By Advocate Tarun Gaur | Practicing in Delhi High Court
In a landmark ruling, the Supreme Court of India has brought much-needed clarity to the issue of director liability in cheque bounce cases under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). The apex court held that a director who has resigned before the issuance of a cheque cannot be held liable for its dishonour, even if the underlying liability or debt arose during their tenure.
This significant ruling ensures that former directors, managing directors, CEOs, CFOs, and similar officers are not subjected to unnecessary litigation for actions carried out by a company after their exit.
Ingredients of an Offence Under Section 138 NI Act
To understand the rationale behind this verdict, it is essential to first grasp the legal ingredients that constitute an offence under Section 138:
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Legally Enforceable Debt or Liability: The cheque must be issued towards a legally enforceable debt or liability.
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Issuance of the Cheque: The cheque must be drawn by the accused (drawer) in favour of the complainant (payee).
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Dishonour of Cheque: The cheque must be returned unpaid due to insufficient funds or other reasons.
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Statutory Notice: A notice must be sent to the drawer demanding payment within 30 days of receiving bank intimation.
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Failure to Pay: The drawer must fail to make the payment within 15 days of receipt of the notice.
Unless all these elements are present, the offence under Section 138 is not complete.
The Case Before the Supreme Court
In the case under consideration, the complainant sought to prosecute a former director under Section 138, arguing that although the cheque was issued after their resignation, the liability had arisen during their tenure.
The core question was: Can a person who resigned before the cheque was issued still be prosecuted under Section 138 NI Act?
Supreme Court’s Ruling
The Supreme Court unequivocally answered No.
Key takeaways from the judgment:
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Issuance of Cheque is Pivotal: The Court clarified that the act of issuing a cheque is central to an offence under Section 138. If the director was no longer part of the company at the time of issuance, they cannot be treated as a “drawer.”
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Existence of Liability is Not Enough: Merely having an outstanding debt during a director’s tenure does not create liability under Section 138 unless the director was part of the act of issuing the dishonoured cheque.
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Natural Justice: Dragging former directors into criminal litigation for company acts committed post-resignation is unjust and contrary to the principles of fairness.
Why This Verdict Matters
This ruling provides several important implications for corporate governance and litigation involving cheque bounce matters:
✅ Relief for Resigned Directors
Former directors, CEOs, CFOs, and other officers can now be confident that their post-resignation liability under Section 138 NI Act is legally restricted.
✅ Better Focus on Real Offenders
The judgment ensures accountability lies with the actual “drawer” or signatory involved in issuing the cheque, avoiding needless harassment of former stakeholders.
✅ Importance of Proper Documentation
Corporate officers must ensure that their resignation is formally recorded with the Registrar of Companies (ROC) and well-documented to avoid future complications.
Conclusion
The Supreme Court’s decision is a progressive step toward ensuring precision, fairness, and accountability in the application of criminal provisions under the Negotiable Instruments Act. It serves as a valuable precedent for courts dealing with Section 138 complaints involving non-signatory directors or those who have exited the company.
For directors and corporate officers, this judgment serves as a legal safety net—but it also places a responsibility to ensure timely resignations are duly communicated and recorded.
If you are facing legal issues related to cheque bounce or want to understand your liabilities as a corporate officer, feel free to consult.
– Advocate Tarun Gaur
Practicing in Delhi High Court | Arbitration, Criminal & Corporate Law