Assessing Liability of Authorized Signatories in Cheque Dishonour

He who signs a dishonored cheque bears the consequences— a principle well-established by law and affirmed across several precedents. Determining the liability of a signatory is straightforward when the drawer is an individual. But what happens when a cheque is issued on behalf of a juristic person, such as a company? Who is held liable for dishonor of a cheque in such cases—the company, the authorized signatory who issued the cheque, or both? Can a Director be held liable for cheques signed by employees or a former Director?

This article answers these crucial questions by examining the legal implications of dishonored cheques issued by authorized signatories. It delves into the existing legal framework and jurisprudence under the Negotiable Instruments Act, 1881 (hereinafter ‘Act’). Beginning with who qualifies as the ‘drawer’ in such cases, it explores the concept of vicarious liability under Section 141 of the Act and highlights instances where an authorized signatory can and cannot be held personally liable for cheque dishonor.

Bare perusal of section 138 of the Act makes it evident that only the drawer of a cheque is sought to be made liable for cheque dishonour. When an individual issues a cheque, they are deemed to be the drawer but in case of corporate entities, does an authorized signatory become the drawer of a cheque by default? The Hon’ble Supreme Court addressed this very question in P.J. Agro Tech Ltd. v. Water Base Ltd.,¹ emphasizing that an authorized signatory acts merely as an agent of the company and does not “maintain” a company’s bank account in a personal capacity. As such to attract liability U/S 138 of the Act, a cheque must be drawn by a person on an account maintained by him.

The Hon’ble Supreme Court in Shri Gurudatta Sugars Marketing (P) Ltd. v. Prithviraj Sayajirao Deshmukh² adopted a similar view. Applying the Doctrine of Separate Corporate Personality, the Court held that only the company, as an account holder, could be deemed the drawer of a cheque and that although an authorized signatory is empowered to act on the company’s behalf, they cannot assume the company’s legal identity. The company, and only the company alone, will remain the maker of a cheque U/S 7 of the Act.

In Mainuddin Abdul Sattar Shaikh v. Vijay D. Salvi,³ where an authorized signatory issued a cheque from a personal account to discharge the company’s debt, and the cheque was dishonoured, the Apex Court held that liability U/S 138 of the Act would rest solely on an account holder and further clarified that a company and its directors cannot be prosecuted in case of cheque dishonour, even when the cheque is issued by one of the director’s towards discharge of the company’s debt.

If a company is the drawer of a cheque, does that mean the authorized signatory gets off the hook? Simply put – No. The general rule is that an account holder is to be held liable for dishonor of a cheque. Every general rule has an exception. In this context, an exception is carved out U/S 141 of the Act by imposing vicarious liability in case of cheque dishonor.

Under Section 141 of the Act every person responsible for the conduct of business of the company at the time of the offence shall be prosecutable. If there is proof of the offence having been committed with the connivance or consent or maybe attributable to (i) a director; (ii) a manager; (iii) a secretary; or (iv) any other officer – they shall be deemed to be guilty of the offence.⁴

Vicarious liability can only be fastened when a person was “in charge of” and “responsible to the Company” for the conduct of business at the time of commission of the offence. A person merely managing the affairs of a Company does not by default become in charge of the conduct of the business or be considered as responsible for the conduct of its business.⁵ In case of a cheque issued after a Director resigns from a Company, he cannot be prosecuted for its subsequent dishonor.⁶

To hold a Managing Director or a Joint Managing Director vicariously liable, it is not necessary to make specific averments that he was incharge of and responsible for the company’s affairs as the same is evident from their job title. To escape liability it is to be proved that they either had no knowledge of the offence or that they exercised due diligence to prevent it.⁷ Adding to this it is categorically settles that – “A Director or an officer of the company who signs a cheque renders himself liable in case of dishonor.⁸” Having dealt with the liability of Directors, in so far as the other officers of a company are concerned, they can be made liable U/S 141(2) of the Act by specifically averring in the complaint their position, duties and role in connection with the issue and the subsequent dishonor of the cheque, disclosing consent, connivance or negligence.

Only stating that a person was in charge of the company at the time of commission of offence is insufficient to invoke vicarious liability.⁹ Directors of a Company cannot be made liable merely for being in charge of a Company in the absence of specific averments as to their involvement in the company’s day-to-day affairs¹⁰. This is not only to ensure that directors are not unfairly presumed to have knowledge of each and every transaction carried out in the company’s name but also to ensure that they are not automatically convicted for cheque dishonor without evidence of their direct involvement. However, vicarious criminal liability can be inferred against the partners of a juristic person when specific averments regarding the status of the partner ‘qua’ the juristic person are mentioned in the complaint, making them prosecutable.¹¹ Thus, the position of law as to the liability that can be fastened upon a Director for non-realization of a cheque is no longer res integra – A director cannot be made liable in the absence of knowledge of the day-to-day affairs of the Company.

There are also instances when a signatory cannot be held liable for the dishonor of a cheque.

Firstly, no prosecution will hold up against an authorized signatory or others connected with the company U/S 141 of the Act, unless the company, as a drawer of the cheque is arraigned as an accused in the complaint. Further, vicarious liability can only be affixed against the directors or authorized signatories, only after the company is held liable for offence U/S 138 of the Act.¹² This position was reiterated in Himanshu v. B. Shivamurthy and Anr.¹³, where the Apex Court held that where a company is not arraigned as an accused, the complaint against an individual signatory would not be maintainable. Although a complainant is entitled to the benefit of presumption U/S 139 of the Act, there cannot be conviction of an individual as sole accused, when the company being the principal offender is not arraigned as an accused.

The only exception to the company’s impleadment is carved out through the Doctrine of Lex Non Cogit Ad Impossibilia, i.e., the law does not compel the impossible. This doctrine exempts the impleadment of a company when it becomes practically impossible to arraign the company as an accused due to a legal impediment.¹⁴

Secondly, in case of a cheque drawn on a joint account, each account holder affixing signature maybe liable for its subsequent dishonor. If one or more of the joint account holders do not affix signature of the dishonoured cheque, they cannot be held vicariously liable.¹⁵

Conclusion

Liability for cheque dishonor hinges on the drawer and the role of an authorized signatory in issuance of the cheque. While the company, as the drawer, is primarily accountable, Section 141 of the Act extends vicarious liability to those directly involved in the conduct of the company’s affairs. However, this liability is not automatic—it requires clear evidence of consent, connivance, or negligence. Courts have consistently upheld that directors and officers cannot be held liable solely based on their position without specific averments proving their active role in the transaction. The legal framework strikes a balance, ensuring that accountability is imposed only on those who bear direct responsibility, while safeguarding others from undue prosecution.

References

1. P.J. Agro Tech Ltd. v. Water Base Ltd., (2010) 12 SCC 146.
2. 2024 SCC OnLine SC 1800.
3. Mainuddin Abdul Sattar Shaikh v. Vijay D. Salvi, (2015) 9 SCC 622.
4. Rajesh Viren Shah v. Redington (India) Ltd., 2024 INSC 111.
5. Siby Thomas v. M/s. Somany Ceramics Ltd., 2023 INSC 890.
6. Supra Note 5.
7. S.M.S. Pharmaceuticals Ltd. vs Neeta Bhalla and Anr., (2005) 8 SCC 89.
8. Sunita Palita v. M/s Panchai Stone Quarry (2022) SC Online SC 945.
9. Ashok Shewakramani and Others v. State of Andhra Pradesh & Anr., (2023) 8 SCC 473.
10. Supra Note 6.
11. S.P. Mani and Mohan Dairy v. Dr. Snehalatha Elangovan, 2022 LiveLaw (SC) 772.
12. Supra note 4.
13. (2019) 3 SCC 797.
14. Bijoy Kumar Moni v. Paresh Manna & Anr., 2024 INSC 1024.
15. Aparna A. Shah v. Sheth Developers (P) Ltd., (2013) 8 SCC 71.