In a landmark judgment, the Supreme Court has reaffirmed the principle that an authorized signatory of a company cannot be held personally liable under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), for a dishonored cheque unless the company itself is made a principal accused. The decision, delivered in Bijoy Kumar Moni vs. Paresh Manna & Anr. (Criminal Appeal No. 5556 of 2024), highlights the doctrine of corporate personality and the necessity of prosecuting the company first to affix vicarious liability on its representatives.
Bench of Justice J.B. Pardiwala and Justice R Mahadevan set aside the conviction of the respondent, Paresh Manna, imposed by the lower courts and upheld by the Sessions Court. The ruling is expected to have significant implications for cases involving corporate transactions and the liabilities of company officials.
Case Background
The appellant, Bijoy Kumar Moni, alleged that he had lent ₹8.45 lakh to the respondent, Paresh Manna, in 2006. To discharge this debt, Manna issued a cheque bearing his signature as Director of Shilabati Hospital Pvt. Ltd., drawn on the company’s account. When presented for payment, the cheque was dishonored due to insufficient funds.
Moni issued a statutory notice under Section 138 of the NI Act, demanding repayment. Upon Manna’s failure to comply, Moni filed a private complaint before the magistrate. Both the Trial Court and Sessions Court convicted Manna, sentencing him to one year of imprisonment and imposing a fine of ₹10 lakh as compensation.
However, the Calcutta High Court, in a revision application, acquitted Manna on the ground that the company, Shilabati Hospital Pvt. Ltd., was not made a co-accused in the proceedings. The High Court held that in the absence of the company being arraigned as an accused, Manna could not be held vicariously liable as an authorized signatory.
Key Legal Issues
1. Liability of Authorized Signatory vs. Company:
The Supreme Court emphasized the statutory framework of Section 138 and Section 141 of the NI Act. It held that the company, being the drawer of the cheque, must first be prosecuted for its representatives to face vicarious liability.
“Section 138 targets the drawer of the cheque, which, in the case of a corporate entity, is the company itself. Without arraigning the company, proceedings against its authorized signatory cannot be sustained under the Act,” the Court observed.
2. Vicarious Liability Under Section 141:
Section 141 of the NI Act creates an exception by extending liability to persons in charge of the company’s affairs if the company commits the offense. However, such liability is contingent upon the company being prosecuted as the principal offender.
3. Corporate Personality Doctrine:
The Court reinforced the concept of a company as a distinct legal entity. It held that while directors or authorized signatories may execute transactions on behalf of the company, their liability is secondary and depends on the prosecution of the company.
Supreme Court’s Observations
The bench made several critical observations:
“The drawer of the cheque is the entity maintaining the account on which the cheque is drawn. The authorized signatory acts on behalf of the company but does not assume personal liability unless specific statutory conditions are met.”
“Section 141 mandates that liability of individuals arises only if the company, as the principal offender, is first prosecuted and convicted. The omission to include the company as an accused renders the prosecution untenable.”
“The legislative intent of Section 138 was to deter dishonor of cheques in business transactions, not to penalize individuals without clear evidence of their culpability.”
The Court also rejected the appellant’s argument that the debt was a personal liability of Manna, clarifying that the cheque itself indicated its issuance on behalf of the company.
Decision
The Supreme Court set aside the orders of the Trial Court and Sessions Court, quashing Manna’s conviction and sentence. It upheld the High Court’s decision, which had acquitted Manna.
