COURTKUTCHEHRY SPECIAL ON NI ACT GOVERNING LIQUIDATED COMPANY’s DIRECTORS LIABLITIES
Supreme Court Questions Director’s Liability in Cheque Bounce Cases During Company Liquidation
Larger Bench to Decide if Directors Must Deposit Compensation Under NI Act Appeals
Past Judgments Exempting Directors Now Under Judicial Review
By Our Legal Reporter
New Delhi: December 22, 2025:
The Supreme Court of India has opened a crucial debate on whether directors of a company can avoid liability for cheque bounce deposits when the company is liquidated. A division bench comprising Justice Aravind Kumar and Justice N.V. Anjaria expressed disagreement with earlier rulings that exempted directors from depositing compensation under Section 148 of the Negotiable Instruments Act, 1881 (NI Act) during appeals.
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The Court has referred the issue to a larger bench, highlighting the need for clarity on the interpretation of the term “drawer” under the NI Act and its application to company directors.
Background: Cheque Bounce and Section 148 NI Act
- Section 138 NI Act criminalises dishonour of cheques due to insufficient funds.
- Section 148 NI Act requires appellants convicted under Section 138 to deposit at least 20% of the compensation awarded by the trial court before their appeal can be heard.
- The provision aims to discourage frivolous appeals and ensure victims receive timely relief.
Earlier Supreme Court judgments had held that directors or authorised signatories of a company could not be forced to deposit compensation under Section 148 if the company itself was the “drawer” of the cheque.
The Current Case
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The matter arose when directors of a company facing liquidation challenged their liability to deposit compensation during appeal. The bench noted that blanket exemptions for directors could undermine the purpose of Section 148 and weaken the deterrent effect of cheque bounce laws.
Key Supreme Court Judgments in Context
1. M/s Meters and Instruments Pvt. Ltd. v. Kanchan Mehta (2017)
- The Court emphasised speedy disposal of cheque bounce cases and encouraged compounding of offences.
- It recognised the need for reforms to reduce backlog but did not directly address director liability.
2. Surinder Singh Deswal v. Virender Gandhi (2019)
- The Court upheld mandatory deposit of 20% compensation under Section 148 for appellants.
- However, it left ambiguity on whether directors of a company could be compelled to deposit.
3. Shashankbhai Jayantibhai Shah v. HDFC Bank Ltd. (2025)
- The Court ruled that liquidation of a company does not shield directors from liability in cheque bounce convictions.
- This judgment reinforced accountability of directors even when the company ceases to exist.
4. Recent Bench Observations (2025)
- Justices Kumar and Anjaria doubted earlier precedents exempting directors.
- They stressed that directors cannot automatically escape liability, and the issue requires larger bench scrutiny.
Legal Views and Implications
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- Corporate Accountability: Directors are responsible for the company’s financial decisions. Allowing them to escape liability during liquidation could encourage misuse.
- Interpretation of “Drawer”: Courts must decide whether the company alone is the drawer or whether directors signing cheques share equal responsibility.
- Public Confidence: Strict enforcement of Section 148 ensures victims are compensated and maintains trust in financial transactions.
- IBC vs NI Act Conflict: Insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) often clash with NI Act provisions. The Supreme Court has clarified that insolvency moratorium does not erase criminal liability under Section 138.
Expert Opinions
Legal experts argue that exempting directors undermines the deterrent effect of cheque bounce laws. Advocates note that directors act as agents of the company, and their liability should not vanish with liquidation.
On the other hand, some corporate lawyers caution that excessive liability on directors could discourage entrepreneurship and risk‑taking. They suggest a balanced approach where liability depends on the director’s role and involvement.
Wider Impact
- Business Environment: The ruling will affect how companies handle cheque transactions and financial discipline.
- Banking Sector: Stronger enforcement will reassure banks and creditors about recovery of dues.
- Judicial Backlog: Clear guidelines will reduce litigation over director liability and speed up cheque bounce case disposal.
Conclusion
The Supreme Court’s referral of the issue to a larger bench marks a turning point in corporate criminal liability. The final ruling will determine whether directors can be compelled to deposit compensation under Section 148 NI Act even when the company is liquidated.
This decision will shape the future of cheque bounce litigation, balancing victim rights, corporate accountability, and director responsibilities.
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