Supreme Court Clarifies Liability Under Section 138 of the NI Act: “Director Cannot Be Held Liable Without the Company Being Made an Accused”

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Court’s Decision:

The Supreme Court set aside the High Court’s judgment, which had acquitted the accused, and remanded the matter for further examination. The Court highlighted that under Section 138 of the Negotiable Instruments Act (NI Act), a director cannot be held personally liable for a dishonored cheque unless the company is also arraigned as an accused.

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Facts:

1. The complainant alleged that the accused, a director of Shilabati Hospital Pvt. Ltd., borrowed ₹7,00,000 via a bearer cheque and an additional ₹1,45,000 in cash, totaling ₹8,45,000.
2. To discharge this debt, the accused issued a cheque for ₹8,45,000 from the company’s account, which was dishonored due to insufficient funds.
3. A statutory notice under Section 138 of the NI Act was issued to the accused, demanding repayment, but the accused failed to comply.
4. The complainant filed a criminal complaint against the accused, but the company was not made a party to the proceedings.

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Issues:

1. Can a director of a company be held liable under Section 138 of the NI Act without the company being made an accused?
2. Does signing a cheque as an authorized signatory render the individual personally liable under the NI Act?

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Petitioner’s Arguments:

1. The accused issued the cheque to discharge a personal debt, as the financial transaction was between the complainant and the accused, not the company.
2. Although the cheque bore the company’s stamp and the accused signed as a director, the accused should still be held liable as the transaction was personal.

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Respondent’s Arguments:

1. The cheque was issued from the company’s account and was signed by the accused in his capacity as a director. Hence, the liability is corporate, not personal.
2. Section 141 of the NI Act explicitly states that directors can only be held vicariously liable if the company is first made an accused and found guilty.

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Analysis of the Law:

Understanding Section 138 of the NI Act:

1. Section 138 makes the “drawer” of a cheque liable if:
   • The cheque is dishonored due to insufficient funds.
   • It was issued to discharge a legally enforceable debt.
   • Statutory notice is served, and payment is not made within 15 days.
2. The drawer must maintain the account on which the cheque was issued. In this case, the account belonged to the company, not the accused personally.

Applicability of Section 141:

1. Section 141 extends liability to directors and officers of companies in cases where the company is accused of an offense under Section 138.
2. Vicarious liability applies only if:
   • The company is made an accused.
   • The offense was committed with the director’s consent or negligence.

Key Legal Principles:

1. A director signing a cheque as an authorized signatory acts on behalf of the company and is not the “drawer.”
2. The doctrine of separate legal personality shields directors from liability unless the statutory requirements of Section 141 are met.

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Precedent Analysis:

1. Himanshu v. Shivamurthy (2019):
   • Held that without arraigning the company as an accused, proceedings under Section 138 cannot be initiated against its directors.
   • The company, as the drawer of the cheque, is the principal offender.
2. P.J. Agro Tech Ltd. v. Water Base Ltd. (2010):
   • Established that liability under Section 138 attaches only to the drawer of the cheque.
3. N. Harihara Krishnan v. J. Thomas (2018):
   • Emphasized that directors acting as authorized signatories do not become the “drawer” of the cheque. The complaint must be filed against the company first.

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Court’s Reasoning:

1. The cheque bore the stamp of Shilabati Hospital Pvt. Ltd. and was signed by the accused as a director. This indicates it was issued on behalf of the company, not personally by the accused.
2. The complainant failed to make the company an accused. Without the company’s inclusion, the requirements of Section 141 were not met.
3. Although the complainant argued that the debt was personal, the evidence did not support this claim. The accused consistently maintained that the cheque was issued on behalf of the company.

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Conclusion:

1. The Supreme Court set aside the High Court’s acquittal and remanded the matter for reconsideration, directing the High Court to re-examine whether the accused can be held personally liable under the circumstances.
2. The judgment reaffirmed that liability under Section 138 is strictly tied to the “drawer” of the cheque, and directors can only be held liable through Section 141 if the company is first made an accused.

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Implications:

1. This decision reinforces the corporate shield principle, safeguarding directors from personal liability for corporate debts unless statutory conditions are met.
2. Complainants must ensure procedural compliance under Section 141 to hold directors vicariously liable in cases of dishonored cheques.

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