Maintainability of a complaint of dishonour of cheque under Section 138 of the Negotiable Instrument Act, 1881, in a case where the company is not being arraigned as an Accused

The two-judge bench comprising of Justice Hemant Gupta and Justice D Y Chandrachud of Supreme Court in the recent case of Himanshu v. B. Shivamurthy & another[1]have ruled out that, in order to maintain prosecution under Section 141 of Negotiable Instrument Act, 1881, it is imperative to arraign the company as an accused.

The appellant, in this case, was one of the directors of the company M/s Lakshmi Cement and according to complainant, a cheque was issued in the favour of the respondent for the money borrowed by the Appellant i.e. Rs. 4,15,000/- “for his business development”. However, on encashment, the bank returned the cheque to the respondent with an endorsement stating that the funds were insufficient.  In consequence of the same, the complainant issued a notice to the appellant. However, on non-compliance of the payment, a complaint was instituted by the respondent under Section 138 of the Negotiable Instruments Act, 1881 against the appellant.

The appellant being aggrieved by the initiation of the proceedings against him went on to institute a petition before the Karnataka High Court under Section 482 of the Code of Criminal Procedure, 1973 for quashing the complaint filed by the respondent against him under Section 138 of Negotiable Instrument Act, 1881. The Appellant’s case was that the cheque was issued by him in not in his personal capacity but in the capacity of being the Director of the company. Therefore, the respondent in the event of dishonour of cheque must have instituted the complaint against the company and its Directors and not just the appellant as the offence here was not individually committed by the appellant but by the company. 

However, the Karnataka High Court dismissed the petition filed under Section 482 of the Code of Criminal Procedure, 1973 by the appellant on two grounds. Firstly, that the complainant had pleaded ignorance about the existence of the company. Secondly, In view of the court, since the respondent had no knowledge about the company, therefore, once the petitioner has provided the details of the company, it would not be difficult for the respondent to take steps and array the company and its directors as a party.

The decision of the High court was brought into question before the Hon’ble Supreme Court on the grounds that the appellant alone cannot be “prosecuted without making the company as an accused”, as the cheque was issued by the appellant not in the individual capacity but in the name of the company. Further, due to the non-compliance of the requirements of Section 138 of the Negotiable Instruments Act, 1881, the observation contrived by the High Court of Karnataka, that the company can now be proceeded against in the complaint is misconceived as the offence under Section 138 is complete only upon the issuance of a notice of demand and the failure of payment within the prescribed period. However, in the present case, no notice of demand has been served to the company. Therefore, the observations made by the High Court are erroneous in nature.

The moot question that arose for determination before the Hon’ble Supreme Court was “whether an authorized signatory of a company would be liable for prosecution under Section 138 of the Negotiable Instruments Act, 1881 without the company being arraigned as an accused.” 

In order to answer the said issue, reference was made to the case of Aneeta Hada v. Godfather travel,[2] where the three-Judge Bench held that-

“Applying the doctrine of strict construction, we are of the considered opinion that the commission of offence by the company is an express condition precedent to attract the vicarious liability of others. Thus, the words “as well as the company” appearing in the Section make it absolutely unmistakably clear that when the company can be prosecuted, then only the persons mentioned in the other categories could be vicariously liable for the offence subject to the averments in the petition and proof thereof. One cannot be oblivious of the fact that the company is a juristic person and it has its own respectability. If a finding is recorded against it, it would create a concavity in its reputation. There can be situations when the corporate reputation is affected when a director is indicted.”

The Court further held that:

“In view of our aforesaid analysis, we arrive at the irresistible conclusion that for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative. The other categories of offenders can only be brought in the dragnet on the touchstone of vicarious liability as the same has been stipulated in the provision itself.”

The bench also pointed out certain conditions, which are required to be fulfilled in order to lodge a complaint under Section 138 of the Negotiable Instruments Act, 1881. It said: “These conditions are; (i) presentation of the cheque to the bank within six months from the date on which it is drawn or within the period of its validity, whichever is earlier; (ii) a demand being made in writing by the payee or holder in due course by the issuance of a notice in writing to the drawer of the cheque within thirty days of the receipt of information from the bank of the return of the cheques; and (iii) the failure of the drawer to make payment of the amount of money to the payee or the holder in due course within fifteen days of the receipt of the notice.”

Further, the court referred to the ingredients present under Section 141 of the Negotiable Instruments Act, 1881, which provides that, “if the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.” The possible reason for creating such vicarious liability is that a company is a juristic entity and all its operations are conducted by the living persons responsible for carrying out its activities.[3] Therefore, all those who act as the guiding factor and are responsible for carrying out the operations of such juristic entity must be made liable for its actions.[4]

Thus, in view of the precedents and the prevailing law, Supreme Court quashed the complaint filed against the appellant under Section 138 of the Negotiable Instruments Act, 1881 and arrived at an irresistible conclusion that in the absence of the company being arraigned as an accused, no prosecution could be made under Section 141 of the Negotiable Instruments Act, 1881. Further, any complaint filed by the respondent against the appellant will not maintainable.

The decision of the Supreme Court here primarily deals with the procedural aspect of maintaining prosecution under the Negotiable Instruments Act (for the offences relating to dishonour of cheque). This judgment provides a clear insight into the implications which may occur when a cheque is issued by a company. A company being a juristic entity carries out all its affairs through living persons; this implies that, whenever a cheque is issued by a company, it will bear a sign of an authorized signatory. Therefore, in a situation of cheque dishonour, it becomes imperative for the complainant to bring out the complaint not just against the signatory but also against the company and in absence of the same, the criminal complaint filed by the complainant against any of the signatories might be loaded with challenges.

[1] Himanshu v. B. Shivamurthy & another,

[2] Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661

[3] N.K. Wahi v. Shekhar Singh, (2007) 9 SCC 481

[4] Dsc Ltd. vs Dada Jeetu Buildcon Pvt. Ltd., 2018 (11) TMI 930

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