SC puts directors ‘on notice’ over cheque dishonouring

Recently, the Supreme Court, in the matter of Krishna Texport & Capital Markets Limited V/s ILA A Aggarwal & Ors [Criminal Appeal No.1220 of 2009] was to decide whether notice under section 138 of the Negotiable Instruments Act (“NI Act”) is required to be served on each of the directors of a Company along with the Company so as to make them liable under the Act. 

Overruling the Judgment of the Division Bench of the Madras High Court in the matter of B Raman & Ors v/s M/s Shasun Chemicals and Drugs Ltd, the Supreme Court held that service of notice under section 138 of the NI Act to the Company alone is enough for holding its directors liable. It must be noted that under the NI Act, the act of dishonour of cheque is a criminal office. Thus, when a cheque drawn by the drawer returns unpaid and the drawer, even after being notified of such a default fails to make the payment to the drawee, the drawee can file a criminal complaint against such a defaulting drawer. The starting point of initiating a legal action under section 138 starts with the issuance of notice to the person against who legal action has to be taken. 

In B. Raman & Ors. v. M/s. Shasun Chemicals and Drugs Ltd the High Court had observed that the legal fiction created by the law under Section 141of the Negotiable Instruments Act, 1881, required that if the person to be held liable is a Company, then  the directors who are responsible for day to day affairs of the Company are punishable. In such a case, it is essential that directors get a fair opportunity of rectifying the mistake or clarifying matters as the case maybe after service of notice. Hence, before making the complaint against the directors, service of notice should mandatorily be issued to the directors. Unless such a procedure is adhered to, directors cannot be vicariously held liable under Section 138. 

The Supreme Court observed that courts should interpret legal provisions in such a way that it gives out the true intent of the legislature. Keeping this in view, the court observed that notice under Section 138 to the ‘drawer’ of the cheque is given so as to enable him to make the payment and thus, avoid penal consequences. The law on this point is very clear, to make only the ‘drawer’ liable. Further, Section 141 states that in case of a Company, every director who was responsible for managing the affairs of the Company should also be held liable. The intention behind bringing the directors within the claws of the law was simple, that since Company is a juristic or an artificial person, it would be managed by living persons who guided the acts of such a juristic person to commit such a glaring default and hence, should be held responsible. Further, on a close reading of Section 141, it becomes quite clear that nowhere does the provision require separate notices to be issued to every director along with a simple presumption that directors who take care of the daily affairs of the Company must naturally be aware of such notice of demand under Section 138 of the Act. Hence, no additional requirement of sending separate notices to each director is required. If the directors are unaware of such a demand, then they can take this defense at the time of the trial and not at the notice stage under Section138. 

Thus, the Supreme Court has done away with the requirement of issuing separate notices to the Directors. and a single notice of demand issued against the Company under section 138 of the NI Act will henceforth, be considered to have been issued to the Directors as well and the liability of Directors can arise on the basis of such notices.