SC Refers to Larger Bench Question on Mandatory 20% Deposit by Directors Under NI Act When Company Is Wound Up

The recent judgment in Bharat Mittal case marks an important moment in the evolving jurisprudence under the Negotiable Instruments Act, 1881, particularly on the uneasy interface between vicarious criminal liability and appellate conditions of deposit.

At its core, the case raises a deceptively simple but legally fraught question: can an appellate court insist on a mandatory 20% deposit under Section 148 of the NI Act from a convicted director when the company the juristic drawer of the cheque cannot be proceeded against due to winding-up or liquidation?

What's The Matter?

The factual background is illustrative of a recurring commercial reality.

A cheque issued by a company towards discharge of liability was dishonoured.

Proceedings under Section 138 followed, with the company arraigned as the principal accused and its director, who had signed the cheque, prosecuted under Section 141.

During the pendency of proceedings, the company was ordered to be wound up.

The trial court ultimately convicted the director alone and imposed a sentence with substantial compensation.

When the director preferred an appeal and sought suspension of sentence, the appellate court invoked Section 148 and directed him to deposit 20% of the compensation amount as a precondition for suspension.

The challenge before the Supreme Court of India was not merely to the quantum or hardship of the deposit, but to the very source of power to impose such a condition in this factual configuration. Section 148, textually, empowers the appellate court to direct the “drawer” to deposit a minimum of 20% of the fine or compensation awarded.

The controversy, therefore, turns on whether a director convicted in the absence of a conviction of the company due to a legal impediment can be treated as the “drawer” for the purposes of Section 148.

What Court Said ?

What makes the judgment significant is the Court’s refusal to adopt an over-simplistic answer. On the one hand, it reiterates settled principles: offences under Section 138 are quasi-criminal, predominantly compensatory, and must be interpreted purposively to uphold the credibility of commercial transactions.

The introduction of Sections 143A and 148 was clearly intended to curb dilatory tactics and ensure that the complainant is not left remediless during prolonged trials and appeals.

On the other hand, the Court acknowledges the doctrinal limits of vicarious liability. A director is prosecuted under Section 141 not as the drawer, but because of his role in and responsibility for the conduct of the company’s business.

The juristic personality of the company is not erased merely because prosecution against it becomes impossible due to winding-up.

The judgment carefully navigates through earlier precedents, including those which have held that an authorised signatory is not, by default, the “drawer” of a company cheque for the purposes of Sections 143A and 148. At the same time, it resists the argument that directors should enjoy a blanket exemption from deposit obligations whenever the company cannot be prosecuted.

The Court makes it clear that Section 148 is not to be applied mechanically, but neither can it be rendered otiose in all such cases.

Crucially, the Bench finds that there exists a genuine interpretive conflict in prior decisions on whether Section 148 permits directing deposit against a convicted director alone, especially when the company is absent from the field due to a legal snag.

Judicial discipline prevents a co-equal Bench from conclusively settling the issue. Recognising the systemic importance of the question given the volume of NI Act litigation the Court refers the matter to a Larger Bench for authoritative determination.

The practical implications are substantial. Until clarity emerges, appellate courts are reminded that the power under Section 148 carries discretion, albeit a narrow one, and must be exercised with careful attention to the factual matrix.

Factors such as partial recovery through liquidation proceedings, the nature of the director’s role, the risk of double recovery, and the potential rendering of the right of appeal illusory cannot be brushed aside.

The forthcoming Larger Bench decision will likely determine whether Section 148 remains tethered strictly to the concept of the “drawer” or evolves to accommodate the realities of corporate insolvency and vicarious criminal liability an outcome that will shape cheque dishonour litigation for years to come.