Decoding Director's Liability: When "Day-to-Day Affairs" Can Lead to Prosecution for Dishonored Cheques.


22 May 2025 Dishonor of Cheque >> Business & Commercial Law   |   Cheque Bounce >> Civil/Debt   |   Criminal Appeals & Suspension of Sentence >> Criminal Law  

The world of business often involves complex financial arrangements, and sometimes, things go wrong. One common legal issue arises when cheques bounce, leading to cases under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). While a company is primarily liable, the law also extends responsibility to individuals associated with the company, particularly its directors. A recent Supreme Court of India judgment, HDFC Bank Limited v/s State Of Maharashtra & Another, decided on May 22, 2025, sheds crucial light on when a director can be held accountable for a company's dishonored cheque, especially if they are involved in the "day-to-day affairs" of the company.

The Case at Hand:

 
 

The case involved HDFC Bank Limited and M/s R Square Shri Sai Baba Abhikaran Pvt. Ltd.. The company, along with its directors, including Mrs. Ranjana Sharma, approached HDFC Bank for a revolving loan facility. After availing the credit, the company failed to repay its dues, and its account was classified as a Non-Performing Asset. A cheque issued by the accused for over Rs. 6 crore was dishonored with the reason "account blocked". Consequently, HDFC Bank initiated criminal proceedings against the company and its directors, including Mrs. Ranjana Sharma.

The High Court of Judicature at Bombay had quashed the proceedings against Mrs. Ranjana Sharma, arguing that there were "no sufficient averments" in the complaint to invoke her vicarious liability under Section 141 of the NI Act. Aggrieved by this, HDFC Bank appealed to the Supreme Court.

Understanding Section 141 of the NI Act: The "In Charge Of" Clause

Section 141(1) of the NI Act states that if a company commits an offense under Section 138 (dishonor of cheque), "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," shall also be deemed guilty.

The core of the legal debate often revolves around the phrase "in charge of, and was responsible to the company for the conduct of the business of the company". Previous Supreme Court judgments, particularly S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Another, have provided guidance on this. The term "in charge of" means being "in overall control of the day-to-day business of the company or firm".

Supreme Court's Analysis and Key Findings:

The Supreme Court examined the complaint filed by HDFC Bank. It noted that the complaint explicitly stated that "Accused Nos 2 to 4 [including Mrs. Ranjana Sharma] are the Directors of Accused No 1 Company and is responsible for its day to day affairs, management and working of the Accused No 1 Company".

Furthermore, the complaint highlighted that the company, through the accused directors (including Mrs. Ranjana Sharma), had approached the bank for credit facilities, and negotiations took place with them. Crucially, a Board Resolution of the company authorized Mrs. Ranjana Sharma to negotiate with HDFC Bank, accept revised terms, deposit original title deeds as security, and execute various loan and security documents like demand promissory notes, hypothecation agreements, and guarantees. She was also authorized to file particulars of charge with the Registrar of Companies and affix the common seal on relevant documents. The sanction letters also required her performance guarantee.

The Supreme Court emphasized that merely reproducing the exact words of Section 141 is not necessary. What is required is that the complaint, when read as a whole, must clearly indicate that the accused falls within the parameters of Section 141(1). The Court reiterated that the "substance will prevail over form".
Distinguishing this case from previous rulings where omnibus averments were deemed insufficient, the Supreme Court found that the specific averment that Mrs. Ranjana Sharma "was responsible for the day-to-day affairs, management and working of the accused No. 1 company", coupled with her active role in negotiations and authorization to execute critical financial documents, clearly fulfilled the requirements of Section 141(1) of the NI Act.

Conclusion:

The Supreme Court set aside the High Court's judgment, restoring the criminal proceedings against Mrs. Ranjana Sharma. This judgment reinforces the principle that while vicarious liability under Section 141 of the NI Act is an exception in criminal law, it can be invoked if the complaint contains sufficient averments demonstrating that a director was actively "in charge of, and was responsible to the company for the conduct of the business of the company," even if the exact statutory phrasing is not mechanically reproduced. The administrative roles and specific responsibilities of directors, especially those involved in significant financial dealings, can be crucial in establishing their liability in cheque dishonor cases. This ruling serves as an important reminder for directors to understand their responsibilities and the potential legal implications of their involvement in a company's financial operations.


Section 138, Negotiable Instruments Act - 1881  

Section 141, Negotiable Instruments Act - 1881  

Negotiable Instruments Act, 1881