and personal protection. Legal compliance and ethical financial practices can go a long way in safeguarding the interests of both company directors and the organizations they represent.

References

  1. Negotiable Instruments Act, 1881 – Ministry of Law, Government of India
  2. “Company Directors and the Law” – Indian Corporate Law Journal
  3. “Handling Cheque Bounce Cases in Corporate Scenario” – Corporate Lawyers India

Disclaimer: This article is for informational purposes only and should not be considered as legal advice.

Company directors must acquaint themselves with the legal landscape around negotiable instruments to effectively navigate their roles, responsibilities, and potential liabilities.

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