Director not liable if company check dishonored: Top court

Director not liable if company check dishonored: Top court 

21.12.2024

New Delhi : Supreme Court on Friday ruled that if a person repays a personal loan through a check signed by him as a director of a company, then he would not be liable to be prosecuted under Section 138 of the Negotiable Instruments Act if the check bounced. A man took a personal loan of ₹7 lakh and returned the amount through a check drawn on an account of Shilabati Hospital, Kolkata, of which he was a director. The check bounced and the creditor had initiated proceedings under Section 138 of the Act. HC quashed the proceedings and the creditor appealed in SC. A bench of Justices JB Pardiwala and R Mahadevan said Section 138, being a penal provision, has to be strictly construed and a man could face prosecution only if the cheque, issued by him from an account maintained by him, gets dishonored. It said since the check was drawn from the hospital's account, the man as director cannot be prosecuted under the NI Act. There are as many as 36 lakh check bouncing cases pending in various courts as of 2023. Writing a detailed judgment analyzing the provision threadbare, Justice Pardiwala said, “Section 138 of the NI Act clearly postulates that the check returned for insufficiency of funds should have been drawn by a person on an account maintained by him.” "It will amount to doing violence to the language of the statute if Section 138 of the Act is interpreted to mean that even if a person draws a check on an account not maintained by him, he shall be liable if the check is returned for insufficiency of funds. Such an interpretation will lead to absurd and wholly unintended results,” he said.