KNOWLEDGE CENTER

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

Is a former employee disqualified from being appointed as an Arbitrator

Arbitration in India was brought into the picture with an objective of providing speedy and cost-effective dispute resolution between litigating parties. The sole purpose was to reduce litigation and minimize the role of courts. However, even after the enactment of the Arbitration and Conciliation act, 1996, there has been a constant pressure over judiciary to adjudicate matters of arbitration majorly dealing with the appointment of an arbitrator.

Significantly, the appointment of an arbitrator has been challenged in the court of law, whenever there are certain circumstances “giving rise to justifiable doubts as to his independence or impartiality“.[1] In a recent judgment delivered by the division bench of the Supreme Court headed by Justice Indu Malhotra and Justice Abhay Manohar Sapre,[2] have held that a former employee of a company can be appointed as an arbitrator even if he was an employee of a company which is a party to the arbitration. Further, the court also held that the Arbitration and Conciliation Act, 1996 does not preclude a former employee from being appointed as an arbitrator provided that “there are no justifiable doubts as to his/her independence or impartiality” to act as an arbitrator.

In the present case, the appellant i.e. the State of Haryana (PWD) awarded a contract of construction, maintenance and operation to the respondent (M/s. G. F. Toll Road Private Limited). Further, a concession agreement was also executed between both the parties. The concession agreement contained a dispute resolution clause which provided that “there shall be a Board of three arbitrators of whom each party shall select one and the third arbitrator shall be appointed in accordance with the Rules of Arbitration of the Indian Council of Arbitration”.

Subsequently, a dispute arose between the parties and the respondent invoked the arbitration clause and thereafter made a request before the Indian Council of Arbitration to commence arbitration proceedings. Thereafter, both the parties nominated their respective arbitrators. However, the Indian Council of Arbitration raised an objection with regards to the nominee arbitrator of the state on the ground that the nominee of the state i.e. Engineer-in-Chief was a retired employee of company of a State and therefore, there exist circumstances as to his impartiality and integrity to go about as an arbitrator. However, the Appellant state opposed the objection raised by the Indian Council of Arbitration stating that there exists no such rule, which prohibits such nomination as the nominee arbitrator was a retired employee for over 10 years and therefore, there could not exist any circumstances, which could give rise to justifiable doubt as to his integrity and impartiality to act as an arbitrator.

Nonetheless, the Indian Council of Arbitration emphasized that there exist a stable relationship between the State and its nominee; consequently, there happen to be circumstances suggesting the existence of biases in arbitrating the dispute. Further, the Indian Council of Arbitration stated that it shall appoint an arbitrator on its own replacing the one appointed by the Appellant. Thereupon, the appellant State requested for a time period of 30 days, so as to appoint a substitute arbitrator. However, the Indian Council of Arbitration went ahead and appointed a nominee arbitrator against the request of the Appellant State and further appointed a presiding arbitrator.

Later, the Appellant State went on to challenge the appointment of a substitute arbitrator made by the Indian Council of Arbitration on its behalf and filed a petition before the District Court of Chandigarh under Section 15 of the “Arbitration and Conciliation Act, 1996.” The Appellant’s case was that the “constitution of the arbitral tribunal was illegal, arbitrary and against the principles of natural justice.”[3] Further, the Appellant State also raised an objection under section 16 of the Arbitration and Conciliation Act, 1996, concerning the issue of jurisdiction. However, the District Court inter alia held that the present petition under Section 16 is not maintainable as the Arbitral tribunal has already been constituted; therefore, the state is supposed to raise any objection with respect to section 16 before the tribunal itself.

Against the decision of the District Court, the Appellant State filed a Civil Revision Petition before the Punjab & Haryana High Court which on contrary upheld the decision of the District Court. The High Court further held that when an agreement is silent with regards to the mode of appointment of a substitute arbitrator and an objection is raised regarding such nomination, “then the rules applicable would be those of the institution under which the arbitration is held.” Pertaining to this, the application filed by the Appellant under Section 16 of the Arbitration and Conciliation Act, 1996, was also dismissed by the Arbitral Tribunal.

Aggrieved by the decision of the High Court, the Appellant State went on to file a SLP before the Hon’ble Supreme Court, where the court in reference to the issue of the appointment of a Substitute Arbitrator by the Indian Council of Arbitration observed that the High Court has committed an error while delivering the judgment as it failed to acknowledge Section 15(2) of Arbitration and Conciliation Act, 1996, which provides that “a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.” Further, relying on the judgment in the case of ACC Ltd v Global Cements Limited,[4] the court held that “the procedure agreed upon by the parties for the appointment of the original arbitrator is equally applicable to the appointment of a substitute arbitrator, even if the agreement does not specifically provide so.”

Therefore, the appointment of the nominee arbitrator made by the Indian Council of Arbitration on behalf of the Appellant State was found to be unjust as the agreement itself provides that each of the party shall appoint a nominee arbitrator and the presiding officer was supposed to be appointed in accordance with the rules of Indian Council of Arbitration. As a matter of fact, the appointment made by the Indian Council of Arbitration was contrary to its own rules, particularly since it did not adhere to the request made by the Appellant State for the grant of 30 days for appointing a substitute arbitrator. The Indian Council of Arbitration could have topped off the opportunity, in case no appointment has been made by Appellant State during that period or if there existed circumstances suggesting that the Appellant State had no intention to appoint a substitute arbitrator.

For deciding the issue regarding the appointment of the nominee arbitrator by the State, the court relied upon the judgment of Medicaments and Related Classes of Goods[5] and Locabail Ltd. v. Bayfield Properties[6] and held that in order to determine biasness, the test to be used is “whether the circumstances are such as would lead to a fair-minded and informed person to conclude that the arbitrator was in fact biased.” It was further observed by the court that both the Arbitration and Conciliation Act, 1996 and the Arbitration Amendment Act, 2015 did not disqualify a former employee from being appointed as an arbitrator unless “there are justifiable doubts as to his independence and impartiality.” Moreover, in the present case, the nominee arbitrator appointed by the Appellant State had been a former employee for over 10 years and mere allegations without justifiable doubt as to his independence and impartiality cannot become the ground for his removal as an arbitrator. Therefore, the allegations made by the Indian Council of Arbitration were found to be baseless and untenable.

Impartiality and independence of an arbitrator have always been a contentious and an exceedingly subjective issue. However, with the introduction of the Fifth Schedule by the Arbitration Amendment Act, 2105, the issue of the appointment of an arbitrator has largely been clarified. Various grounds have been inserted under the schedule in order to determine the nature of the appointment. Therefore, the court is now only supposed to interfere in the cases, where there exist circumstances giving rise to justifiable doubts as to the independence and impartiality of a former employee to go about as an arbitrator.

Supreme Court while delivering this judgment has only considered an exposed understanding of the provisions relating to the appointment of an arbitrator and has overlooked the fact that the case is a pre-amendment case and yet it engendered the objective of the 2015 Amendment Act. However, it is pertinent to mention that the court had failed to acknowledge the likelihood of predisposition as there may be a situation where a former employee might get influenced by his employer or a situation where they do not share a healthy relationship. Therefore, it is hard to predict or ascertain any such circumstance which could suggest or creates justifiable doubts as to the independence or impartiality of an arbitrator and thereby, once again creating a doubt in the mind of the parties to opt for arbitration as a dispute resolution method.


[1] India: Appointment of Arbitrators by Indian Government Owned Entities: Dos And Don’ts, < http://www.mondaq.com/india/x/599816/Arbitration+Dispute+Resolution/Appointment+Of+Arbitrators+By+Indian+Government+Owned+Entities+Dos+And+Donts >

[2] The Government of Haryana PWD Haryana v. M/s. G.F. Toll Road Pvt. Ltd. & Ors, CIVIL APPEAL NO. 27/2019.

[3] Id. at Para 2.7

[4] ACC Ltd v Global Cements Limited ((2012) 7 SCC 71)

[5] Medicaments and related Classes of Goods (No 2) (2002 (1) All ER 465)

[6] Locabail Ltd. v. Bayfield Properties, [2000] Q.B. 451