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Introduction:

Recently  two judge bench of Supreme court delivered an interesting judgment on offence underSection 138 of “Negotiable Instruments, Act,1881” ( referred as NI, Act) in the case “Mainuddin Abdul Sattar Shaik Vs Vijay D Salvi,(Reported in AIR2015SC2579:MANU/SC/0720/2015) In this caseManaging director of a company, was made liable  for dishonour of cheque issued by him on his personal account for a legally enforceable debt of the company. It may sound very strange but decision is based on interpretation of Section 138 and on settled principle of law that criminal provision has to be strictly construed.

In this article, this judgment is analyzed by referring to the past judgments of Apex court in which offence is made out against the company as well as its directors.

Brief facts of the case:

The Appellant in this case is “Mainuddin Abdul Sattar Sheik” The Respondent is Mr. Vijay D Salvi(Managing Director of M/s Salvi Infrastructure (P) Ltd).The Appellant had booked a flat in the year  1999 in Khargar Project to be developed   by M/s. Salvi Infrastructure Pvt. Ltd and paid Rs.74,200/- towards deposit for booking the flat.   As the project did not materialize , the Respondent  returned application money and EMD by  issuing a cheque  for Rs.74,200/- drawn in favour of the Appellant but out of his  personal bank account maintained by him instead of company’s bank account.

The Appellant issued a notice through his advocate u/s 138(b) of the NI Act,1881 to the Respondent when the said cheque was dishonoured  by drawer’s bankers.  As the Respondent failed to pay the demanded sum, a complaint was filed by the Appellant for offence u/s 138 of NI,Act.

Lower court orders:

In the lower court,the Respondent in his defence  had taken a plea that Company “Salvi Infrastructure (P) Ltd was not made accused and moreover cheque could not be said to have been issued against a legally enforceable  debt. It is necessary as per provisions of Section 141 of the NI Act, the company must be made accused to make the directors vicariously liable for the offence committed by a company.

Readers may note that Section 141 of NI Act states that the company as well as the persons who are in charge of and responsible for conduct of the business of the company at the time of commission of offence, shall also be deemed to be guilty of the offence.

Metropolitan Magistrate of 33rd court, while considering the  relevant CC No.5194/2003, had noted that company was not made an accused as contended by the Respondent and drawn a conclusion that the cheque could not be said to have been issued in discharge of whole or  part of a legally enforceable debt.Therefore he had acquitted the Respondent.

Appeal before High Court:

The Appellant filed an appealbefore the High court and the said appeal was dismissedon the ground that the reasoning set out by the trial court did not call for reconsideration. 

Appeal before Supreme Court:

In the appeal, the Apex court had to consider the issue whether the Respondent can be made liable in his personal capacity when the company has not been given notice or made a party in the complaint. Two judge bench of supreme court  held that from a bare reading  Section 138 ,the drawer of cheque alone can be made liable  even though the Company had not been named in the notice or in the complaint. It observed that the essential ingredients for making out an offence under Section 138 are fulfilled in the present case.

Punishment:

The Apex court awarded a compensation twice the amount of the cheque  i.e Rs.1,48,000/- and simple interest @9% on the said amount  and also sentenced the accused to undergo imprisonment for a period of 5 months.If the accused fails to pay, he will have to undergo imprisonment  for a period of 6 months.

Discussion on Referred judgments:

For deciding the above case, Two judge bench relied on earlier decision of the SC in the case of “P.J. Agro Tech Limited &ors Vs water base Ltd:Manu/SC/0526/2010 :(2010) 12 SCC 146. In this case, the issue that was examined was that whether compliant u/s 138 is maintainable against a person who is not drawer of the cheque.

Brief Facts of PJ Agro:

In this case, PJ Agro(Appellant) had to refund  abandoned venture dues to Water Base Ltd (Respondent Company) and it authorized water base to collect money from its the customers through its General Manager. The cheques issued, on the request of the P.J. Agro Company(to meet its liability) by its former employee,were dishonoured. Water Base Ltd issued notice to PJ Agro and also to drawer of the cheques u/s 138 demanding payment of dishonoured cheque amount.  PJ Agro challenged the issuance of summons to it but the High court dismissed the petition filed by P J Agro and allowed continuation of lower court’s proceedings on the ground that the cheques issued by its former employee was to meet the company’s liability and company and directors are liable as per Section 141 of NI Act.

In appeal, Apex court had to examine the issue whether offence u/s 138 is maintainable against a person who is not the drawer of the cheque. The Appellant Company or its directors cannot be made liable for dishonor of cheque issued from personal account of an employee of the company. Itheld that in order to attract the provisions of Section 138, a cheque which is dishonoured must be drawn by a person on an account maintained by him with the banker for payment of any amount of money to another person, for the discharge, in whole or in part of anydebt or other liability. It is onlyagainst the drawer of cheque which is dishonoured, complaint u/s 138 of Ni act is maintainable even though the cheque is issued for discharge of dues of the Appellant Company.

Why focuson  this judgment ?In this judgment and relied upon P J Agro application of Section 141 is not considered but interpretation of Section 138 has been strictly applied. To understand the logic behind the decision, It is useful to refer to some of the Apex court’s judgments which dealt with the offence committed by companies for dishonour of cheques and principles laid down for making  companies and  its directors liable for the offence( vicarious liability of directors) In National Small Industries Corp.Ltd Vs Harmeet Singh Paintal and Anr:Manu/SC/0112/2010:(2010) 3 SCC 330two judge bench of Supreme court  reiterated the following principles while interpreting section 141 of NI act which deals with offences by Companies:-

1. Primary responsibility is on the Complainant to make specific averment that accused person was in charge of and responsible for day to affairs of the company.SMS Pharmaceuticals Vs Neeta Bhalla&Anr (2005) 8 SCC 89

2. Criminal liability can be fastened only on those directors who are in charge of and responsible   for conduct of business at the time of commission of offence

3. There is no deemed liability of directors of a company. Vicarious liability on directors not only must be pleaded but also to be proved.

4. If the accused person is a Managing Director /Jt Managing Director, there is no necessity to make a specific averment as they will be liable by virtue of their position.

5. If a director or an officer is a signatory to the cheque, then also it is not necessary to make a specific averment. {Section 141(2)}

Conclusion:-

A Clear distinction has been made between the situation in which offence under Section 138 is committed by a company and offence by a director or officer who commits offence for a settling debt of company as a drawer of cheque.  It is made clear that drawer alone would be liable for offence under Section 138, if a cheque is issued by him out of his personal account even though it is for settlement of a legally enforceable debt of company.

G. S. RAO
Consultant

Source:

Negotiable Instruments Act, 1881
Judgments of Supreme court

Tags:  Dishonour of Cheques, vicarious liability, Negotiable Instruments Act, 1881.

Disclaimer:  This article contains interpretation of the Act and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article.


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Category Corporate Law, Other Articles by - G S Rao 



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