The Negotiable Instruments Act of 1881 is a critical legal framework in India that governs transactions involving negotiable instruments like cheques, promissory notes, and bills of exchange. One of the most common legal issues related to this Act is the incidence of cheque bounces. While individuals can face these cases, companies are not immune either. In this blog post, we will explore how cheque bounce cases against companies are treated under the Negotiable Instruments Act.

What Constitutes a Cheque Bounce?

A ‘cheque bounce’ occurs when a bank does not honor a cheque due to insufficient funds in the account, a mismatch of signatures, overwriting, or other technical reasons. Once the cheque bounces, the bank issues a ‘Cheque Return Memo’ to the payee’s bank detailing the reason for non-payment.

Sections Relevant to Cheque Bounce in Companies

Section 138

This section penalizes the drawer of a dishonored cheque with imprisonment for a term which may extend to two years or with a fine which may extend to twice the cheque amount, or with both.

Section 139

This section establishes a presumption in favor of the holder, which means it is generally presumed that the holder received the cheque for discharge of a liability.

Section 142

This deals with the cognizance of offenses and stipulates conditions under which complaints can be filed.

Section 141

This section is specifically crucial for companies. It states that if an offense is committed by a company, then every person who was in charge of, and responsible for, the company could be deemed to be guilty.

Legal Procedure in Company Cases

1. Legal Notice: Once the cheque is dishonored, the payee must send a legal notice to the drawer (in this case, the company) within 30 days.
2. Company’s Response: The company has 15 days to respond and settle the matter outside court.
3. Filing a Complaint: If the company fails to make the payment within the stipulated time, a criminal complaint under Section 138 can be filed against the company and its directors.
4. Court Proceedings: The court will then summon the accused. Failure to comply could result in an arrest warrant.
5. Trial and Verdict: After the trial, the court will pronounce its judgment. Penalties can include imprisonment, fine, or both.

Liability of Company Directors

Per Section 141, not just the company but also its directors can be held liable. However, the director must have been in charge of the day-to-day activities related to the issuance of the cheque. This section also covers other officers of the company, depending on their roles and responsibilities.

Defenses Available to Companies

1. Lack of Knowledge: If the director was not aware of the cheque issuance, they could use this as a defense.
2. Discharged Liability: The company can prove that the payee has no enforceable liability against the drawer.
3. Notice Issues: If the legal notice by the payee was not served correctly, the case may get dismissed.
4. Validity of Cheque: If the cheque was not valid when presented (e.g., it was stale), it can be a strong defense.

Conclusion

Cheque bounce cases against companies can lead to severe repercussions, including financial penalties and damage to reputation. Understanding the legal intricacies of the Negotiable Instruments Act can help companies better prepare for such situations. It is advisable for companies to consult legal experts when faced with such issues to navigate the complex legal landscape efficiently.

References

1. Negotiable Instruments Act, 1881 – Ministry of Law, Government of India
2. “Cheque Bounce Cases: What You Need to Know” – Indian Legal Services
3. “Handling Cheque Bounce Cases Against Companies” – Corporate Lawyers India

Disclaimer: This blog post is for informational purposes only and should not be construed as legal advice.

By staying updated with the law and ensuring robust financial practices, companies can significantly mitigate the risks associated with cheque bounces.