Dishonoured Post-Dated Cheques, Acceptance of Defective Machinery and Director Liability
Precision Tools Pvt Ltd sold a CNC machining centre to Fabritech Engineering Pvt Ltd for ₹28.40 lakh on a contract that specified positional accuracy of ±0.02 mm and provided for a trial run at Fabritech's works. The purchase order stated: 'Acceptance only after successful trial run.' The machine was installed on 12 January 2025; the trial showed a consistent error of 0.05 mm. Fabritech emailed that the machine had been commissioned and production started and that the accuracy issue was 'under discussion'. It then used the machine for seven weeks. It had paid ₹5 lakh advance and issued three post-dated cheques of ₹7.80 lakh each. It stopped payment of the second cheque. The third cheque, presented on 4 April 2025, was returned on 5 April with the remark 'payment stopped by drawer'. Precision's advocate sent a demand notice by registered post on 3 May 2025, received on 6 May. The s.138 complaint was filed on 25 June 2025 against Fabritech and four of its directors, including a nominee director of a financial institution who attended two of the six board meetings and had no role in operations or finance.
1. Can Fabritech reject the machine and recover the price, or is it confined to damages? Apply the implied conditions as to quality and the rules of acceptance in the Sale of Goods Act, 1930.
Read the worked answer
Breach established. The accuracy of ±0.02 mm was an express term going to the substance of the contract. A machine delivering 0.05 mm breaches the description and, in substance, the implied condition as to fitness for the buyer's known purpose and merchantability under s.16. The buyer's prima facie remedies are rejection, damages or specific performance.
But acceptance has intervened. Section 42 deems acceptance where the buyer intimates acceptance to the seller, or does any act inconsistent with the seller's ownership, or retains the goods after the lapse of a reasonable time without rejecting them. Fabritech did all three: it emailed that the machine was commissioned, ran production for seven weeks, and never rejected. The 'under discussion' email is not a rejection; rejection must be communicated within a reasonable time and must be unequivocal.
Consequence of acceptance. Under s.13, where the contract is not severable and the buyer has accepted the goods, a breach of condition can only be treated as a breach of warranty. That converts the claim into one for damages, not rescission. The purchase-order clause 'acceptance only after successful trial run' defines when the buyer is bound to accept, but once the buyer waives the trial and takes the machine into commercial use, it cannot later treat the trial failure as a ground for rejection.
Measure of damages. Under s.73 of the Contract Act the buyer recovers the difference between the value of the machine as delivered and its value if it had conformed, plus reasonably foreseeable consequential loss (lost orders, rework), credit being given for the unpaid price. Rectification cost to bring accuracy from 0.05 mm to 0.02 mm is the natural starting point.
Conclusion. Fabritech cannot reject the machine or recover the ₹5 lakh advance. It must pay the price and counterclaim damages; a set-off against the cheque amounts is permissible in execution but does not by itself extinguish the negotiable instrument liability.
2. Examine whether the s.138 complaint is maintainable on limitation, and whether 'payment stopped by drawer' satisfies the statutory requirement of dishonour.
Read the worked answer
Dishonour. Section 138 is attracted when a cheque is returned unpaid for insufficiency of funds or because it exceeds the arrangement. Closure of the account and instructions to stop payment are treated by the courts as dishonour for this purpose, because the drawer cannot be allowed to defeat the section by its own instruction. The return memo of 5 April 2025 is therefore a valid dishonour.
Notice period. The demand notice must be issued within 30 days of receipt of information of dishonour - here by 5 May 2025. The notice dated 3 May 2025 complies, even though it was received on 6 May.
Cause of action. Under the proviso to s.138, the cause of action arises only on the expiry of 15 days from receipt of the notice, if payment is not made. Notice received 6 May 2025, so the 15-day period expires on 21 May 2025.
Complaint period. Section 142(1)(b) requires the complaint within one month of the cause of action, i.e., by 21 June 2025. Filed on 25 June 2025, the complaint is four days late. The proviso inserted by the Negotiable Instruments (Amendment) Act, 2018 permits the court to take cognizance after the prescribed period if the complainant satisfies it that there was sufficient cause for the delay. A four-day delay arising from the advocate's office is ordinarily condoned, but the complainant must file an application supported by an affidavit explaining the delay; without it the complaint is liable to be dismissed as time-barred.
Subsisting debt. Under s.139 there is a presumption that the cheque was issued for discharge of a debt. The quality dispute does not destroy the debt - the machine was supplied and used - so the presumption operates, subject to Fabritech proving failure of consideration, which it cannot do in full.
Conclusion. On merits the complaint is sustainable; its fate turns on the condonation application. Precision should also consider a civil suit on the invoices as a parallel remedy, though it cannot recover the same amount twice.
3. What is the position of the nominee director under s.141, and what must the complaint aver to proceed against the directors?
Read the worked answer
Who is liable. Section 141(1) makes every person who at the time the offence was committed was in charge of, and responsible to, the company for the conduct of its business, liable along with the company. The section does not attach liability to directorship as such. Section 141(2) allows proceedings only against a director who is proved to have been in charge of and responsible for the conduct of business, or who consented to, connived in or negligently failed to prevent the offence.
Date of the offence. The offence under s.138 is complete only when the drawer fails to pay within 15 days of receipt of the notice - here 21 May 2025, not the date of dishonour. The nominee director's role at that date is what matters.
The nominee director. Attending two of six board meetings, being a nominee of a financial institution and having no operational or financial function does not, without more, make her 'in charge of and responsible for the conduct of business'. A bald averment that all directors are in charge is insufficient and is a recognised ground for quashing proceedings. The complaint must state the specific role of each director, the acts attributed to each, and the source of the complainant's knowledge.
Company liability. The company itself is liable under s.141(1) and punishable under s.141(2). The cheque signatory, usually the managing director or finance director, is presumed to be in charge and should be named with particulars.
Practical conclusion. The complaint should be pressed against the company and the signatory director; the allegation against the nominee director is vulnerable and, if pressed without specific averments, may result in that part being quashed with costs. The complainant should also consider proceedings under s.138 read with s.141 against the officers who actually issued the stop-payment instruction, since that instruction evidences knowledge and responsibility.