In India, the functioning of companies is governed by the provisions of the Companies Act, 2013. According to this act, directors play a significant role in managing the day-to-day affairs and are held accountable for all company actions. They are considered as key personnel and held responsible for every action of the Company.
As per the Indian laws, Directors being the agents/ authorized representative of the Company prima facie shall be accountable for any acts committed on behalf of the organization. The question whether a Former Director can be held liable in case of cheque dishonour will be answered through this article.
Meaning of a Former Director
A person/member previously associated with the operations and day- to day affairs of an organization is referred to as a Former Director. In simple terms, a person who left the organization and has no control over its operations will be known as a Former Director.
Can Former Directors be held Liable in Case of Cheque Dishonour?
A Former Director (Director post resignation) cannot be held liable in case of cheque dishonour if the cheque is issued after their resignation. In fact, the Director shall also not be liable for any act committed by/ on behalf of the organization post his resignation.
For instance, there is a Company (X) with five Directors. Out of the five Directors, two of them resigned and their resignations were duly accepted by the Company. After some time, Company (X) approached Company (Y) for services.
Company (Y) successfully rendered the services to Company (X). Subsequently, Company (X) issued a cheque in favour of Company (Y) in relation to the services rendered. The cheque when presented to the concerned bank got dishonoured and subsequently, a complaint was filed by Company (Y) against the five directors of Company (X).
In such case, the two directors who have already resigned from the Company prior to this transaction shall not be held liable and cannot be prosecuted for the acts committed by /on behalf of the organization. However, the other Director acting on behalf of the organization will be prosecuted.
- Recently, the Hon’ble Court of Rajasthan vide its judgement “Pankaj Anand Mudholkar vs State of Rajasthan and Anr” held that if the cheques are issued after the resignation of the Directors, and Form 32 has been filed by organization with the Registrar of Companies (ROC), then Directors shall not be liable for such act. The Hon’ble Court also pointed that when the cheques were issued by the Company, the accused Directors were not the part of the organization at that time, so they cannot be prosecuted and held liable for such an offence which they have not committed.
- The Hon’ble Supreme Court vide its Judgement “Rajesh Viren Shah vs Redington (India) Limited” made it clear that Directors cannot be held liable for any such act committed by/ on behalf of the organization after their resignation. Pertinently, if the event has occurred after Director(s) disassociation with the organisation, then the latter cannot be made liable for such acts committed. To make them liable, the aggrieved must present substantial evidence.
Essential Conditions where liability cannot be imposed on the Former Director:
- The Director (s) have duly resigned from their respective role prior to occurrence of the event.
- Resignation duly accepted by the Organization.
- Organization is required to notify the Registrar of Companies (ROC) about the status of the Director who have resigned by filing Form 32 in accordance with the Companies Act.
Whether Former Directors post resignation can be held liable in case of Cheque Dishonour signed by them
Former Directors, post resignation, can be prosecuted and be held liable in case of cheque dishonour if the cheques in question are signed by them i.e., if the Directors have signed the cheque and then resigned from their respective role. In such a case, they cannot escape from the liability if the cheque is dishonored.
It is well settled law that Signatory of the cheque i.e., the person who has signed the cheque shall be held liable if the cheque is dishonoured on its presentation. If the Director who has signed the cheque intentionally puts in his resignation cannot escape the liability and shall be prosecuted by the trial court.
The essential conditions which are required to be fulfilled to make the Former Director liable are:
- Cheques dishonored should be signed by the Former Director.
- The Director was present at the time of occurrence of the event.
- The Organization should not accept Resignation of the Director.
- Form 32 has not been filed in compliance with the Registrar of Companies.
If the above conditions are met, then in such a case, the Former Director shall be prosecuted and can be made liable too for his/her acts.
The Hon’ble High Court of Jharkhand vide its judgement “Pramod Shankar Dayal vs State of Jharkhand and Anr” held that if a Former Director prior to his resignation signs a cheque which thereafter got dishonoured. The Director shall be prosecuted for such offence. However, in this case, Form 32 was also not filed by one of the Directors with the Registrar of Companies in accordance with the provisions of the Companies Act. Therefore, the Hon’ble Court made sure that the Director does not escape the liability and should be prosecuted by the Trial Court.
Conclusion
In view of the above, whether Former Directors shall be liable for the cheque dishonor depends upon the circumstances of the case. The view of the Hon’ble Supreme Court and various Hon’ble High Courts in cases wherein the Director has resigned from their respective roles and is falsely implicated shall not be held liable if they are in compliance with the conditions specified above. Whereas in cases, if the Former Directors are not in compliance with the conditions stated above, then the latter shall be liable and further be prosecuted.
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