Kerala HC: Director Liable U/S 141 NI Act if Director at Time of Cheque Dishonour, Even if Not at Other Stages of S.138 Offence

Kerala High Court Clarifies Director's Liability in Cheque Dishonour Cases Under NI Act

Ernakulam, Kerala – April 2, 2025 – The High Court of Kerala, in a significant ruling, has clarified the extent of a director's liability in cheque dishonour cases under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). Justice V.G. Arun , presiding over a batch of Criminal Miscellaneous Cases, held that a director can be prosecuted if they held the position at the time of cheque dishonour, even if they were not a director at other stages of the offence, such as the issuance of the cheque or when the cause of action formally arose.

The Court delivered a mixed verdict, quashing proceedings against the petitioner, Advocate and Notary John Zacharia , in several cases where he was not a director at any key stage of the alleged offence, but dismissing his petitions in three cases where he was found to be a director when the cheques were dishonoured.

Case Background

The petitions were filed by John Zacharia , arraigned as the 4th accused in multiple complaints filed before the Judicial First Class Magistrate Court-II, Kanjirappally. The complaints, lodged by Anson Thomas and James V.J., alleged the commission of offences punishable under Section 138 of the NI Act due to the dishonour of cheques issued by M/s. Fotton Paints Private Limited (the first accused company).

The complainants had lent money to the company. An agreement dated February 13, 2020, which was prepared and notarized by Zacharia in his professional capacity, stipulated the issuance of 24 cheques to Anson Thomas and 8 cheques to James V.J. Zacharia subsequently became a full-time director of the company on February 18, 2020, and resigned on March 22, 2021. The cheques, when presented, were dishonoured for insufficiency of funds, leading to the current legal proceedings.

Arguments Presented

Petitioner's Contentions ( John Zacharia ): * His involvement in notarizing the agreement was solely professional and should not lead to prosecution under Section 138. * He was not a director when the cheques were issued (as the agreement predated his directorship for the purpose of execution, though cheques were issued pursuant to it) or when the cause of action arose (15 days after the demand notice). * He was not a signatory to the cheques nor was he in charge of the company's affairs at the relevant times.

Respondents' Contentions ( Anson Thomas & James V.J.): * An offence under Section 138 NI Act is a "conflation of acts" including issuance, presentation, dishonour, and issuance of demand notice. * Therefore, persons responsible for the company's affairs at any of these stages could be prosecuted. * They highlighted that in three specific cases (Crl.M.C. Nos. 4662/2023, 8483/2023, and 8552/2023), Zacharia was a director on the dates the cheques were dishonoured (January 28, 2021, March 17, 2021, and March 6, 2021, respectively). * They relied on the Supreme Court's decision in S. P. Mani and Mohan Dairy v. Dr. Snehalatha Elangovan [2022 (6) KHC 215] .

Court's Reasoning and Application of Legal Principles

Justice V.G. Arun meticulously examined the timeline of Zacharia 's directorship in relation to the stages of the alleged offences in each case.

Cases Quashed: The Court allowed Crl M.C.Nos.10006, 5085, 6339, 6367, 6368, 6378 and 10019 of 2023 & 10288 of 2024. In these instances, the Court found that: > "Indisputably, except in Crl.M.C.Nos. 4662 and 8552 of 2023, the petitioner was not the Director of the 1st accused company at the time of execution of the cheque, its dishonor, issuance of notice or as on the day when the cause of action arose... Therefore, except in the cases mentioned above, the petitioner cannot be prosecuted with the aid of Section 141 of the N.I. Act."

The Court relied on its previous decisions in Kairali Marketing and Processing Cooperative Society Ltd. and Another v. Pullengadi Service Cooperative Society Ltd. and Another [ILR 2006 (4) Ker. 697] and Achankunju P.C. v. House of Tiles, Koothatukulam and Others [2017 (3) KHC 440] to support this part of the decision.

Cases Not Quashed: However, Crl.M.C. Nos.4662, 8483, and 8552 of 2023 were dismissed. The Court noted that in these cases, Zacharia was a director on the dates the cheques were dishonoured (January 28, 2021, March 17, 2021, and March 6, 2021, respectively). During this period (February 18, 2020, to March 22, 2021), Zacharia was a director.

The Court extensively quoted the Supreme Court's judgment in S. P. Mani and Mohan Dairy (supra) , which explained the "concatenation of acts" that constitute an offence under Section 138: > "The offence under S.138 of the Act can be completed only with the concatenation of a number of acts. The following are the acts which are components of the said offence: (1) drawing of the cheque, (2) presentation of the cheque to the bank, (3) returning the cheque unpaid by the drawee bank., (4) giving notice in writing to the drawer of the cheque demanding payment of the cheque amount, (5) failure of the drawer to make payment within 15 days of the receipt of the notice." (Quoting K. Bhaskaran v. Sankaran Vaidhyan Balan )

Further, citing S.P. Mani , the High Court emphasized: > "Every person who was in charge of and was responsible to the company for the conduct of its business at the time any of the components necessary for the commission of the offence occurred may be 'proceeded against', but may not be 'punished' If he succeeds in proving that the offence was committed without his knowledge and despite his due diligence; the burden of proving that remaining on him."

Thus, the Court concluded: > "The petitioner being a Director of the first accused company as on the date of dishonor of the cheques in the above three cases, it is for him to establish that he was not in charge of the affairs of the company as on that date."

Final Decision and Implications

The Kerala High Court ordered the quashing of proceedings against John Zacharia in S.T.Nos. 2057/2021, 913/2022, 2214/2022, 3165/2021, 202/2022, 3200/2022, 2379/2023, and 698/2023 pending before the Judicial First Class Magistrate Court-II, Kanjirappally.

However, the petitions Crl.M.C. Nos.4662/2023 (regarding S.T. No.2474/2021), 8483/2023 (regarding S.T.No.1180/2021, specifically for one cheque), and 8552/2023 (regarding S.T.No.2473/2021) were dismissed, meaning the proceedings against Zacharia in these specific cheque dishonour cases will continue.

This judgment reinforces the principle that for vicarious liability under Section 141 of the NI Act, a person's status as a director at the time any of the constituent acts of the Section 138 offence occurred (particularly cheque dishonour) is crucial. It is not essential for the person to have been a director at all stages, or solely when the final cause of action crystallizes. The onus then shifts to the accused director to prove they were not in charge of the company's affairs or had exercised due diligence.