CS Megha Saraf and Qasim Saif, Vinod Kothari and Company
A company is an artificial person acting through its management, specifically its board of directors. Also, a company is a separate legal entity that is to say, that a company has a separate legal standing and owns its assets and is liable for its debts. Though both these principles are well settled in corporate laws across the globe, from time to time there arises conflict on the matter that whether director should be held liable for the acts that he did as an office-holder in company or the company should be held solely liable. This conflict has been addressed in various cases and also under the Companies Act, 2013 (“Act, 2013).
In a recent ruling, Bhupendra Suryawanshi v/s Sai Traders, the Madhya Pradesh High Court held the company “vicariously liable” for the dishonour of cheque issued on behalf of company by its chairman as the foremost criteria for impleading a person signing on behalf of that company.
The article discusses the said judgment in light of the relevant provisions and other judicial precedents.
Brief facts of the case
In the instant case, the Petitioner (Chairman of Company X) had borrowed a particular sum from the Respondent. In order to make payment, the Petitioner had issued a cheque for the amount. Later, when the cheque was presented in the bank for clearance, the said cheque was dishonoured by the bank on account of “Stop Payment”.
The Respondent had filed a case in court of Judicial Magistrate of First Class, impleading only the Petitioner but not the Company, which was later on appealed in the High Court. The Petitioner had contended that as the Company is not impleaded, the case is liable to be quashed. Whereas, the Respondent was of the view that since, the Petitioner has borrowed the money from the Respondent for his own business purpose, there was no need to implead the Company as an accused.
Observations by the MP HC and other judicial pronouncements
On the perusal of facts, legal text and representation made by the parties, the HC observed as follows-
- On reading of the provisions, it is apparent that Section 141 of NI Act deals with the offences committed by the companies and says that if an offence is committed by a company under Section 138 of the Act, every person, at the time, the offence was committed, was in-charge and responsible to the company in the conduct of the business of the company, is liable along with the company to be proceeded against and punished accordingly.
- In the case of Aneeta Hada v. Godfather Travels & Tours (P) Ltd. the Supreme Court has held that there cannot be any vicarious liability unless there is prosecution against the company.
- In the case of M.S. Pharmaceuticals Corporation Ltd v/s Neeta Bhalla & Anr, National Small Industries Corporation Ltd v/s Harmeed Singh Paintal & Anr, and K.K. Ahuja v/s V.K. Vora & Anr, the Supreme Court had explained the necessity of specific averment in the complaint regarding the company and that director/ managing director/ joint managing director/ other employees of the company cannot be prosecuted under Section 138 of the NI Act unless the company is impleaded as an accused.
Therefore, in the instant case, since the demand notice was served only on the petitioner/accused and there was no demand notice against the company, it held that without arraying the company as an accused in the complaint case, the petitioner cannot be prosecuted for an offence and subsequently allowed the case.
Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (“NI Act”) provides that where any cheque is drawn by any person on an account maintained by him with a banker and if it is returned back by the banker due to:
- Insufficient balance to honour the cheque;
- The cheque value exceeds the amount arranged for payment from the account;
such person is deemed to have committed an offence and is punishable with an imprisonment or fine or with both.
However, before charging a person with such offence, it is required that the following three conditions are fulfilled:
- the cheque is presented to the bank within 6 months from the date on which it is drawn or within the period of its validity, whichever is earlier;
- 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 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
- 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 15 days of the receipt of the said notice.
It is only if the abovementioned conditions are present, the person drawing such cheque can be held liable.
While the aforesaid provides for the reason for charging such person to such offence, it is also pertinent to note the applicability of Section 141 to such case. Section 141 of the NI Act provides for “offences by companies”. Several judicial pronouncements had already quashed cases due to no averment against the company before alleging a person who was acting on behalf of such company, thereby clearly providing the extension of Section 141, to the company first before moving ahead and charging the person-in-charge and holding good the concept of “vicarious liability”.
The MP High Court Order thus relied on Aneeta Hada Vs. Godfather Travels and Tours Private Ltd., and S.M.S. Pharmaceuticals Ltd. Vs. Neeta Bhalla and Another and is in sync with the observations of SC.
Decriminalisation of offence committed u/s 141 of the NI Act– is it desirable?
Aside, it may be pertinent to note that the Department of Financial Services had recently issued a Suggestion Paper and had laid down certain provisions of 19 Acts for de-criminalisation of offences which were open for public comments. One of the provisions include Section 138 of the NI Act. Several Supreme Court judgements such as M/s. Dalmia Cement (Bharat) Ltd. v. M/s. Galaxy Traders and Agencies Ltd and Indian Bank Association and others v. Union of India, have already recognised the essence and intent of the section and deliberated on the nature of default involved in the matter. It is pertinent to note that as per the 213th report of the Law Commission; almost 20 percent of the pending litigation relates to cheque dishonour disputes.
In India, contractual relationships are a common way of doing business. The whole purpose of issuing a cheque is to make payment ultimately, and if the person knows that even if he is unable to make the payment, no strict legal action can be taken against him, a cheque will lose its value as a negotiable instrument as there is no promise of getting the payment. Hence, it might not be a feasible idea to decriminalise the section.
Our other Articles on this subject may be viewed at:
- Dishonour of PDCs may not be an offence u/s 138 of NI Act- click here
- Bounced cheque: SC ruling makes prosecution easier- click here
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