Cheque bouncing

Directors are agents of the Company in transactions they enter into on behalf of the Company, though they are not agents for individual shareholders or members. A director may be an employee, a servant or even a "worker" of the Company. He occupies the position of a trustee, though he is not a trustee in the strict sense in respect of the Company’s properties and funds.

Director’s liability arises because of their position as agents or officers of the Company as also for being in the position of trustees or having fiduciary relation with the Company or its shareholders.

Some of these liabilities are in contract, some are in tort, some are under the criminal law and others are statutory, i.e., under the Companies Act, 1956 and other laws. The courts have, in deciding the liability of Directors, taken into consideration a director’s position as a whole.

Contractual Liability: -
Directors are bound to use fair and reasonable diligence in discharging the duties and to act honestly, and act with such care as is reasonably expected from him, having regard to his knowledge and experience.
In R.K. Dalmia and others v. The Delhi Administration it was held that "A director will be personally liable on a company contract when he has accepted personal liability either expressly or impliedly. Directors are the agents or the trustees of a Company."

Express liability will usually arise only when a director has personally guaranteed the performance of a contract. Implied liability will arise when a director signs a contract for the Company or mentioning the name but failing to add the vital word "limited" or its abbreviation. This rule rests on the ordinary principle of agency that where an agent enters into a contract without disclosing that he is acting as agent he accepts personal liability. In the case of Penrose v. Martyr a bill was addressed to a company and omitted the word "Limited" in describing it. The defendant (Secretary to the Co.) signed the acceptance and was held to be personally liable by the Court of Exchequer Chamber.

As far as fiduciary duties/obligations are concerned, any breach by any director would visit them with liability. Our Supreme Court has considered this issue of fiduciary liability. It has been observed in Official Liquidator vs. PA Tendulkar.

The Supreme Court has ruled that in a cheque bounce case, the liability of a company's director can be inferred only if it can be proved that the accused was in charge for the conduct of the company at the time of the alleged offence.

Merely because a person was involved with the negotiations for obtaining a loan cannot make him or her liable for the offence relating to the bouncing of a cheque, Justices S B Sinha and H S Bedi said while setting aside an order for the Andhra Pradesh High Court.

Interpreting section 141 of the Negotiable Instruments Act, the apex court said that the liability of a person arises from being in charge of and responsible for the conduct of business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office.

The appellant Srikant Singh had filed a special leave petition against the High Court's ruling which upheld a magistrate's order holding the former liable for a cheque bounce offence since he happened to be the director of the company. It was alleged that Singh was the director of a companyRishab Alchem India which availed a loan of Rs 10 lakh from M/s North East Securities Ltd.

Singh's company issued a cheque for repayment of the loan which bounced, following which a complaint was registered against various company officials including Singh.

However, Singh took the plea that he had resigned from the firm at the time when the said cheque was issued and hence could not be prosecuted. His plea was rejected by the magistrate and the High Court following which he appealed in the apex court.

Upholding his argument, the apex court said that negotiation for obtaining financial assistance on behalf of the company by its directors itself is not an ingredient for the purpose of constituting an offence.

"Furthermore, a vicarious liability on the part of a person must be pleaded and proved. It cannot be a subject matter of inference," the apex court said while allowing the accused's appeal. 

I feel magistrates order is wrong. S.138 cases being Complaint case, Magistrate cannot make any person an accused on his own.  Secondly since notice has not been issued to the said Director proceedings against him should fail.  Thirdly it is the prerogative of the Company to decide who should represent it.  If the company has no representative to represent it, matter should proceed against the company without any representation as ultimately against company only fine can be imposed.  I therefore feel the order of the magistrate is wrong if looked at from any angle.