S.138 NI Act | Director Who Signed Cheque Not Liable For Dishonour When Company Hasn't Been Added As Accused : Supreme Court

The Supreme Court reiterated that the authorised signatory of a company cannot be held liable under Section 138 of the Negotiable Instruments Act, 1881 for dishonour of a cheque drawn on the company's account unless the company is arraigned as the principal accused.

A bench of Justice JB Pardiwala and Justice R Mahadevan upheld the acquittal of a man convicted for dishonoured cheque on the ground that the cheque was issued on behalf of a company, which was not arraigned as an accused. The Court rejected the argument that there was no occasion to implead the company as the cheque was drawn in discharge of personal debt of the accused, who signed the cheque as the company's director.

“even if the cheque might have been issued for the discharge of personal liability of the accused towards the complainant, had the company Shilabati Hospital Pvt. Ltd. been arraigned as an accused in the complaint case before the Trial Court, it would have remained open to the complainant to establish with the aid of the presumption under Section 139 that the cheque issued by the company was in discharge of a legally enforceable debt. However, in the absence of the drawer of the cheque having been arraigned as an accused, it was rightly held by the High Court that no prosecution could have proceeded against the accused in his personal capacity. The only way by which the accused could be held liable was under Section 141 of the NI Act, however the same could not have been done in the absence of the company being arraigned as an accused”, the Court explained.

The appeal stemmed from a dishonoured cheque issued by Paresh Manna, a Director of Shilabati Hospital Pvt. Ltd., allegedly to repay a personal debt of Rs. 8,45,000. The complainant, Bijoy Kumar Moni, alleged that he provided financial assistance to Manna in 2006 and that Manna issued the cheque drawn on the hospital's account to repay the debt. The cheque was dishonoured for insufficient funds.

Moni filed a complaint, and Manna was convicted, sentenced to one year in prison, and ordered to pay Rs. 10,00,000 in compensation. The Sessions Court upheld the conviction, but the Calcutta High Court reversed it, ruling that the cheque was issued on behalf of the hospital, and Manna could not be held liable under Section 141 of the NI Act unless the company was also arraigned as an accused.

Supreme Court Ruling

Before the Supreme Court, the complainant argued that the debt was personal and not related to the company, highlighting that the accused never claimed during the trial that the loan was for the company's benefit. The accused, however, maintained that the cheque was issued in his capacity as Director of Shilabati Hospital Pvt. Ltd., and that he could not be prosecuted in the absence of the company being arraigned as an accused.

The Supreme Court highlighted that under the NI Act, only the drawer of the cheque can be made liable under Section 138. The Court reiterated the principle of separate corporate personality, holding that an authorized signatory acts on behalf of the company, which remains the drawer of the cheque. It relied on various precedents which clarified that a cheque must be drawn on an account maintained by the accused to attract liability under Section 138.

The expression “on an account maintained by him with a banker” in Section 138 of the NI Act establishes a specific relationship between the account holder and the banker, and delegating authority to manage or transact from an account does not alter the fact that the account is maintained by the account holder, the Court observed.

The Court highlighted that liability cannot be extended to individuals who are merely authorized signatories unless the statutory requirements under Section 141 are satisfied. The Court noted that vicarious liability under Section 141 of the NI Act requires the company to be prosecuted as the principal offender. Without arraigning the company as an accused, the director or authorized signatory could not be held liable.

“it is the drawer Company which must be first held to be the principal offender under Section 138 of the NI Act before culpability can be extended, through a deeming fiction, to the other Directors or persons in-charge of and responsible to the Company for the conduct of its business. In the absence of the liability of the drawer Company, there would naturally be no requirement to hold the other persons vicariously liable for the offence committed under Section 138 of the NI Act.”

Since Shilabati Hospital Pvt. Ltd. was not made a party to the proceedings, the respondent could not be held vicariously liable, the Court held.

The Court rejected the argument that excluding cases like the present one from Section 138 of the NI Act would defeat its object. A decision by the Madras High Court was cited, in which an accused sought to quash a complaint under Section 138, claiming he was merely an authorized signatory for a proprietorship and could not be held liable. The High Court, however, held that the signatory could be considered the “drawer” of the cheque and liable under Section 138.

The Supreme Court disagreed with the High Court's reasoning. It reaffirmed that only the drawer of the cheque can be held liable under Section 138, and an authorized signatory acting on behalf of a principal cannot be considered the drawer.

The Court emphasized that Section 138 must be strictly interpreted, as it is a penal provision. In the present case, although the accused signed the cheque, it was drawn on an account maintained by the hospital, not by the accused personally. Therefore, the requirements of Section 138 were not met.

“Section 138 of the NI Act clearly postulates that the cheque returned for insufficiency of funds should have been drawn by a person on an account maintained by him. It will amount to doing violence to the language of the statute if Section 138 of the Act is interpreted to mean that even if a person draws a cheque on an account not maintained by him, he shall be liable if the cheque is returned for insufficiency of funds. Such an interpretation will lead to absurd and wholly unintended results”, the Court held.

While the Court found no grounds for liability under Section 138, it acknowledged that the complainant may have suffered due to the dishonoured cheque and the statute of limitations for civil action had expired. The complainant could not initiate a new case under Section 138, but the possibility of the accused having committed fraud or cheating remained.

The Court permitted the complainant to approach the police for a potential FIR on the charge of cheating, and the appeal was dismissed.

Case no. – Criminal Appeal No. 5556 of 2024

Case Title – Bijoy Kumar Moni v. Paresh Manna & Anr.

Citation : 2024 LiveLaw (SC) 1035