Supreme Court Clarifies Liability in Cheque Dishonor Cases: Aparna A. Shah vs. M/s Sheth Developers Pvt. Ltd. (2013)

Date of the Judgment: July 1, 2013
Citation: (2013) INSC 485
Judges: P. Sathasivam, J., Jagdish Singh Khehar, J.

Can a person be held liable for a cheque bounce if they did not sign the cheque, even if it’s from a joint account? The Supreme Court of India addressed this critical question in a case concerning the dishonor of a cheque. The court clarified that only the signatory of the cheque can be held liable under Section 138 of the Negotiable Instruments Act, 1881. This judgment provides clarity on the responsibilities of joint account holders in cheque bounce cases.

Case Background

In January 2008, M/s Sheth Developers Pvt. Ltd. (the respondent) sought to develop a Township Project and a Special Economic Zone (SEZ) near Panvel, Maharashtra. They were introduced to Aparna A. Shah (the appellant) and her husband, Ashish Shah, who owned land in the area.

The appellant represented that their land was ideal for the projects. However, they lacked the financial capacity to develop it alone. The respondent agreed to a joint venture.

The respondent issued a cheque of ₹25 crores to the appellant and her husband as a token amount. This was done so that the title documents could be inspected. The understanding was that the amount would be returned if the project did not materialize.

The joint venture did not proceed. The appellant claimed that the ₹25 crores was spent to meet the initial requirements of the project.

Later, the respondent wanted to submit a tender for a mill land. They needed financial facilities from their bank. The respondent requested the appellant and her husband to issue a cheque of ₹25 crores from their joint account to show receivables.

On February 5, 2009, the respondent deposited the cheque. It was dishonored due to “insufficient funds.”

On February 18, 2009, the respondent sent a statutory notice under Section 138 of the Negotiable Instruments Act, 1881 to the appellant and her husband. They were asked to repay ₹25 crores. The appellant and her husband replied on March 6, 2009, explaining the circumstances of the cheque issuance.

On April 4, 2009, the respondent filed a complaint against the appellant and her husband in the Metropolitan Magistrate Court, Dadar, Mumbai. The court issued a process against them on April 20, 2009.

The appellant and her husband objected to the exhibition of documents on January 12, 2010. The Magistrate dismissed their application on May 11, 2010.

The appellant then filed a writ petition in the High Court of Judicature at Bombay. The High Court partly allowed the petition on September 24, 2010. It quashed the order dismissing the objection to the exhibition of documents. However, it refused to quash the proceedings against the appellant. Aggrieved, the appellant filed a special leave petition before the Supreme Court.

Timeline

Course of Proceedings

The Metropolitan Magistrate Court in Dadar, Mumbai, issued a process against the appellant and her husband based on the complaint filed by the respondent. The appellant objected to the exhibition of documents, but the Magistrate dismissed this application.

The High Court of Judicature at Bombay partly allowed the appellant’s writ petition. It quashed the order dismissing the objection to the exhibition of documents. However, the High Court refused to quash the criminal proceedings against the appellant. The High Court directed the Magistrate to decide the objections after hearing both sides.

Legal Framework

The case revolves around Section 138 of the Negotiable Instruments Act, 1881. This section deals with the dishonor of a cheque due to insufficient funds.

Section 138 of the Negotiable Instruments Act, 1881 states:

“138. Dishonour of cheque for insufficiency, etc., of funds in the account.—Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an arrangement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless— (a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier; (b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque within fifteen days of the receipt of the said notice. Explanation.—For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability”.

The court also considered Section 141 of the Negotiable Instruments Act, 1881. This section deals with offenses by companies. It extends the liability to officers of the company.

The court also referred to Section 3(42) of the General Clauses Act, 1897, which defines “person”.

Arguments

Appellant’s Arguments:

• The appellant argued that she was not the “drawer” of the cheque. Therefore, she cannot be prosecuted under Section 138 of the Negotiable Instruments Act, 1881.
• The appellant contended that the cheque was issued from a joint account. She did not sign the cheque. Thus, she cannot be held liable.
• The appellant argued that Section 141 of the Negotiable Instruments Act, 1881, does not apply to her. She is not an officer of a company.

Respondent’s Arguments:

• The respondent argued that the appellant and her husband are an “association of individuals” as per Section 141 of the Negotiable Instruments Act, 1881. Thus, they are liable.
• The respondent stated that the appellant was involved in the transaction. The cheque was deposited in their joint account.
• The respondent argued that the appellant suppressed material facts. Therefore, her claim should be rejected.
• The respondent contended that the trial has commenced. The appellant has a remedy during the trial.

Innovativeness of the argument: The respondent argued that the appellant and her husband should be treated as an “association of individuals” under Section 141 of the Negotiable Instruments Act, 1881. This argument was an attempt to extend the vicarious liability to the appellant, despite her not being the signatory of the cheque. However, the court did not accept this argument.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether a joint account holder who has not signed the cheque can be prosecuted under Section 138 of the Negotiable Instruments Act, 1881?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following cases:

• Jugesh Sehgal vs. Shamsher Singh Gogi, (2009) 14 SCC 683: The Supreme Court held that only the drawer of the cheque can be held liable under Section 138 of the Negotiable Instruments Act, 1881.
• S.K. Alagh vs. State of Uttar Pradesh and Others, (2008) 5 SCC 662: The Supreme Court held that a director of a company cannot be held vicariously liable for an offense committed by the company unless the statute specifically provides for it.
• Sham Sunder and Others vs. State of Haryana, (1989) 4 SCC 630: The Supreme Court held that there is no vicarious liability in criminal law unless the statute specifically provides for it.
• Oswal Fats and Oils Limited vs. Additional Commissioner (Administration), Bareilly Division, Bareilly and Others, (2010) 4 SCC 728: This case was cited by the respondent regarding suppression of facts, but the Supreme Court found it inapplicable.
• Balwantrai Chimanlal Trivedi vs. M.N. Nagrashna & Ors., AIR 1960 SC 1292: This case was cited by the respondent regarding suppression of facts, but the Supreme Court found it inapplicable.
• J.P. Builders & Anr. vs. A. Ramadas Rao & Anr., (2011) 1 SCC 429: This case was cited by the respondent regarding suppression of facts, but the Supreme Court found it inapplicable.
• Raghu Lakshminarayanan vs. Fine Tubes, (2007) 5 SCC 103: This case was cited to explain the terms “complaint,” “persons,” “association of persons,” “company,” and “directors.”

The Supreme Court also referred to the following High Court decisions:

• Devendra Pundir vs. Rajendra Prasad Maurya, Proprietor, Satyamev Exports S/o. Sri Rama Shankar Maurya, 2008 Criminal Law Journal 777 (Madras High Court): The Madras High Court held that a person cannot be held vicariously liable for an offense under Section 138 of the Negotiable Instruments Act, 1881, if they are not the drawer of the cheque.
• Gita Berry vs. Genesis Educational Foundation, 151 (2008) DLT 155 (Delhi High Court): The Delhi High Court held that a joint account holder who has not drawn or issued the cheque cannot be prosecuted under Section 138 of the Negotiable Instruments Act, 1881.
• Smt. Bandeep Kaur vs. S. Avneet Singh, (2008) 2 PLR 796 (Punjab and Haryana High Court): The Punjab and Haryana High Court held that the liability for dishonor of a cheque lies with the drawer of the cheque.

Judgment

The Supreme Court held that the appellant, not being the signatory of the cheque, could not be prosecuted under Section 138 of the Negotiable Instruments Act, 1881. The court emphasized that only the drawer of the cheque can be held liable.

The court also clarified that in the case of joint accounts, all joint account holders must sign the cheque to be held liable. This principle is an exception to Section 141 of the Negotiable Instruments Act, 1881.

The court stated that proceedings under Section 138 of the Negotiable Instruments Act, 1881, cannot be used as a tactic to recover money.

The court emphasized that “it is only the drawer of the cheque who can be made an accused in any proceeding under Section 138 of the Act.”

The court further stated that “the culpability attached to dishonour of a cheque can, in no case “except in case of Section 141 of the N.I. Act” be extended to those on whose behalf the cheque is issued.”

The Supreme Court also observed that the High Court was wrong in holding that the prayer of the appellant cannot even be considered. The High Court had directed the Magistrate to carry out the process of admission/denial of documents. This showed that the trial was not at an advanced stage.

The Supreme Court quoted the High Court’s observation that the appellant was not the signatory of the cheque. However, the High Court rejected the contention that the amount was not due and payable by her solely on the ground that the trial was in progress.

The Supreme Court concluded that the High Court was wrong in rejecting the appellant’s plea.

The Supreme Court also held that “under Section 138 of the N.I. Act, in case of issuance of cheque from joint accounts, a joint account holder cannot be prosecuted unless the cheque has been signed by each and every person who is a joint account holder.”

The Supreme Court allowed the appeal and quashed the proceedings against the appellant.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that penal statutes must be strictly interpreted. The court emphasized that vicarious liability in criminal law is an exception. It requires a specific statutory provision.

The court also relied on the plain language of Section 138 of the Negotiable Instruments Act, 1881. The court observed that the section clearly states that only the “drawer” of the cheque can be held liable.

The court also considered the fact that the appellant did not sign the cheque. The cheque was issued from a joint account, but only her husband signed it.

The court also considered the fact that the complaint was filed only under Section 138 of the Negotiable Instruments Act, 1881. There was no other provision of the penal code invoked.

The court also considered that the proceedings under Section 138 of the Negotiable Instruments Act, 1881, cannot be used as a tactic to recover money.

Logical Reasoning:

Key Takeaways

• Only the person who signs a cheque is liable under Section 138 of the Negotiable Instruments Act, 1881.
• In the case of joint accounts, all joint account holders must sign the cheque to be held liable for its dishonor.
• Section 138 of the Negotiable Instruments Act, 1881, cannot be used as a tool to recover money from individuals who are not the drawers of the cheque.
• This judgment provides clarity on the responsibilities of joint account holders in cheque bounce cases.
• The principle of vicarious liability in criminal law is an exception and requires specific statutory provision.

Directions

The Supreme Court quashed the criminal proceedings against the appellant in Criminal Case No. 1171/SS/2009 pending before the Court of learned Metropolitan Magistrate 13th Court, Dadar, Mumbai.

Development of Law

The ratio decidendi of the case is that only the drawer of the cheque can be prosecuted under Section 138 of the Negotiable Instruments Act, 1881. In the case of joint accounts, all joint account holders must sign the cheque to be held liable. The judgment clarifies the scope of liability under Section 138 of the Negotiable Instruments Act, 1881 and provides an exception to the vicarious liability principle in criminal law. This is a significant clarification as it protects individuals who are joint account holders but not signatories to the cheque from being prosecuted under Section 138 of the Negotiable Instruments Act, 1881.

Conclusion

The Supreme Court’s judgment in Aparna A. Shah vs. M/s Sheth Developers Pvt. Ltd. clarifies that only the signatory of a cheque can be prosecuted for its dishonor under Section 138 of the Negotiable Instruments Act, 1881. This decision protects joint account holders who have not signed the cheque from being held liable. The court emphasized the principle of strict interpretation of penal statutes and the need for specific statutory provisions for vicarious liability in criminal law.