Notifying Directors on Dishonoured Cheques under Section 138: Legal Implications of Security Cheques

The court held that sending a notice of dishonour only to the Directors of the Company, rather than to the Company itself, is sufficient under Section 138 of the Negotiable Instruments Act. Additionally, it ruled that cheques issued as security towards repayment of liabilities fall under the purview of Section 138, emphasizing the significance of the cheques' purpose in determining their legal implications. The court dismissed the petition, allowing the prosecution of the cheques in case of dishonour, provided proper procedures are followed.

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Issues:
1. Notice of dishonour sent only to Directors and not to the Company.
2. Cheques issued as security and not as payment.

Analysis:

Issue 1: Notice of dishonour sent only to Directors and not to the Company
The petitioners argued that the notice of dishonour was sent only to the Directors of the Company and not to the Company itself, citing a judgment where it was held that such a notice would violate statutory requirements. However, the respondent contended that notices sent to Directors of the Company are sufficient for proceedings under Section 138 of the Negotiable Instruments Act. The respondent relied on various judgments, including one from the Supreme Court, emphasizing that a notice issued to the Managing Director, who signed the cheques, is legally valid. The court agreed with the respondent's argument, stating that a notice issued to the Directors of the Company is adequate to attract Section 138 of the Act, emphasizing that a technical approach to notice sufficiency is not warranted.

Issue 2: Cheques issued as security and not as payment
The petitioners claimed that the impugned cheques were given as security, not as payment, based on a memorandum of understanding between the parties. They argued that cheques issued as security should not attract Section 138 of the Negotiable Instruments Act. However, the respondent countered this argument by citing a judgment that clarified the legal implications of issuing post-dated cheques as security. The court agreed with the respondent, stating that if the cheques were issued towards repayment of installments, they represent an outstanding liability and should fall under Section 138 of the Act. The court emphasized that the purpose for which the cheques were issued, whether dated or undated, is crucial in determining their legal implications. Therefore, the court dismissed the petition, concluding that there was no legal impediment to presenting the cheques for prosecution in case of dishonour, as long as the necessary procedures were followed.

In conclusion, the court upheld the legality of issuing notices to Directors of the Company and clarified that cheques issued as security towards repayment of liabilities can attract Section 138 of the Negotiable Instruments Act. The judgment emphasized the importance of the cheques' purpose and compliance with legal procedures in determining their legal consequences.

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