Supreme Court quashes cheque bounce case against director for lack of company as accused: Himanshu vs. B. Shivamurthy (2019)

Date of the Judgment: 17 January 2019

Citation: (2019) INSC 19

Judges: Dr. Dhananjaya Y. Chandrachud, J., Hemant Gupta, J.

Can a director of a company be held liable in a cheque bounce case when the company itself is not named as an accused? The Supreme Court of India addressed this crucial question in a recent judgment. This case revolves around a complaint filed under Section 138 of the Negotiable Instruments Act, 1881, where a director was prosecuted for a bounced cheque issued on behalf of the company, but the company was not made a party to the case. The Supreme Court, in this case, clarified the legal position regarding the liability of a director when a company is not included as an accused in a cheque dishonor case. The judgment was delivered by a two-judge bench comprising Dr. Dhananjaya Y. Chandrachud, J. and Hemant Gupta, J.

Case Background

The respondent filed a complaint against the appellant under Section 138 of the Negotiable Instruments Act, 1881. The respondent claimed that the appellant had borrowed Rs. 4,15,000 for business development. The appellant issued a cheque for the same amount, drawn on Karnataka Bank, Hosadurga. When presented on 26 December 2003, the cheque was returned by the State Bank of Mysore, Beligere Branch on 29 December 2003, due to insufficient funds. The respondent sent a notice to the appellant on 19 January 2004, which was served on 28 January 2004. Upon the appellant’s failure to pay, the respondent filed a complaint.

The Civil Judge, Junior Division, Tiptur, took cognizance of the complaint on 6 July 2004 and issued summons to the appellant. The appellant then filed a petition under Section 482 of the Code of Criminal Procedure, 1973, before the High Court of Karnataka, arguing that the cheque was issued by a director of Lakshmi Cement and Ceramics Industries Ltd., a public limited company, and not in his personal capacity. The appellant contended that the complaint should have been against the company and its directors, not just him.

Timeline

Course of Proceedings

The High Court of Karnataka dismissed the appellant’s petition, stating that the complainant was unaware of the company’s existence. The High Court also noted that it would not be difficult for the complainant to proceed against the company and its responsible persons. The appellant challenged this order, arguing that he could not be prosecuted without the company being named as an accused since he signed the cheque as a director of the company. The appellant also contended that the High Court’s observation that the company could now be proceeded against was incorrect because the requirements of Section 138 of the Negotiable Instruments Act, 1881, were not met.

Legal Framework

The case primarily revolves around Section 138 and Section 141 of the Negotiable Instruments Act, 1881. Section 138 of the Negotiable Instruments Act, 1881, deals with the dishonor of cheques for insufficiency of funds. It states that if a cheque is dishonored due to insufficient funds, the drawer can be prosecuted if they fail to make the payment within 15 days of receiving a notice from the payee. The proviso to Section 138 of the Negotiable Instruments Act, 1881, specifies three conditions that must be met before an offense is made out:
✓ Presentation of the cheque within six months of its issue or validity period.
✓ A written demand for payment by the payee within 30 days of receiving notice of dishonor.
✓ Failure of the drawer to pay within 15 days of receiving the demand notice.

Section 141 of the Negotiable Instruments Act, 1881, deals with offenses by companies. It states that if the person committing an offense under Section 138 is a company, every person who was in charge of the company’s business at the time the offense was committed, as well as the company itself, shall be deemed guilty of the offense.

Arguments

Appellant’s Submissions:

• The appellant argued that he could not be prosecuted under Section 138 of the Negotiable Instruments Act, 1881, without the company being named as an accused.
• The cheque was issued by the company, Lakshmi Cement and Ceramics Industries Ltd., and signed by the appellant as its director. Therefore, the company should have been made a party to the case.
• The appellant contended that the High Court’s observation that the company could now be proceeded against was flawed. The offense under Section 138 of the Negotiable Instruments Act, 1881, is complete only when a notice of demand is issued and payment is not made within the prescribed period. Since the company was not issued a notice, it cannot be impleaded at this stage.

Respondent’s Submissions:

• The respondent argued that the High Court was correct in stating that the complainant was unaware of the existence of the company.
• The respondent submitted that it would not be difficult for the complainant to take steps to proceed against the company and other responsible persons.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether a director of a company can be prosecuted under Section 138 of the Negotiable Instruments Act, 1881, without the company being arraigned as an accused.
2. Whether the High Court was correct in holding that the company could be impleaded at a later stage, despite the requirements of Section 138 of the Negotiable Instruments Act, 1881, not being met.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

✓ The Supreme Court followed the ratio laid down in Aneeta Hada vs. Godfather Travels and Tours Private Limited [(2012) 5 SCC 661]* which held that the company must be an accused for the director to be vicariously liable under Section 141 of the Negotiable Instruments Act, 1881. The court reiterated that the company must be an accused for the director to be vicariously liable.

✓ The Supreme Court followed the ratio laid down in Charanjit Pal Jindal vs. L.N. Metalics [(2015) 15 SCC 768]* which reiterated the principle that the company must be an accused for the director to be vicariously liable.

✓ The Supreme Court cited MSR Leathers vs. S. Palaniappan [(2013) 1 SCC 177]* to explain the three conditions precedent under the proviso to Section 138 of the Negotiable Instruments Act, 1881.

✓ The Supreme Court cited N. Harihara Krishnan vs. J. Thomas [(2018) 13 SC 663]* to reiterate the ingredients of an offense under Section 138 of the Negotiable Instruments Act, 1881.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily based on the legal interpretation of Section 138 and Section 141 of the Negotiable Instruments Act, 1881, and the precedent set by previous judgments. The court emphasized the necessity of strict compliance with the statutory requirements for prosecuting a director for a cheque bounce offense. The court’s reasoning was heavily influenced by the principle that for a director to be held vicariously liable, the company must be arraigned as an accused. The court also noted the importance of fulfilling the conditions under Section 138 of the Negotiable Instruments Act, 1881, including the issuance of a notice to the drawer of the cheque, which in this case, was the company.

Logical Reasoning:

The court considered the argument that the complainant was unaware of the company’s existence but rejected it, focusing on the legal requirements. The court also rejected the High Court’s view that the company could be impleaded at a later stage, emphasizing that the conditions under Section 138 of the Negotiable Instruments Act, 1881, were not met. The court’s final decision was that the complaint against the appellant was not maintainable without the company being arraigned as an accused.

The Supreme Court stated, “In the absence of the company being arraigned as an accused, a complaint against the appellant was therefore not maintainable.”

The Supreme Court also stated, “The appellant had signed the cheque as a Director of the company and for and on its behalf.”

The Supreme Court further stated, “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.”

There were no dissenting opinions in this case.

Key Takeaways

• A director of a company cannot be prosecuted under Section 138 of the Negotiable Instruments Act, 1881, for a cheque bounce if the company is not named as an accused in the complaint.
• The company must be arraigned as an accused for the director to be vicariously liable under Section 141 of the Negotiable Instruments Act, 1881.
• A notice of demand must be served on the company, as the drawer of the cheque, for the requirements of Section 138 of the Negotiable Instruments Act, 1881, to be met.
• The High Court cannot direct the impleadment of the company at a later stage if the initial complaint is not maintainable due to the absence of the company as an accused.
• This judgment reinforces the principle that the company is a separate legal entity and must be proceeded against as an accused in cases of cheque dishonor when the cheque is issued on behalf of the company.

Directions

The Supreme Court directed that the amount of Rs. 4,15,000 deposited by the appellant, along with accrued interest, be paid to the respondent-complainant. The Registry was instructed to communicate a copy of the order to the respondent and disburse the amount upon proof of identity.

Development of Law

The ratio decidendi of this case is that for maintaining a prosecution under Section 141 of the Negotiable Instruments Act, 1881, arraigning the company as an accused is imperative, and the director cannot be prosecuted without the company being named as an accused. This case reinforces the principle established in Aneeta Hada vs. Godfather Travels and Tours Private Limited [(2012) 5 SCC 661], and clarifies that the requirements of Section 138 of the Negotiable Instruments Act, 1881, must be strictly followed, including serving a notice to the company as the drawer of the cheque. There is no change in the previous position of law, but this case reiterates the importance of compliance with the statutory requirements.

Conclusion

The Supreme Court allowed the appeal, setting aside the High Court’s judgment and quashing the complaint against the appellant. The court held that a director cannot be prosecuted under Section 138 of the Negotiable Instruments Act, 1881, without the company being named as an accused. The court emphasized that the company, being a separate legal entity, must be included in the proceedings. This judgment clarifies the legal position regarding the liability of a director in cheque bounce cases and reinforces the need for strict compliance with the provisions of the Negotiable Instruments Act, 1881.