Supreme Court quashes conviction of partner under Section 138 NI Act for firm’s cheque bounce: Dilip Hariramani vs. Bank of Baroda (2022)

Date of the Judgment: May 9, 2022
Citation: 2022 INSC 418
Judges: Ajay Rastogi, J. and Sanjiv Khanna, J.
Can a partner of a firm be held criminally liable for a cheque bounce when the firm itself is not prosecuted? The Supreme Court of India recently addressed this critical question in a case concerning the vicarious liability of partners under Section 138 of the Negotiable Instruments Act, 1881. The Court clarified that a partner cannot be convicted solely based on their status as a partner when the firm is not an accused in the case. This judgment has significant implications for how vicarious liability is interpreted in cheque bounce cases. The judgment was delivered by a two-judge bench consisting of Justice Ajay Rastogi and Justice Sanjiv Khanna, with the opinion authored by Justice Sanjiv Khanna.

Case Background

The case revolves around a loan taken by M/s. Global Packaging, a partnership firm, from the Bank of Baroda. The firm, through its authorized signatory, Simaiya Hariramani, issued three cheques totaling ₹75,00,000 to the bank as part of loan repayment. These cheques, dated October 17, 2015, October 27, 2015, and October 31, 2015, were dishonored due to insufficient funds. Subsequently, the bank issued a demand notice to Simaiya Hariramani on November 4, 2015. On December 7, 2015, the Bank filed a complaint under Section 138 of the Negotiable Instruments Act, 1881 against Simaiya Hariramani and Dilip Hariramani, the appellant, who was also a partner in the firm. Notably, the firm itself was not named as an accused in the complaint.

Timeline

Course of Proceedings

The Judicial Magistrate First Class, Balodabazar, Chhattisgarh, convicted both Dilip Hariramani and Simaiya Hariramani under Section 138 of the NI Act, sentencing them to six months imprisonment and ordering them to pay ₹97,50,000 as compensation. The Sessions Judge, Balodabazar, dismissed their appeal but modified the sentence to imprisonment till the rising of the court and increased the compensation to ₹1,20,00,000. The High Court of Chhattisgarh also dismissed their revision petition, primarily relying on the fact that both partners had guaranteed the loan taken by the firm.

Legal Framework

The core of this case revolves around Section 138 and Section 141 of the Negotiable Instruments Act, 1881.

Section 138 of the Negotiable Instruments Act, 1881, states that if a cheque is dishonored due to insufficient funds, the drawer of the cheque is deemed to have committed an offense. The section reads:

“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 agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision 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”

Section 141 of the Negotiable Instruments Act, 1881, extends this liability to those in charge of the company or firm when the offense is committed by the company or firm. It states:

“141. Offences by companies .—(1) 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:
Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Explanation.—For the purposes of this section,—
(a) “company” means any body corporate and includes a firm or other association of individuals; and
(b) “director”, in relation to a firm, means a partner in the firm.”

The explanation to Section 141 clarifies that a “company” includes a firm, and a “director” in relation to a firm means a partner. This section is crucial for determining vicarious liability in cases where a firm is involved in a cheque bounce.

Arguments

The arguments presented before the Supreme Court focused on whether a partner could be held vicariously liable under Section 141 of the NI Act when the firm itself was not an accused in the case.

• Appellant’s Submissions:
  • The appellant, Dilip Hariramani, argued that he could not be held liable under Section 141 of the NI Act because the firm, M/s. Global Packaging, was not made an accused in the complaint.
  • He contended that he did not issue the cheques in question in his personal capacity or as a partner, and there was no evidence to prove that he was in charge of the day-to-day affairs of the firm.
  • The appellant emphasized that his liability as a guarantor was a civil liability and could not be a basis for criminal liability under Section 141 of the NI Act.
• Respondent’s Submissions:
  • The respondent, Bank of Baroda, argued that the appellant was liable as a partner of the firm, citing Section 20 of the Partnership Act, 1932.
  • The Bank contended that the liability under the NI Act is upon the partners who are responsible for the conduct of the business of the firm.
  • They pointed out that both the appellant and Simaiya Hariramani had furnished guarantees for the loan taken by the firm.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether a partner can be convicted and held vicariously liable under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, when the partnership firm is not an accused tried for the primary/substantive offence?
2. Whether the vicarious criminal liability of a partner is established in the present case?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered several key judgments and legal provisions in its analysis:

Judgment

The Supreme Court allowed the appeal, setting aside the conviction of Dilip Hariramani under Section 138 read with Section 141 of the NI Act. The Court emphasized that for maintaining a prosecution under Section 141, the company or firm must be arraigned as an accused.

How each authority was viewed by the Court?

✓ State of Karnataka v. Pratap Chand and Others, (1981) 2 SCC 335: The Court followed this judgment to reiterate that a partner cannot be convicted merely because they have the right to participate in the firm’s business.

✓ Girdhari Lal Gupta v. D.H. Mehta and Another, (1971) 3 SCC 189: The Court relied on this case to define “a person in-charge” as someone in overall control of the day-to-day business of the company or firm.

✓ National Small Industries Corporation Limited v. Harmeet Singh Paintal and Another, (2010) 3 SCC 330: The Court followed this judgment to emphasize that vicarious liability must be pleaded and proved, not inferred, and that the person sought to be made liable must be in charge of the business at the relevant time.

✓ S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Another, (2005) 8 SCC 89: The Court used this case to highlight that the burden is on the prosecution to prove that the person prosecuted was in charge of and responsible for the conduct of the business.

✓ State of Madras v. C.V. Parekh and Another, (1970) 3 SCC 491: The Court followed this judgment to state that the liability of persons in charge of a company arises only when the contravention is by the company itself.

✓ Aneeta Hada v. Godfather Travels and Tours Private Ltd., (2012) 5 SCC 661: The Court relied heavily on this judgment to establish that arraigning a company as an accused is imperative for maintaining a prosecution under Section 141 of the NI Act. The Court also explicitly overruled Sheoratan Agarwal and Another v. State of Madhya Pradesh, (1984) 4 SCC 352 and Anil Hada v. Indian Acrylic Ltd., (2000) 1 SCC 1 as they were contrary to the view taken in C.V. Parekh.

✓ Sharad Kumar Sanghi v. Sangita Rane, (2015) 12 SCC 781: The Court followed this judgment to reiterate that when a company has not been arrayed as a party, no proceeding can be initiated against it.

✓ Himanshu v. B. Shivamurthy and Another, (2019) 3 SCC 797: The Court followed this judgment to state that in the absence of the company being arraigned as an accused, a complaint against the director was not maintainable.

✓ Hindustan Unilever Limited v. State of Madhya Pradesh, (2020) 10 SCC 751: The Court followed this judgment to emphasize that in the absence of the company, the nominated person cannot be convicted.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that vicarious criminal liability under Section 141 of the NI Act requires the commission of the offense by the company or firm as a primary offender. The Court emphasized that a partner cannot be held liable solely based on their status as a partner or guarantor, but only if they were in charge of and responsible for the day-to-day business of the firm or if the offense was committed with their consent or connivance. The Court also noted that the firm was not made an accused in the case.

The court’s reasoning was based on the interpretation of Section 141 of the NI Act, which imposes vicarious liability on persons associated with a company or firm when the company or firm commits an offense. However, this liability is contingent on the company or firm being the primary offender. The court also emphasized the need for the prosecution to establish that the person being prosecuted was in charge of and responsible for the conduct of the business of the company or firm.

The Court rejected alternative interpretations that would have allowed for the conviction of the partner solely based on their status as a partner or guarantor. The Court emphasized that vicarious liability under Section 141 of the NI Act requires the commission of the offense by the company or firm as a primary offender. The Court also rejected the argument that the partner’s guarantee of the loan was sufficient to establish criminal liability under Section 141 of the NI Act.

The Court’s decision was based on the principle that criminal liability cannot be imposed without a clear legal basis and that vicarious liability requires specific conditions to be met. The Court also emphasized the need for the prosecution to establish that the person being prosecuted was in charge of and responsible for the conduct of the business of the company or firm.

The majority opinion was delivered by Justice Sanjiv Khanna, with Justice Ajay Rastogi concurring. There were no dissenting opinions.

The Supreme Court quoted the following from the judgment:

“The provisions of Section 141 impose vicarious liability by deeming fiction which presupposes and requires the commission of the offence by the company or firm. Therefore, unless the company or firm has committed the offence as a principal accused, the persons mentioned in sub-section (1) or (2) would not be liable and convicted as vicariously liable.”

“Vicarious liability under sub-section (1) to Section 141 of the NI Act can be pinned when the person is in overall control of the day-to-day business of the company or firm. Vicarious liability under sub-section (2) to Section 141 of the NI Act can arise because of the director, manager, secretary, or other officer’s personal conduct, functional or transactional role, notwithstanding that the person was not in overall control of the day-to-day business of the company when the offence was committed.”

“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.”

Key Takeaways

• A partner of a firm cannot be held vicariously liable under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, if the firm itself is not an accused in the case.
• Criminal liability under Section 141 requires that the company or firm must be the primary offender.
• The prosecution must establish that the person being prosecuted was in charge of and responsible for the day-to-day business of the firm.
• A partner’s status as a partner or guarantor is not sufficient to establish vicarious criminal liability under Section 141.
• This judgment clarifies the scope of vicarious liability under the NI Act and provides important safeguards for partners in firms.

Directions

The Supreme Court set aside the appellant’s conviction and ordered the cancellation of his bail bonds.

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 of a company or firm as an accused is imperative. The judgment clarifies that vicarious liability cannot be imposed on a partner of a firm unless the firm itself is an accused and the partner was in charge of the day-to-day affairs of the firm or was otherwise responsible for the commission of the offence. This decision reinforces the principle that vicarious liability requires the commission of an offense by the company or firm as a primary offender and cannot be inferred simply from the status of a person as a partner or guarantor. This judgment has changed the previous position of law that a partner could be prosecuted even if the firm was not an accused.

Conclusion

The Supreme Court’s judgment in Dilip Hariramani vs. Bank of Baroda provides a significant clarification on the vicarious liability of partners under Section 141 of the Negotiable Instruments Act, 1881. The Court held that a partner cannot be convicted for a cheque bounce offense if the firm itself is not an accused in the case and if there is no evidence to show that the partner was in charge of the day-to-day affairs of the firm. This judgment ensures that partners are not held criminally liable solely based on their status as partners or guarantors and reinforces the principle that vicarious liability requires the commission of the offense by the company or firm as a primary offender.