A micro supplier supplies goods to a private limited company for a few lakhs. No payment is made for months despite numerous phone calls. Finally, a director provides his signature on a cheque made out to the supplier in the company’s favour. The MSME deposits the cheque and breathes a sigh of relief. But the cash-flow nightmare is just beginning – the cheque bounces. The supplier now has to decide whether to initiate legal proceedings against the company, the signatory director, or both. A director can be held liable for cheque dishonour but liability is not automatic simply because someone styles themselves a director. The company would usually be the drawer of the cheque. Section 141 NI Act brings persons who were in charge of and responsible for the conduct of the company’s business to book for offences committed by the company. Since the signatory director has personally allowed the cheque to be issued, he is in a different position to the other directors. Examination of the conduct of other directors will be necessary to ascertain liability. Mere status as a director may not be enough to attribute liability. An MSME chasing delinquent accounts receivable may find a bounced cheque wreaks havoc on more than just one account. Employee salaries, GST liabilities, payments to suppliers and working capital requirements can all be affected. BK Singh Advocate recommend preserving not just the cheque and return memo, but also the underlying invoices and any other proof of the cheque being connected to a legally enforceable debt incurred by the company in the normal course of its business. BK Singh Advocate also reminds clients that time is of the essence. Section 138 has prescribed strict time limits for giving notice and filing a complaint. Remedies available under the Micro, Small and Medium Enterprises Development Act, 2006 may also need to be considered at the outset if the applicant is a micro or small enterprise and the statutory pre-requisites are met. These remedies can be pursued parallel to a cheque bounce suit. BK Singh can help evaluate if the cheque was issued by the company, who signed it on behalf of the company, which directors were ‘in charge of and responsible for the conduct of the business of the company’ and if an MSME specific remedy is available in addition to filing a cheque bounce lawsuit. The strategy will differ on a case-by-case basis. Director liability issues arise because companies operate through human beings, but company law also treats a company as a separate legal entity. You cannot blindly disclose all directors of an MSME without reviewing their involvement. You also cannot ignore the authorised signatory who was involved in presenting the bounced cheque. Companies based in Delhi NCR, Noida, Gurugram, Ghaziabad, Mumbai, Pune, Bengaluru, Hyderabad, Chennai, Kolkata or Ahmedabad often conduct business transactions from state lines. Products are supplied from one state, invoices are issued from another state and cheques are handed over to bank branches of a completely different state. Such facts matter for your records, jurisdiction and strategy for efficient handling of the matter. Defaulted amounts translate to existential problems for small businesses. While ?5 lakhs shortage of funds can be absorbed by a large corporate, it can halt salaries and stoppage of critical raw-materials for a small manufacturer. Small businesses which are often family-run face added anxiety as business savings are also meant to support family necessities. Incorrect names can lead to technical defences and duplication of costs. Dormancy can be even costlier as the limitation period under Section 138 doesn’t halt just because the purchaser gives you an assurance to issue another cheque. MSME Lawyers guides you to separate the corporate liability from personal claims against directors. Prompt review of the documents can also help you understand if the matter is due to defective goods, disputed invoice, part payment or settlement cheques or just undisputed business debt. Above rules have been extracted from Sections 138, 141 and 142 of The Negotiable Instruments Act, 1881. Documents decide whether you can tie the cheque to an admitted and enforceable commercial obligation. Don’t screenshot selectively – maintain complete records including all invoices – MSME Lawyers advises. Organise the following in chronological order as an MSME must. Retain the entire electronic conversation. Your screenshot might have chopped off the date or any attachments or other messages around it that alter its context. Mismatches are another common problem. Tax credits, returns, adjustments or disagreements over goods received can mean the amount in the ledger doesn’t match the cheque. It’s important to know why first before making legal accusations. BK Singh Advocate can review transaction history, pinpoint missing links and determine which parties are seemingly involved in authorising the payment. An MSME should seek advice at the earliest opportunity – usually right after the bank returns the memo. Waiting for “I’ll pay you, honest, I’ll pay you” promises will eat into any short notice period and risks weakening your control of the evidence. Specifically, advice should be sought if: Simply getting a replacement cheque will not necessarily resolve any legal issues caused by the initial dishonour. Likewise, an MSME should not accept an ambiguous promise to settle unless they check the payment dates, consequences of further default and whether any existing rights are being forfeited. Where unpaid vendor invoices extend beyond the face value of the cheque, suppliers can consider our vendor payment recovery service available through MSME Lawyers. MSME Lawyers can evaluate if a viable Section 138 claim seems to be available, what company and director parties are proper, if notice periods are met and how cheque-bounce litigation compares with alternative remedies. The service may entail general guidance with respect to review of documents, drafting of demand notice particulars, company details, venue, settlement conditions and synchronization with delayed-payment remedies. The exercise does not start with the premise that all directors should be charged. BK Singh Advocate reviews the paper trail of the transaction. That means who ordered the goods, who accepted the delivery, whose account was debited for the cheque and who had authority over the payment. These factors can influence director liability significantly. If the supplier is covered by statutory delayed-payment safeguards, MSME Lawyers may review if an MSME delayed-payment claim is applicable as well. Not all legal forums are suitable in every case and no specific legal result can be promised. Clients operating in Delhi, New Delhi, Noida, Greater Noida, Gurugram, Ghaziabad, Faridabad, Meerut, Hapur or any other Indian business hub can share their transactional documents for a preliminary legal opinion. No. Just because someone is a director does not mean they can be held liable. The complaint must allege that the director was in charge of or responsible for the conduct of the company’s business at the time of the offence. Sometimes a signing director, managing director or individual involved with the transaction will have a different level of responsibility than say an independent director or non-executive director. The person who signed the cheque can be prosecuted under sections 138 and 141 for their direct involvement with the bounced cheque. This does not mean that the company’s debt becomes the director’s personal debt for all purposes. BK Singh Advocate can help you understand their criminal liability and your civil recovery separately. Yes, generally speaking. Since the cheque was issued by the company, the company would be considered the “principal offender”. As such, the company would typically need to be named as an accused person for vicarious liability purposes against its officers. However, there could be limited legal issues that would require a review of the specific facts. Yes, both can be used parallelly. You can approach for filing a complaint under Section 138 of NI Act as well as a request for MSMEC reference under MSME Samadhaan. This is because these are two different laws punishing two different wrongs. While a Section 138 complaint deals with cheque bounce, MSMEC samadhaan is filed for delayed payment to micro or small supplier. MSME Lawyers at BK Singh & Associates can help you understand if the two processes have any duplicity, help you with the documents required for the same and can suggest which commercial seems more suitable as per your requirements. No. In many cases the court has looked into facts such as did a legally enforceable debt exist at the time when the cheque was presented for payment. If it is found that there was liability, then merely because the cheque was labeled as a security cheque does not mean that the claim would fail. Other facts like the agreement, invoice history and payment terms would also be relevant. Their date of resignation, date of signing of the cheque, date of cheque presentation and what their actual role was in the company should all be looked at closely. If this is a case of a former director who did not sign the cheque and was not responsible for the conduct of the company’s business when the cheque was presented, then they could have a very strong defense. Date of resignation and supporting MCA documents will be key. Yes. Crimes under Section 138 are compoundable in nature as per Section 147 of the NI Act. Terms of the settlement should unambiguously cover payment amount, schedule, costs if any, withdrawal/compounding of proceedings and consequences of future defaults. BK Singh Advocate can help review if settling the case would be a prudent decision or if it would prejudice the MSME’s current rights. Yes. If you are an eligible micro or small supplier, you can certainly claim interest under MSMED Act provided you satisfy certain requirements. This is independent of your right to file a suit for liability under Section 138. When claiming interest under MSMED Act, date of registration, supply records and payment terms would be relevant documents to look at before figuring out the amount you could claim as interest. If there is a bona fide dispute regarding the quality of goods then that could impact whether the liability represented by the cheque was an enforceable liability. The MSME should try to keep a record of acceptance, any inspection reports, date of complaint by the other party, correspondence for replacement/repair and credit notes if issued. If this is something the other party brought up only after the cheque was dishonoured and cannot be supported by documents, it will be viewed differently than if there were documents to support the complaint made immediately after delivery. As soon as possible. The statutory notice demanding payment should generally be issued within 30 days of when the payee is informed of the dishonor. MSME Lawyers can review the return memo, validity of the cheque, notice sent to correct address and all relevant documents pertaining to the transaction so that the 30-day limit is not lost. The director of a company can be liable for a bounced cheque. However, their signature, position and responsibility for the company’s finances are relevant. Naming all directors blindly can backfire. Omitting the company itself could be similarly perilous. An MSME’s best starting point is a paper trail: cheque, return memo, invoices, proof of delivery, ledger and correspondence. Waiting too long can foreclose statutory remedies while leaving room for commercial negotiation.Can MSMEs Hold a Company Director Liable for a Dishonoured Cheque?
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Quick Facts About Company Director Cheque Bounce Liability
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When Should an MSME Consult a Lawyer?
How Can MSME Lawyers Help?
Frequently Asked Questions
1. Can we prosecute every director of the company for cheque bounce?
2. Does the director who signed the cheque face personal liability?
3. Do we have to name the company in the complaint as well?
4. Can I use Section 138 of NI Act and MSME Samadhaan against the defaulting company?
5. Is a “security cheque” not covered under Section 138?
6. The director retired before the cheque was dishonoured. What now?
7. Can we settle this case?
8. Can we demand interest under MSMED Act on top of the cheque amount?
9. The company is saying the goods we supplied were defective.
10. How soon after a cheque bounce should we act?
Final Thoughts
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