Understand director risk in cheque bounce cases involving personal guarantee settlements, legal liability, NI Act proceedings, and settlement disputes in India.
Defaults are never pleasant. There’s light at the end of the tunnel sometimes when a settlement is worked out. The defaulting company will often negotiate with the creditor, settle on an amount and issue cheques under thePromise to pay” umbrella. Directors and promoters will also pledge their personal guarantee because “we will make sure the cheques won’t bounce.”
But what if the cheque does bounce back?
“What did I do wrong?” Every directors’ nightmare when his company defaults on a loan and he foolishly provided his personal guarantee. “I took loan in the companies name. Why are they coming after me personally?” This question has plagued businessmen all over India. If you’ve ever blindly signed on personal guarantees during loan takes, debt restructuring, settlement negotiations or any commercial transactions you need to read this article.
If a cheque is issued for the purpose of settling a personal guarantee and it bounces you could potentially be in trouble. Not just trouble for the dishonoured cheque, the promoter now has civil liability for the underlying commercial transaction itself as well as criminal liability under NI Act, 1881. Every situation is fact specific. It will boil down to who signed the cheque, why was the cheque issued, what was the intent during the settlement agreement, what type of guarantee was provided and what paperwork do you have available etc.
A Director has limited liability to the acts of the company. Tread carefully though when you personally sign any documents or issue a cheque from your personal account because you have now opened yourself up to a separate cause of action. Such cause of action will be judged independently.
Cheque bounce litigation becomes more complex when both parties start arguing about the cheque alone. Advocate BK Singh wants to make sure people understand that judge is going to look past the cheque if there’s a dispute. He’ll scrutinize every aspect of the deal right from the underlying liability, what were the terms of settlement, who was authorised to issue the cheque and if the cheque was issued for a legally enforceable debt.
When a cheque is issued for purpose of settling a personal guarantee, that cheque is not just a medium to make a payment. That cheque now links you as the guarantor to your creditor and to the company’s underlying liability.
Read the small prints promoters. If you’re in Delhi NCR, Noida, Gurugram, Mumbai, Chennai, Bengaluru, Hyderabad or even if you reside outside India please understand the risk involved before you sign that dotted line on a settlement agreement. Stay safe from unnecessary litigation.
Most of the times in India when a loan is being taken by a company there are many people involved with the said business. The company could have been financed through credit, vendor credit support, funds or a commercial loan. A creditor while giving further loans may seek personal guarantee from the director or promoters of the company.
Let’s understand this with the help of an example;
A company may default on its payments and agree to enter into a settlement with the creditor. During the discussion a creditor may also accept delayed instalments, settlement cheques or new terms of payment.
Issues start when –
Creditor initiates a case under Bounce laws.
Some directors believe that once they sign on a settlement agreement this would be a business liability only. But if you have issued your personal cheque against that settlement then yes law can hold you liable to pay the amount.
BK Singh Advocate, an established lawyer in this field says that every personal guarantee dispute has to distinguish between –
Guys “Cheque bounce” on personal guarantee settlement implies that you have issued a cheque to a lender in terms of the settlement agreement and that cheque got bounced/dishonoured by the bank.
Issued by who?.
Whether the cheque got bounced is NOT a concern.
You should be asking why a cheque was issued at all. Also was there any liability which was enforceable
If A Company settles with a lender. Lets say that company agrees to pay X amount of money to the lender in full and final settlement of certain dues.
The Director provides his personal Guarantee and issues a cheque to convince the lender to accept this deal.” Sweetening the deal.”
If that cheque bounces, lender can sue the Director for the offence of cheque bounce and can also sue the company for the amount mentioned to be paid under the settlement. He can choose to explore what remedies are available to him under the Indian law depending upon the facts.
BK Singh Advocate Said,
On “PERSONAL GUARANTEE SETTLEMENT “ :
Never take any settlement agreement lying down. Always remember JOB is how you draft the language(which should be clear) in the settlement agreement.you can mention it in the guarantee itself. Clearly mention the repayment schedule.in the settlement agreement and keep a track of cheque issuances.
If a lender ever files a dishonor of cheque against you.case, relationship doesn’t end there and then, in one go. The Court will take into consideration the facts and see from the surrounding circumstances. Whether there was any liability & whether u have fulfilled the requirements prescribed by law.
BK Singh Advocate has put together this guide on Personal Liability for directors.
A company is a seperate legal entity to the directors. In most situations you will not be personally liable just because your company has defaulted on a payment.
Only when a director:
If a personal guarantee has been given that does not automatically turn every default into a criminal matter against a director. The circumstances surrounding why the cheque was written, what transaction was entered into and what the contractual obligation etc. can all be considered.
Many business owners believe that if a company pays they as an individual can not be held liable. When you settle your debt you sign paperwork. You also sign paperwork when you borrow money. Read the freaking documents.
BK Singh Advocate can help you determine if the dispute is with the company, you as a natural person or both.
Liability of director for cheque bounce depends on facts and circumstances of each case.
What if a cheque is issued by a company. Do we ask for liability of related persons. Or what if that director issues a cheque from his personal account? The analysis becomes little different when the person signing that instrument happens to be a director.
Few things court will look into.
Fact that you happen to be a director of a company does not make you liable for every other transaction entered into by that company through issuance of cheques. But when you, that same natural person signs a cheque from his personal account or gives a personal guarantee. You have voluntarily distinguished yourself from said company. When you voluntarily change your position from that of the company.
There are lot many directors out there who don’t understand this. They feel (wrongly) that if company was given benefit, let the company face the music. This kind of reasoning will land you in trouble when your creditors decide to question the liability of natural guarantors.
BK Singh Advocate will help you understand the distinction between corporate liability and personal liability in cheque bounce cases.
Documents play a crucial role in determining how your cheque bounce case would unfold. These Documents help you identify the chronology of the transaction and parties responsible.
Following are few important documents.
Sometimes disputes also arise due to unavailability of a document or unclear terms because very few agreements during business transactions are passed on a single document. They are usually a series of conversations put together.
BK Singh Advocate says - Take care to maintain records right from the beginning of the transaction and you can avoid this situation.
If you have been sent a dishonoured cheque notice, settlement default notice or legal demand letter then seek legal advice.
Here are some scenarios where you would need legal advice:
Attorney BK Singh can help review the facts of your case early on. You will learn about the claim, what documents are involved and what legal proceedings could take place.
BK Singh Advocate reviews evidence of transactions, settlement agreements and laws for people and businesses involved in cheque bounce disputes.
Each and every cheque bounce matter on the ground of personal guarantee cannot be assessed on the basis that you find out the fact that cheque got dishonoured. Terms of settlement, nature of underlying transaction, documents which created liability & role of director etc. all factors need to be analysed.
An experienced cheque bounce lawyer can review the documents in your possession and advise the director about his rights and ramifications if any for such cheque bounce.
Legal analysis would involve :-
BK Singh Advocate advises directors and business owners about their standing in situations where personal guarantees have been issued and company liabilities are being conflated.
We focus on substance of complaint and documents upon which complaint is lodged instead of just focusing on drafting a reply to complaint.
If there is any compromise then character of transaction would change as parties may enter into new agreement regarding liability to pay.
Cheque was issued as a Compromise cheque and it gets dishonoured. Following are some of the points which can be considered-
Facts and circumstances of every compromise would be different. Terms of compromise, conduct of parties and other supporting documents would be relevant. It cannot be laid down as a general rule that a compromise would extinguish the previous liabilities, or that it would give rise to liability against all persons who are liable on a firm.
Read FAQs on cheque bounce disputes.
Have you or your company received a legal notice for cheque bounce? Bounced cheque whether it is a settlement cheque or personal guarantee or commercial liability you can seek assistance from Cheque Bounce Lawyer.
Legal Consultation will include.
BK Singh Advocate advises Directors/Company Promoters/Individuals to know their position with respect to the Cheque bounce situation created during business settlements.
We analyze the documents and the facts to determine your legal position before advising you on the course of any action.
No. Merely on the fact that a company has defaulted to make payment, a director would not become liable. Every fact needs to be looked into. Whether a personal guarantee was provided by the director, who signed the cheque, were there any other documents executed etc., would be relevant in deciding whether a director would become personally liable.
Yes. On giving a personal guarantee, a director may become personally liable to discharge that debt. But this would depend on the terms of the guarantee and the facts of each case.
Yes. A director can be sued for cheque bounce if the requisite conditions are met and the cheque was issued by the company for the discharge of any debt or other liability which is legally enforceable.
Advise should be taken after reviewing the Notice served, the Cheque (amount, date, upon whom drawn, etc. ). The terms of Settlement, any supporting documents and correspondence.
No. A company is considered a separate legal entity from its directors. However there are certain circumstances in which a director may become personally liable.
Not necessarily. It would depend on the intention of the parties and the terms of settlement. All facts need to be considered.
Yes. By issuing a cheque from your personal account you are connecting yourself to that cheque.
Settlement Agreement, Guarantee ( if provided), Copy of Cheque( s) issued, Bank’s return memo, Record of payment, Correspondence, Notice( s) served. Would vary from case to case.
Yes. It is advisable to know what risk you are getting yourself into and if any obligations you would be required to fulfill before signing on a settlement document.
BK Singh Advocate can assist you by reviewing the documents, advising you on the background facts of the transaction and making sure you understand your legal position.
Settled cheques raised on personal guarantee
Whilst I don’ Mean to scaremonger I do want to highlight for you issues that directors,promoters and businessmen come across.
The providing of a dishonoured cheque during a settlement can become very worrying.
Whilst the situation may have been seen as a commercial dispute and resolved.. Dont forget once the cheque is presented for payment as previously discussed there could be flood gates opened up dependingant on the contracts involved liability and capacity if the cheque was issued.
Even if the said payment was agreed with the company or on behalf of the company . Directors are not always correct in thinking that because there personal account was used they can wipe both personal and company obligation in the same way.
Speak directly with Advocate BK Singh at LEGAL365.
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