When a cheque issued from a company's bank account is dishonoured, who can be prosecuted? The company itself? Its directors? Both? This is a question that arises constantly in cheque dishonour litigation involving corporate entities. The Hon'ble Supreme Court has now clarified a critical procedural requirement that, if missed, makes the entire case against the directors legally untenable.
The Rule — Company and Directors Must Both Be Accused
Under Section 141 of the Negotiable Instruments Act, 1881, when a company commits an offence under Section 138 — i.e., a cheque drawn on the company's account is dishonoured — every person responsible for the conduct of the company's business at the time of the offence is also deemed guilty. This is the mechanism through which directors, managers, and authorised signatories are made personally liable.
However, this vicarious liability of directors flows from and depends on the primary liability of the company. The company must itself be an accused in the case. If the company is not arraigned as an accused, the vicarious liability of its directors and officers cannot be fastened.
What Happened — And Why the Case Failed
A company (M/s Cine Prime Entertainment) owed the complainant ₹5 lakh. A cheque signed by Manjula Kapoor, an authorised signatory, was dishonoured. The complainant filed a Section 138 complaint — but only against Kapoor personally, without making the company a co-accused. The demand notice was also sent only to Kapoor, not to the company.
When the error was discovered during trial, the complainant sought to add the company as an accused under Section 319 CrPC (now Section 358 BNSS). The Himachal Pradesh High Court allowed this. The Supreme Court reversed — the defect was fatal and could not be cured mid-trial.
The Court held that this is not a curable procedural irregularity — it is a jurisdictional defect. Section 319 CrPC allows summoning of additional accused where evidence surfaces during trial — it cannot be used to fix a fundamental absence in the complaint's framework from the outset. Once the complaint is filed without the company as accused, the director's vicarious liability is legally unsustainable.
A Checklist for Filing Section 138 Cases Against Companies
- The demand notice must be addressed to both the company and the individual director/authorised signatory responsible
- The complaint must name the company as accused along with all responsible directors/managers/signatories
- The authorised signatory who signed the cheque and any director "responsible for the conduct of business" must be specifically named
- Service of notice on the registered office of the company is essential — not merely on the individual
Practical Guidance
If you are filing a Section 138 case where the cheque is from a company's account: always include the company as a co-accused along with the relevant directors and the authorised signatory. Send the demand notice to both the company (registered office) and the individuals.
If you are a director facing a Section 138 complaint where the company has not been made a co-accused: this ruling is a complete defence. Raise it at the earliest stage of the proceedings — ideally through a petition to quash the complaint before the High Court under Section 528 BNSS.
For existing complaints mid-trial where this error has occurred: Section 319 BNSS cannot cure it. The only remedy is for the complainant to file a fresh complaint — subject to limitation — with the correct parties.