SC-Complaint u/Sec 138 of NI Act against Director is not Maintainable if Company is not Arraigned as Accused

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January 25, 2019

In this recent case, taken up by Two-Judge Bench of the Supreme Court, the Court ruled that for maintaining prosecution under Section 141 of the Negotiable Instrument Act, 1881 (Offence of dishnonor of cheque by companies) arraigning of a company as an accused is imperative.

Case name: Himanshu v. B. Shivamurthy & anr.

In the case, a complaint under Section 138 of the Negotiable Instruments Act, 1881 was instituted by the respondent against the appellant. The Appellant’s case is that he signed the impugned cheque in favour of the respondent in the capacity of Director of a company. Thus, the appellant instituted a petition under Section 482 of the Code of Criminal Procedure, 1973 to quash complaint under section 138 of Negotiable Instrument Act against him.

The Appellant averred that the impugned cheque was issued by him in the capacity of Director of Lakshmi Cement and Ceramics Industries Ltd. Thus, in the event of dishonor of cheque, the complaint should have been instituted against the company and that the appellant could not be prosecuted without the company being named as an accused.

Bench’s Verdict

The Two-Judge Bench of the Supreme Court in view of the prevailing law and precedents set aside the High Court’s order and quashed the complaint instituted by the Respondent against the Appellant. The essential observations about the Director’s vicarious liability in cases of dishonor of cheque under Section 138 of Negotiable Instrument Act are as under:

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?

To answer the aforesaid issue, the Supreme Court made reference to three Judge Bench decision in the case of Aneeta Hada vs. Godfather Travels and Tours Private Limited[1], wherein it was held that for maintaining 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 drag-net on the touchstone of vicarious liability as the same has been stipulated in the provision itself.

While referring to the ingredients of statutory provision under Section 141 of the Act, the Court noted that it postulates that if the person committing an offence under Section 138 is a company, every person, who at the time when the offence was committed was in charge of or 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.

Thus, in the absence of the company being arraigned as an accused, a complaint against the appellant was therefore not maintainable. The appellant had signed the cheque as a Director of the company and for and on its behalf. Moreover, in the absence of a notice of demand being served on the company and without compliance with the proviso to Section 138, the High Court was in error in holding that the company could now be arraigned as an accused.

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[1] (2012) 5 SCC 661