Cheque Bounce Case – Grounds for Stay Order

Summary:

There are no case laws that explicitly lay down all grounds for staying or vacating a stay in a
section 138 proceeding. However, after reading a large number of case laws, it has come to
my understanding that it’s always at the discretion of the court whether to stay or vacate a
stay in this scenario, on cases to case basis, there re no hard and fast rules for the same.
Common situations where a court has granted stay is when the court lacked jurisdiction to try
the matter, where a simultaneous proceeding is taking place or when directors use the
company's injunction to shield themselves from personal liability etc. The following case
laws give a detailed view of the courts’ interpretation of the same.

Gujarat High Court

Bharat Overseas Bank Limited vs Ashima Limited on 12 April, 20041

The argument presented suggests that the respondent company sought an injunction against
the appellant bank not because it was warranted under any specific provision, but rather to
shield its directors from potential prosecution under Section 138 read with Section 142 of the
Negotiable Instruments Act. The company's aim was to delay or prevent the legal
consequences its directors might face if the cheques bounced. By obtaining an injunction, the
company indirectly achieved what it could not have directly – avoiding liability for its
directors.

The comparison is drawn with a precedent case where the Supreme Court ruled that
immunity granted to a company under a specific statute cannot extend to cover the individual
obligations and liabilities of its directors and officers. If directors incur personal obligations
or liabilities distinct from those of the company, they can be held individually accountable,
and legal proceedings against them should not be stayed.

Therefore, in the current scenario, the argument suggests that the directors cannot use the
company's injunction to shield themselves from personal liability. If they have committed
acts independently liable for, they should be subject to legal proceedings, and any attempt to

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(2004)2GLR529, [2004]54SCL292(GUJ)
delay or prevent such proceedings through the company's actions should not be permitted by
the court.

“11. Mr. S.B. Vakil, learned Senior Counsel along with Mr. S.S. Panesar, learned advocate
appearing for the appellant - Bank submitted that the respondent Company has filed the
present suit and obtained injunction against the appellant - Bank with malafide intention to
delay and if possible to prevent prosecution of the Company's Directors for offences
under Section 138 read with Section 142 of the Negotiable Instruments Act, in the event of
bouncing of the cheques, when presented. The respondent Company has sought the injunction
against the appellant Bank not because the same was warranted under the BRU notification,
but because the Company wanted to shelter its Directors against the unavoidable
consequences of being prosecuted if the cheques were bounced. By obtaining an injunction
preventing the appellant to present the cheque, the respondent Company has fraudulently
obtained a stay against the operation of the provisions contained in Section 138 & 141 of
the Negotiable Instruments Act. The respondent Company, therefore, indirectly succeeded in
achieving what he could not have succeeded directly. In this connection, he relied on the
decision of the Hon'ble Supreme Court in the case of INDERJIT C. PAREKH AND OTHERS
V. B.K. BHATT AND ANOTHER, A.I.R. 1974 SUPREME COURT 1183 wherein while
dealing with the Provisions contained in Section 4 (1) (a) (iv) of the Bombay Relief
Undertakings (Special Provisions) Act, 1958, in the context of the individual liabilities of
Directors and officers under Employees Provident Funds Scheme, 1952, the Hon'ble Supreme
Court has held that the immunity cannot be extended to cover the individual obligations and
liabilities of the directors and other officers of the undertaking as distinct from the
obligations or liabilities of the undertaking. Neither the language of the statute nor its object
would justify the extension of the immunity so as to cover the individual obligations and
liabilities of the directors and other officers of the undertaking. If they have incurred such
obligations or liabilities as distinct from the obligations or liabilities of the undertaking, they
are liable to be proceeded against for their personal acts of commission and omission. The
remedy in that behalf cannot be suspended nor can a proceeding already commenced against
them in their individual capacity be stayed. Indeed, it would be strange if any such thing was
within the contemplation of law.”

Punjab-Haryana High Court

Anil Hada vs Indian Arcylics Ltd. on 24 July, 19982

“12. Counsel for the petitioner relied upon Harish C. Raskapoor v. Jaferbhai Mohmedbhai
Chhatpar [1989] 65 Comp Cas 163 (Guj) and submitted that the word "proceeding"
occurring in section 446 of the Companies Act should include not only civil proceedings but
also criminal proceedings. The proceedings under section 138 of the Negotiable Instruments
Act are quasi-criminal in nature and, therefore, the present petitioner cannot be prosecuted. I
have gone through this citation and to my mind this will not come to the rescue of the present
2
[2000]99COMPCAS10(P&H)
petitioner. Even if it is assumed for the sake of argument that the word "proceeding" is given
wide import and is taken that it would include in its sweep criminal proceedings also, still the
benefit cannot go to the petitioner because the petitioner, who was the director of the
company, could not get a stay of the criminal proceedings. The protection which has been
afforded under section 446 of the Companies Act is only extendible to a company and that
too by the discretion of the High Court. If a particular director, in charge of the affairs of the
company issues a cheque with the knowledge or with the supposed knowledge that the cheque
in the eventuality of presentation would bounce in that eventuality he would certainly face
criminal proceedings, which come into existence with the expiry of the statutory period of the
notice.”

In the given extract, the court suggests that a director's request for a stay order might face
challenges. Even if the word "proceeding" in Section 446 of the Companies Act were
interpreted to include criminal proceedings, it would not benefit the director. The protection
under Section 446 extends only to the company, not its directors. Additionally, Section 141 of
the Negotiable Instruments Act deems individuals responsible for the company's conduct
guilty of offences, indicating potential liability for directors in cheque dishonour cases.
Therefore, directors seeking a stay order may find it difficult due to statutory provisions and
court interpretations. A director seeking a stay order may face challenges, as the courts may
prioritize the company's interests and the statutory provisions regarding the liability of
individuals involved in the company's affairs.

In the context of cheque dishonour cases under Section 138 of the Negotiable Instruments
Act, 1881, the Supreme Court of India has clarified that vicarious liability of directors or
partners arises only if the company or firm has committed the offence as the principal
accused. Directors can be held liable if they were actively engaged in the company's affairs
and responsible for its conduct at the time of the offence. However, mere designation as a
director or partner does not automatically imply liability unless there is evidence of direct
involvement, consent, connivance, or neglect in the company's operations. The court
emphasized the importance of statutory provisions and specific acts attributed to directors for
liability to be established, while also considering the director's knowledge and intent
regarding the cheque issuance.
Supreme Court of India

Lalankumar Singh vs The State Of Maharashtra3

“In the case of S.M.S. Pharmaceuticals Ltd4. (supra), this Court was considering the question
as to whether it was sufficient to make the person liable for being a director of a company
under Section 141 of the Negotiable Instruments Act, 11 1881.

This Court considered the definition of the word “director” as defined in Section 2(13) of the
Companies Act, 1956. This Court observed thus: “8. ……. There is nothing which suggests
that simply by being a director in a company, one is supposed to discharge particular
functions on behalf of a company. It happens that a person may be a director in a company
but he may not know anything about the day-to-day functioning of the company. As a director
he may be attending meetings of the Board of Directors of the company where usually they
decide policy matters and guide the course of business of a company. It may be that a Board
of Directors may appoint sub-committees consisting of one or two directors out of the Board
of the company who may be made responsible for the day-to-day functions of the company.
These are matters which form part of resolutions of the Board of Directors of a company.
Nothing is oral. What emerges from this is that the role of a director in a company is a
question of fact depending on the peculiar facts in each case. There is no universal rule that
a director of a company is in charge of its everyday affairs. We have discussed about the
position of a director in a company in order to illustrate the point that there is no magic as
such in a particular word, be it director, manager or secretary. It all depends upon the
respective roles assigned to the officers in a company. …..

This Court, however, clarified that the position of a managing director or a joint managing
director in a company may be different. This Court further held that these persons, as the
designation of their office suggests, are in charge of a company and are responsible for the
conduct of the business of the company. To escape liability, they will have to prove that when
the offence was committed, they had no knowledge of the offence or that they exercised all
due diligence to prevent the commission of the offence.”

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CRIMINAL APPEAL NO. 1757 OF 2022
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(2005) 8 SCC 89
In a recent decision in Dilip Hariramani v. Bank of Baroda, the Hon’ble Supreme Court
held that the provisions of Section 141 impose vicarious liability by a deeming fiction which
presupposes and requires the commission of the offence by the company or firm. Therefore,
unless the company or firm has committed the offence as a principal accused, the persons
mentioned in Section 141 would not be liable and convicted as vicariously liable.

In simple points the following was held by the court:

1. A director or partner cannot be held vicariously liable for a criminal offence under Section
138 of Negotiable Instrument Act, 1881 merely because of being a director or partner of the
company or firm, unless the company or firm is (i) made an accused in the criminal
proceedings, and (ii) proven to have committed the offence of cheque bouncing as the
principal accused,

2. Vicarious liability of a director or a partner arises only if the director or the partner have
been directly involved in the day to day running of the business and the offense is committed
with the consent, connivance, or is attributable to the neglect by the said director or partner of
the company or firm.

“14. The provisions of Section 141 impose vicarious liability by deeming fiction which
presupposes and requires the commission of the offence by the company or firm. Therefore,
unless the company or firm has committed the offence as a principal accused, the persons
mentioned in sub-section (1) or (2) would not be liable and convicted as vicariously
liable. Section 141 of the NI Act extends vicarious criminal liability to officers associated
with the company or firm when one of the twin requirements of Section 141 has been
satisfied, which person(s) then, by deeming fiction, is made vicariously liable and punished.
However, such vicarious liability arises only when the company or firm commits the offence
as the primary offender. This view has been subsequently followed in Sharad Kumar Sanghi
v. Sangita Rane,17 Himanshu v. B. Shivamurthy and Another,18 and Hindustan Unilever
Limited v. State of Madhya Pradesh.19 The exception carved out in Aneeta Hada (supra),20
which applies when there is a legal bar for prosecuting a company or a firm, is not felicitous
for the present case. No such plea or assertion is made by the respondent.”
R. Kalyani vs Janak C. Mehta and Anr (2009) 5: In this case, the Supreme Court ruled that
a director can be held liable for a cheque dishonour offence committed by the company under
Section 141 of the Negotiable Instruments Act, 1881, if he was in charge of the company's
affairs and responsible for the conduct of its business at the time of the offence. According to
the court, the obligation stems from the director's active engagement in the firm and
knowledge of the transaction.

“Allegations contained in the FIR are for commission of offences under a general statute. A
vicarious liability can be fastened only by reason of a provision of a statute and not
otherwise. For the said purpose, a legal fiction has to be created. Even under a special
statute when the vicarious criminal liability is fastened on a person on the premise that he
was in- charge of the affairs of the company and responsible to it, all the ingredients laid
down under the statute must be fulfilled. A legal fiction must be confined to the object.. and
purport for which it has been created…….. 27. If a person, thus, has to be proceeded with as
being variously liable for the acts of the company, the company must be made an accused. In
any event, it would be a fair thing to do so, as legal fiction is raised both against the
Company as well as the person responsible for the acts of the Company.”

Sunil Bharti Mittal vs. CBI and Ors. (2015) 6: In this decision, the Supreme Court
explained that Section 141 of the Negotiable Instruments Act, 1881 requires the director to be
in charge of and accountable for the conduct of the company's operations, but this does not
imply that he must have day-to-day control over the company's affairs. The court ruled that a
director who is involved in the company's decision-making process might be held
accountable under the clause.

“When the company is the offendor, vicarious liability of the Directors cannot be imputed
automatically, in the absence of any statutory provision to this effect. One such example
is Section 141 of the Negotiable Instruments Act, 1881. In Aneeta Hada (supra), the Court
noted that if a group of persons that guide the business of the company have the criminal
intent, that would be imputed to the body corporate and it is in this backdrop, Section 141 of
the Negotiable Instruments Act has to be understood. Such a position is, therefore, because of
statutory intendment making it a deeming fiction. Here also, the principle of "alter ego", was
applied only in one direction namely where a group of persons that guide the business had
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(2009) 1 SCC 516
6
(2015) 4 SCC 609
criminal intent, that is to be imputed to the body corporate and not the vice versa. Otherwise,
there has to be a specific act attributed to the Director or any other person allegedly in
control and management of the company, to the effect that such a person was responsible for
the acts committed by or on behalf of the company. This very principle is elaborated in
various other judgments. We have already taken note of Maharashtra State Electricity
Distribution Co. Ltd. (supra) and S.K. Alagh (supra).”

National Small Industries Corporation Ltd. v. Harmeet Singh Paintal (2010) 7:In this
case, the Supreme Court ruled that a director can only be held liable for the dishonour of a
cheque if it can be proven that he had the requisite knowledge and intent to issue the cheque
in question, and that he was in charge of and responsible for the company's business
operations at the time the cheque was issued.

“15. The Court may be guided by the attending circumstances. Where a criminal action
provides a cause of action for the civil action, then the Court may if the facts so
demand, stay proceedings in the civil suit. In the matter of Sheriff (AIR 1954 SC 397) the
Supreme Court found that the suit for damages was the result of a criminal action on the part
of the accused. There criminality provides a ground for recovery of damages, then the Court
can exercise powers in favour of the defendant/accused for staying the proceedings, but
where a civil wrong or a civil action provides a foundation for punishing the accused, then
the civil Court can refuse to stay civil proceedings. In a case where the defendant issues
a cheque which bounces, then the right of the plaintiff to recover the money is not impaired
because his right to recover the money would always stand whether the accused is punished
or not. If in such a case, action is taken under Section 138B of the Negotiable Instruments
Act, the accused cannot be permitted to say that till the pendency of the criminal matter, the
civil suit should be stayed. If such a request is accepted, it would add premium to the lapse of
the accused because on one side he did not pay the money and on the other hand he is
seeking stay of the proceedings virtually avoiding the liability to pay till disposal of the
criminal matter.”

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(2010) 3 SCC 330.