Liability of Independent Directors in Cheque Bouncing

I would like to start by examining the provisions of the Negotiable Instruments Act, 1881 (hereinafter referred to as "the act"). According to the maxim "generalia specialibus non derogant" the provisions of the act will supersede the provisions of the Code of Criminal Procedure, 1973. However, the Indian Penal Code, 1860 (hereinafter referred to as "the IPC"), being a penal statute, concurrent charges may be framed under both acts.

Section 141 of the act talks about when a company commits the offence mentioned in Section 138. It very specifically deems every person who was in charge of and was responsible to the company for the conduct of its business to be deemed guilty.

However, if the said act was committed without his knowledge then he will not be held under this clause. A substantial point of difference between this and the provisions of the IPC is that under Sections 34 and 149 of the IPC, an element of mens rea (being in furtherance of common intention and in furtherance of common object respectively) is present which is absent as a requirement in the provisions of the act. Section 141 only talks about knowledge and not mens rea.

It has been commonly used as a defence in these cases for the directors to state that they are non-executive independent directors and hence they have no say in the day to day matters of the company. (As used in Briji Gopal Daga vs State of Kerala).

It has been held by a plethora of cases that an independent director, by the very nature of his appointment, is deemed not to have any knowledge of the day to day matters of the Company. This however can be proven to be otherwise by the Complainant.

Coming back to Section 141 of the act, it is clear that a charge will also be framed by necessary implication on all persons deemed to be involved in the day to day matters of the company. Hence, a plain averment to the fact that the director is involved in the day to day matters of the company should be enough to accuse him.

According to the Supreme Court in K.K. Ahuja vs V.K. Vora & Another,the position under Section 141 of the act can be summarized thus:

(i) If the accused is the Managing Director or a Joint Managing Director, it is not necessary to make an averment in the complaint that he is in charge of, and is responsible to the company, for the conduct of the business of the company. It is sufficient if an averment is made that the accused was the Managing Director or Joint Managing Director at the relevant time. This is because the prefix “Managing” to the word “Director” makes it clear that they were in charge of and are responsible to the company, for the conduct of the business of the company.

(ii) In the case of a Director or an officer of the company who signed the cheque on behalf of the company, there is no need to make a specific averment that he was in charge of and was responsible to the company, for the conduct of the business of the company or make any specific allegation about consent connivance or negligence. The very fact that the dishonoured cheque was signed by him on behalf of the company, would give rise to responsibility under sub-section (2) of Section 141 of the act.

(iii) In the case of a Director, secretary or manager [as defined in Section 2(24) of the Companies Act, 1956] or a person referred to in clauses (e) and (f) of Section 5 of Companies Act, 1956, an averment in the complaint that he was in charge of, and was responsible to the company, for the conduct of the business of the company is necessary to bring the case under Section 141(1) of the act. No further averment would be necessary in the complaint, though some particulars will be desirable. They can also be made liable under Section 141(2) of the act by making necessary averments relating to consent and connivance or negligence, in the complaint, to bring the matter under that sub-section.

(iv) Other officers of a company cannot be made liable under sub-section (1) of Section 141 of the act. Other officers of a company can be made liable only under sub-section (2) of Section 141 of the act, by averring in the complaint their position and duties in the company and their role in regard to the issue and dishonour of the cheque, disclosing consent, connivance or negligence.

A detailed scrutiny was also done by the Supreme Court recently in Standard Chartered Bank v Bank of Maharashtra which reflects the same. The main issue is that the averments made in the complaint should be adequate for the magistrate to issue process. This is automatically done if he is the managing director or the signing director of the cheque. Otherwise in all other cases, the accused should be said to be in charge of and responsible for the conduct of the business of the company.

The best defence for a person in such a case is to state that he was an independent director and had no knowledge of the said cheque. This is because it is the Complainant who would have to prove that the independent director was involved in the commission of an offence.

Comparing Section 141 of the act with Sections 34 and 149 of the IPC, we can see that the vicarious liability provisions are stricter in the act and, as mentioned above, the maxim of generalia specialibus non derogant will apply here excluding the jurisdiction of sections 34 and 149 of the IPC.