New Delhi: Can the director of a company that has gone into liquidation evade the requirement of depositing 20 percent of the compensation amount awarded by a lower court, while appealing against conviction for a bounced cheque under Negotiable Instruments Act, 1881. This legal question has divided the Supreme Court, prompting a two-judge bench to Thursday refer the matter to the Chief Justice of India for the constitution of a larger bench.
At the heart of the dispute is the concern that allowing directors to claim a “blanket exemption” from depositing 20 percent of the compensation amount—merely because their company faces a “legal snag” like liquidation—would render the Negotiable Instruments Act ineffective.
The division bench of Justices Aravind Kumar and N.V. Anjaria expressed strong disagreement with earlier Supreme Court judgements that had interpreted the law strictly to exempt directors from such liability.
The bench observed that such an exemption defeats Parliament’s specific intent behind the 2018 amendments to the Act, designed to curb delay tactics by ensuring convicted individuals pay up a portion of the fine before their appeals are heard. The amendment introduced Sections 143A (interim compensation in trial) and 148 (deposit in appeal).
However, bound by the principle of judicial discipline, which prevents a two-judge bench from overruling a decision made by another bench of equal strength, the court stopped short of issuing a final order.
Instead, it referred the matter to the Chief Justice to constitute a larger bench to settle whether a director effectively steps into the shoes of the company to pay the appellate deposit when the company itself cannot be prosecuted.
ThePrint explains the matter.
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The ‘drawer’ dilemma
The conflict stems from the interpretation of the word “drawer” in the said Act. Under Section 7 of the Act, the “drawer” is the person who makes the cheque—which, in corporate cases, is technically the company itself.
“The maker of a bill of exchange or cheque is called the drawer,” Section 7 reads.
The conflict arises when Section 148 comes into the picture. This section empowers appellate courts to order the “drawer” to deposit a minimum of 20 percent of the fine or compensation awarded by the trial court in case of a bounced cheque. The provision was introduced in 2018 to speed up payment for unpaid creditors.
But a legal grey area emerges when the drawer (the company) no longer legally exists.
This was the central argument raised by Bharat Mittal, director of the now wound up Shiv Mahima Ispat Private Limited. Mittal had been convicted for a dishonoured cheque of Rs 4.82 crore issued to the Steel Authority of India (SAIL) in 2012 under Section 138 of the Act.
Section 138 criminalises the dishonour of a cheque issued towards a legally enforceable debt. This is subject to a notice of dishonour and further failure to pay within the statutory period.
“Where any cheque drawn by a person… is returned by the bank unpaid… such person shall be deemed to have committed an offence,” Section 138 provides.
While the trial court sentenced him to two years in prison and ordered him to pay Rs 8.10 crore in compensation, the appellate court suspended his sentence on the condition that he deposit 20 percent of that amount (roughly Rs 1.6 crore).
Mittal challenged this order, relying on two Supreme Court judgements in Bijay Agarwal and Shri Gurudatta Sugars. These coordinate benches had ruled that an authorised signatory, such as a director, does not become the “drawer” simply by signing the cheque.
“To wit, as in the case of the position qua Section 143A, NI Act, merely because an officer of a company concerned is the authorised signatory of the cheque concerned by itself will not make such an officer ‘drawer of the cheque’…,” the court had held in Bijay Agarwal.
In effect, the benches had held that the power to order a deposit under Section 148 applies strictly to the company, and cannot be extended to the director.
The logic of these earlier verdicts was rooted in the strict interpretation of criminal statutes: since the “drawer” is the company, a director cannot be vicariously liable for the deposit, even if they are liable for the crime.
‘Unduly literal’ vs ‘legislative intent’
Justices Kumar and Anjaria found the reasoning of these earlier benches flawed.
They noted that the earlier decisions had adopted an “unduly literal construction” of the word “drawer”, ignoring the economic reality that directors often control the company’s actions.
They reasoned that if the strict interpretation were upheld, a director who controlled the company’s affairs would escape the deposit requirement simply because the company could not be prosecuted. This would create a situation where the individual responsible for the offence avoids the remedial financial safeguards.
“The compensatory and remedial object of these provisions which are meant to safeguard the interests of the complainant and to ensure meaningful relief during the pendency of proceedings would be reduced to a lifeless statutory form, devoid of practical efficacy… in our considered view, such an outcome could never have been the intention of the legislature,” the court observed.
It emphasised that Section 148 is not just a penal provision but a remedial one meant to restore credibility to cheque transactions. To exempt directors from this deposit would be to “deprive lenders and payees of the very relief that the amendment sought to secure”, it said.
Now, the CJI will likely constitute a larger bench to decide whether the term “drawer” in Section 148 should be read broadly to include directors in such exceptional circumstances or if the strict letter of the law must prevail.
(Edited by Nida Fatima Siddiqui)