Supreme Court clarifies “Drawer” under Section 138 NI Act in cheque dishonor case: Bijoy Kumar Moni vs Paresh Manna (20 December 2024)

Date of the Judgment: 20 December 2024

Citation: 2024 INSC 1024

Judges: J.B. Pardiwala, J., R. Mahadevan, J.

Can a company director be held liable for a cheque bounce under Section 138 of the Negotiable Instruments Act, 1881, if the cheque was drawn on the company’s account? The Supreme Court recently addressed this crucial question, clarifying the scope of the term “drawer” and its implications for corporate liability in cheque dishonor cases. The court examined whether an authorized signatory of a company, who signs a cheque on the company’s account, can be considered the “drawer” for the purposes of Section 138 of the Act. This judgment provides critical insights into the interpretation of the Negotiable Instruments Act, particularly concerning the responsibilities of company directors and the vicarious liability of corporations in cheque bounce cases. The majority opinion was authored by Justice J.B. Pardiwala, with Justice R. Mahadevan concurring.

Case Background

The complainant, Bijoy Kumar Moni, had a trade loan account and was introduced to the accused, Paresh Manna, by a bank manager in January 2006. In February 2006, the accused requested a loan of ₹7,00,000, which the complainant provided via a bearer cheque. Later, the accused asked for an additional ₹1,45,000 in cash. To repay the total amount of ₹8,45,000, the accused issued a cheque dated 28.04.2006 drawn on the account of Shilabati Hospital Pvt. Ltd., where he was a director. This cheque was dishonored due to insufficient funds. The complainant sent a statutory notice on 14.08.2006, but the accused failed to make the payment, leading to a private complaint under Section 138 of the Negotiable Instruments Act, 1881.

Timeline:

Course of Proceedings

The Trial Court convicted the accused under Section 138 of the Negotiable Instruments Act, 1881, sentencing him to one year of simple imprisonment and a compensation of ₹10,00,000. The Sessions Court upheld this conviction. However, the High Court, in its revisional jurisdiction, acquitted the accused. The High Court reasoned that the cheque was drawn on the account of Shilabati Hospital Pvt. Ltd., and since the company was not made an accused, the director could not be held vicariously liable under Section 141 of the NI Act. The High Court relied on the precedent set in Himanshu v. B. Shivamurthy (2019) 3 SCC 797, which held that a complaint against a director is not maintainable if the company is not also an accused.

Legal Framework

The case revolves around the interpretation of several key sections of the Negotiable Instruments Act, 1881:

• Section 138: This section deals with the dishonor of a cheque for insufficiency of funds. It states that if a cheque drawn by a person on an account maintained by him is returned unpaid, the person is deemed to have committed an offense. The explanation to this section defines “debt or other liability” as a legally enforceable debt or other liability.
• Section 6: Defines a “cheque” as a bill of exchange drawn on a specified banker and payable on demand.
• Section 7: Defines the “drawer” as the maker of a bill of exchange or cheque and “drawee” as the person directed to pay.
• Section 30: States that the drawer of a cheque is bound to compensate the holder in case of dishonor, provided due notice is given.
• Section 31: States that the drawee of a cheque must pay the cheque if sufficient funds are available and must compensate the drawer for any loss caused by default.
• Section 141: This section deals with offenses by companies and extends vicarious liability to persons in charge of the company’s affairs when a company commits an offense under Section 138.

The Supreme Court also highlighted that the legislative intent behind the introduction of Chapter XVII of the NI Act, which includes Section 138, was to enhance the acceptability of cheques by making the drawer liable for penalties in case of bouncing of cheques due to insufficiency of funds, while also providing safeguards to prevent harassment of honest drawers.

Arguments

Complainant’s Submissions:

• The complainant argued that the transaction was between the accused and himself personally, not with the company.
• The complainant contended that the accused borrowed the money in his personal capacity and the cheque, though bearing the company’s stamp, was issued to discharge his personal debt.
• It was submitted that even before the Trial Court, it was not the defence of the accused that he had issued the cheque to discharge the debt of the company.
• The complainant stated that the accused’s defense was that the cheque was issued as security for a loan and was misused by the complainant.

Accused’s Submissions:

• The accused argued that the High Court was correct in acquitting him, as vicarious liability under Section 141 of the NI Act cannot be applied without the company being prosecuted.
• The accused stated that the cheque was drawn on the company’s account, and it was the complainant’s responsibility to issue a notice to the company.
• The accused maintained that the cheque was issued as security for a loan, not in discharge of a legally enforceable debt.

The innovativeness of the argument by the accused was that he tried to shift the onus on the complainant by stating that the cheque was issued by the company as a security towards a mortgage, which was not proved by any document.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue for consideration:

1. Whether the High Court committed any error in acquitting the accused on the ground that he could not have been held vicariously liable for the offence said to have been committed by the company in the absence of the company being prosecuted and punished.
2. Whether the accused could be said to be covered by the expression “account maintained by him” as it appears in Section 138 of the NI Act.

The court also considered whether an authorized signatory of a company falls within the ambit of the expression “drawer” and the meaning of the expression “on an account maintained by him” used in Section 138 of the NI Act.

Treatment of the Issue by the Court:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on P.J. Agro Tech Ltd. v. Water Base Ltd. [CITATION] to emphasize that only the drawer of the cheque can be held liable under Section 138 of the NI Act.
• The Court cited Shri Gurudatta Sugars Marketing (P) Ltd. v. Prithviraj Sayajirao Deshmukh [CITATION] to clarify that an authorized signatory is not the drawer of the cheque.
• The Court referred to N. Harihara Krishnan v. J. Thomas [CITATION] to reiterate that the offense under Section 138 is person-specific and the complaint must be against the drawer.
• The Court followed Aneeta Hada v. Godfather Travels and Tours Private Limited [CITATION] to emphasize that the company must be arraigned as an accused for vicarious liability to apply.
• The Court distinguished the view taken in P. Sarvana Kumar v. S.P. Vijaya Kumar [CITATION], stating that an authorized signatory cannot be deemed the drawer of the cheque.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the strict interpretation of Section 138 of the Negotiable Instruments Act, 1881. The court emphasized that the section clearly specifies that the cheque must be drawn by a person on an account maintained by him. The court found that the accused, in his capacity as a director, had signed the cheque on behalf of the company, Shilabati Hospital Pvt. Ltd., and not on his personal account. This distinction was crucial in the court’s reasoning. The court also relied on precedents such as P.J. Agro Tech Ltd. v. Water Base Ltd. [CITATION] and Aneeta Hada v. Godfather Travels and Tours Private Limited [CITATION] to reinforce that only the drawer of the cheque can be held liable under Section 138 and that vicarious liability under Section 141 cannot be invoked without the company being arraigned as an accused.

The court also considered the legislative intent behind Section 138, which is to ensure that the drawer of the cheque is held accountable for dishonor. However, it also noted that penal provisions must be strictly construed and cannot be stretched to include situations or persons not explicitly covered by the statute.

The court acknowledged the complainant’s predicament, noting that civil remedies are time-barred and that the option to file a fresh complaint under Section 138 is not available. However, the court maintained that it could not deviate from the strict interpretation of the law.

The court also observed that the conduct of the accused in not replying to the statutory notice and not taking the plea that the cheque was drawn on the account of the company during the trial raised questions as regards his dishonest intention in not repaying the amount borrowed by him from the complainant.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning:

The court considered the interpretation of “drawer” and “account maintained by him” as critical to its decision. It rejected the complainant’s argument that the accused was personally liable, emphasizing the corporate structure and the need to adhere to the strict language of the statute. The court acknowledged the complainant’s hardship but maintained that it could not deviate from the established legal principles.

Key Takeaways

• An authorized signatory of a company cannot be held liable under Section 138 of the Negotiable Instruments Act, 1881, if the cheque is drawn on the company’s account and not on their personal account.
• For vicarious liability to apply under Section 141 of the NI Act, the company must be arraigned as an accused in the complaint.
• The term “drawer” in Section 138 refers to the entity that maintains the account, not the person who signs the cheque on behalf of that entity.
• The expression “on an account maintained by him” describes the relationship between the account holder and the banker.
• The court emphasized that penal provisions must be strictly construed and cannot be stretched to include situations or persons not explicitly covered by the statute.

Potential Future Impact:

• This judgment reinforces the importance of proper legal procedure when filing complaints under Section 138 of the NI Act, particularly in cases involving companies.
• It clarifies the distinction between the liability of a company and its directors/authorized signatories in cheque dishonor cases.
• It may lead to increased caution among payees when accepting cheques from companies, prompting them to ensure that the company is also made a party to any legal proceedings.

Directions

Directions Given by the Court

The Supreme Court dismissed the appeal and upheld the High Court’s decision to acquit the accused. The court did not issue any further specific directions, but the judgment clarifies the law regarding the liability of authorized signatories and the need to arraign the company as an accused in cases of cheque dishonor involving company accounts.