Cheque Issued from Joint Account or Company’s Account – Who is Liable?

Introduction 

Cheque, a paper promise of payment, underpins countless transactions in India, symbolizing trust and financial commitment. Yet, its dishonour, particularly under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), transforms a mere financial inconvenience into a potent legal liability. 

While the act of bouncing a cheque might seem straightforward, the question of “who is truly liable?” takes on intricate dimensions when the instrument originates from a shared financial domain, be it a joint personal account or the sophisticated machinery of a company. 

This exploration delves beyond the surface, seeking to unearth the analytical underpinnings of liability in these complex scenarios, presenting a fresh perspective on a well-trodden legal path, enriched with judicial interpretations and practical considerations.

Decoding Section 138 NI Act

Section 138 of the NI Act outlines the conditions under which the dishonour of a cheque constitutes a criminal offence:

• A cheque is drawn by a person on an account maintained by them with a bank.
• The cheque is for the discharge of any legally enforceable debt or other liability.
• It is returned unpaid due to insufficient funds or exceeding the arranged amount.
• The payee issues a demand notice within 30 days of receiving information about the dishonour.
• The drawer fails to make payment within 15 days of receiving the notice.

If these conditions are met, the drawer faces potential imprisonment for up to two years, a fine up to twice the cheque amount, or both. This provision, though criminal in nature, often aims for compensatory outcomes, nudging the drawer to honour their financial commitment.

The Supreme Court has aptly described proceedings under Section 138 of the NI Act as a “civil sheep in a criminal wolf’s clothing.” This highlights its hybrid nature. While it carries the punitive teeth of criminal law (imprisonment and fine), its underlying objective is primarily compensatory  to ensure the payee receives their due. This unique character influences everything from the burden of proof to the emphasis on compounding (settlement) of cases.

The phrase “civil sheep in a criminal wolf’s clothing” (see here) was used by the Supreme Court in the landmark case of P. Mohanraj & Ors. vs. Shah Brothers Ispat Pvt. Ltd. [6 SCC 258] (March 1, 2021).

The focus of this case lies in a critical question: If a company is undergoing insolvency under the IBC (Insolvency and Bankruptcy Code), can cheque bounce cases (under Section 138 of the Negotiable Instruments Act) still go on? 

To answer this, the Court looked closely at what Section 138 really represents. While cheque bounce cases carry criminal penalties like fines or even jail time, the true goal is to recover money, not punish someone like in typical criminal offenses. That is why the Court described it as a “civil sheep in a criminal wolf’s clothing”.In other words, it may look aggressive and punitive on the outside, but at its core, it is about compensating the aggrieved party and clearing dues, not criminal retribution.

This understanding was key to the verdict. Since cheque bounce cases could end up draining a company’s resources (through fines or forced payments), the Court ruled that such proceedings should be paused when a company is under the IBC moratorium. This pause ensures that the company’s limited assets are protected while its financial future is being restructured.

The Liability 

Liability in Joint Accounts

In the domain of joint accounts, the analysis revolves around the “Signature as Testament” principle. The law does not automatically penalize mere co-ownership or familial association with an account. Instead, it targets the individual whose direct, volitional act, the physical signing of the cheque, initiates the payment instruction to the bank.

In a landmark judgment of Aparna A. Shah vs. Sheth Developers Pvt. Ltd. (2013) 8 SCC 71,  the Supreme Court unequivocally held that only the signatory of the cheque drawn from a joint account can be prosecuted under Section 138 of the NI Act. The mere fact of being a joint account holder does not automatically make one liable if they did not sign the cheque.

Here are some key points to remember: 

• Signatory’s Sole Criminal Liability: Even if the joint account holders share a common debt or liability for which the cheque was issued, criminal liability under Section 138 squarely falls upon the person(s) who actually signed the cheque. A non-signing joint account holder, despite being a beneficiary or having a share in the account, cannot be automatically implicated. 
• The Intentional Act and its Implication: The act of signing a cheque is an overt and intentional act. It serves as a direct command to the bank and an implicit representation by the signatory that the account holds sufficient funds. The law anchors criminal culpability to this specific, responsible action. To extend liability to non-signatories would dilute the statutory definition of “drawer” and could lead to the unjust prosecution of individuals who had no direct control over the cheque’s issuance or the account’s balance at that moment.
• Beyond Legal Status: This principle underscores that for Section 138, legal status as a joint account holder is secondary to the practical act of drawing the instrument. If a power of attorney holder, duly authorized by a joint account holder, signs a cheque from that account, the power of attorney holder could potentially be deemed the “drawer” if the cheque bounces, depending on the specific terms of the power of attorney and their direct involvement. However, typically, the principal (the account holder) remains primarily liable if the cheque is drawn on their account, and the power of attorney is merely their instrument.

Liability in Company Accounts

When a cheque from a company account bounces, the question of liability becomes more complex and introduces the concept of Vicarious Liability under Section 141 of the NI Act. A company, being an entity, acts through its agents. Therefore, the law extends its reach beyond the corporate shell to hold responsible individuals accountable.

• Company’s Primary Culpability: The company, as the drawer of the cheque, is primarily liable for the offence under Section 138 of the NI Act.
• The “Operational Control and Knowledge” Doctrine [Section 141(1)]: This is the core of corporate liability. It says that “every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company.”

• Beyond Designation: Mere designation as a director is insufficient. The prosecution must concretely establish that the individual held operational control over the company’s affairs, particularly its financial management, and had knowledge of the transaction leading to the cheque’s dishonour. This targets individuals like the Managing Director, Executive Directors, or the Chief Financial Officer, who are intrinsically involved in day-to-day operations.
• De Facto Directors: The law looks at substance over form. Even individuals who are not formally designated as directors but who exert significant influence and control over the company’s financial decisions (de facto directors) can be brought under the purview of Section 141, provided their “in charge and responsible” role is proven.
• No Presumption for All Directors: There is no automatic presumption that every director knows about every transaction. Specific elements in the complaint, detailing the individual’s role and responsibility, are important for fastening criminal liability.
• “Consent, Connivance, or Neglect” Clause [Section 141(2)]: This provision broadens the net to include directors, managers, secretaries, or other officers whose consent, connivance, or neglect facilitated the commission of the offence.

• Passive Complicity: This covers scenarios where an individual, though not directly “in charge,” was aware of the impending dishonour or the company’s precarious financial state but failed to take reasonable steps to prevent it, or actively allowed it to happen.
• Proving Neglect: Proving “neglect” requires demonstrating a failure to exercise the care that a prudent person in that position would have taken under similar circumstances. This often arises when due diligence in monitoring company finances is demonstrably absent.
• Nominee/Non-Executive Directors: Generally, non-executive directors or nominee directors who do not participate in the day-to-day management or financial decision-making are not held liable under Section 141, unless the prosecution can specifically prove their active role, knowledge, consent, connivance, or neglect in relation to the bounced cheque. Their liability is not presumed.

The Role of Mens Rea (Guilty Mind) and the Burden of Proof

Unlike many criminal offences where a “guilty mind” (mens rea) is a fundamental prerequisite, Section 138 of the NI Act operates on a principle of strict liability to a significant extent.

Here are some of the key points: 

• No Requirement to Prove Dishonest Intent at Issuance: The law does not require the prosecution to prove that the drawer had a dishonest or fraudulent intention at the time of issuing the cheque. The offence is triggered by the objective facts of dishonour, notice, and non-payment, irrespective of the drawer’s subjective state of mind when they issued the cheque. Section 140 of the NI Act explicitly states that it shall not be a defense that the drawer had no reason to believe the cheque would be dishonoured.
• Shifting Burden of Proof:

• Initial Presumption (Complainant’s Burden): Once the complainant establishes the basic ingredients of Section 138 (cheque issued, presented within validity, dishonoured, proper notice given, non-payment), a statutory presumption under Section 139 of the NI Act arises. This presumption states that the holder of a cheque received it for the discharge of a legally enforceable debt or liability. This shifts the initial burden onto the accused.
• Rebutting the Presumption (Accused’s Burden): The burden then shifts to the accused to rebut this presumption. They do not need to prove their innocence beyond a reasonable doubt, but rather by a “preponderance of probabilities”. This makes their defense appear more probable than not. This can be done by leading their own evidence or even by pointing out glaring inconsistencies in the complainant’s case.

Common Defenses and Judicial Scrutiny

Understanding the analytical framework helps in appreciating the common defenses against Section 138 charges:

• No Legally Enforceable Debt or Liability: This is the most potent defense. If the cheque was issued as a gift, for a time-barred debt, as security without a crystallised debt, or for an illegal transaction, the complaint under Section 138 will not be maintainable. The “legally enforceable” aspect is crucial.
• Cheque not issued for “debt or other liability”: If the cheque was merely given as security and the underlying liability never matured or was fulfilled, this can be a valid defense. However, the courts have been vigilant against frivolous “security cheque” claims.
• Cheque Misuse (Blank/Undated Cheque): If a blank or undated cheque was handed over and subsequently misused, it can be a defense. However, mere assertion is not enough; the accused must provide credible evidence (e.g., police complaint about loss, stop payment instructions, correspondence).
• Improper Notice: Any procedural flaw in the demand notice (e.g., not sent within 30 days, not containing the exact amount, not demanding payment) can invalidate the complaint.
• Cheque not presented within the validity period: As of current regulations, cheques are valid for three months from the date of issue. Presentation beyond this period nullifies the complaint.
• Account Closed Before Issuance: If the account was legitimately closed before the cheque was issued, the drawer might have a defense, as the cheque was not drawn on an “account maintained by him.”
• Signature Mismatch / Forgery: If the signature on the cheque is not that of the accused, or it is a forgery, it’s a complete defense.

Civil vs. Criminal Aspect

It is significant to distinguish between the civil and criminal remedies available to a payee in the event of cheque dishonour:

• Civil Remedy: The payee can always file a civil suit for recovery of the debt based on the underlying transaction. This remedy is aimed purely at recovering the money and does not carry the threat of imprisonment.
• Criminal Remedy (Section 138): This is a specific statutory offence designed to lend credibility to cheques. While it can lead to imprisonment, the primary driver is often to compel payment through the threat of criminal prosecution. The unique aspect is that these proceedings are compoundable, meaning the parties can settle the matter, leading to the acquittal of the accused.

The Strategies

Cheque liability, especially when things go wrong, can turn into a legal minefield. Whether you are an individual operating a joint account, or part of a corporate setup managing company funds, a proactive and cautious approach is essential to avoid disputes, legal complications, or even criminal proceedings under laws like Section 138 of the NI Act.

Here are some of the strategies: 

For Individuals (Especially Joint Account Holders)

When two or more people share a bank account, it is not just about shared money, it is about shared responsibilities and risks too:

• Have Clear, Written Agreements: All joint account holders should clearly document who is authorized to sign cheques and under what conditions. Verbal understandings can lead to confusion or, worse, legal conflict. Always clarify who is responsible for repaying a debt if a cheque bounces.
• Be Transparent About Money: Regularly discuss the account’s balance and planned withdrawals. Surprises, especially involving bounced cheques, can break trust and relationships. Transparency keeps everyone on the same page.
• Document Liabilities Clearly: If a cheque is issued for a loan or shared obligation, make sure it’s backed by clear documentation. Who drew the cheque? Who owes what? In court, paper trails matter far more than memories.
• Never Issue Blank or Undated Cheques: Even with close friends or family, blank cheques are a legal and financial risk. They can be misused or presented at a time when your account lacks funds.

For Companies (Corporate Bank Accounts)

• Build a Strong Authorization Framework: Create a clear approval system and define who can sign cheques? Up to what amount? Are two signatures required? A well-structured matrix prevents unauthorized payments and strengthens accountability.
• Separate Key Duties: Do not let the same person raise a payment request and sign the cheque. Segregating duties is a classic internal control practice that reduces fraud and error.
• Reconcile Often, Not Just Monthly: Regularly match bank statements with accounting books. Even minor mismatches, if overlooked, can snowball into serious issues or missed fraud.
• Directors Must Stay Engaged: Being a director is not just a title, it comes with responsibility. Board members must actively monitor financial reports, attend meetings, ask questions, and raise red flags when something feels off.
• Communicate Changes Formally: If a director resigns, their departure should be officially documented and informed to the bank and key stakeholders. This prevents misuse of authority by someone no longer involved in the company.
• Consider Indemnity Clauses for Non-Executive Directors: Non-executive or independent directors who are not involved in day-to-day operations may ask for indemnity in contracts to protect themselves from liabilities arising from decisions they were not part of. However, remember: such clauses do not override criminal accountability under the law.
• Always Have Legal Counsel on Standby: For any large or high-risk financial transaction, it is wise to consult a competent legal advisor. Legal advice can help you stay compliant, draft better contracts, and reduce exposure to litigation.

YLCC would like to thank Nikunj Arora for his valuable insights into this article.