In a significant ruling that underscores the distinction between company directors and the company itself, the Supreme Court of India held that authorized signatories of company cheques cannot be deemed liable as “drawers” under Section 148 of the Negotiable Instruments Act, 1881 (NI Act), limiting their responsibility for depositing compensation during appeals against convictions.
The judgment, delivered by Justice C.T. Ravikumar and Justice Sanjay Karol, arose from Criminal Appeals Nos. 2696 and 2695 of 2024 in the case of Bijay Agarwal vs. M/s Medilines. The Court overturned a Karnataka High Court order that required the appellant, Bijay Agarwal, an authorized signatory and director of M/s Gee Pee Infotech Pvt. Ltd., to deposit 20% of the compensation awarded under Section 148(1) NI Act as a condition to suspend his sentence.
Background of the Case
The dispute centered on two dishonored cheques issued by M/s Gee Pee Infotech Pvt. Ltd., which the complainant, M/s Medilines, alleged were issued to settle dues under a failed business agreement. The complainant claimed that the cheques, totaling ₹50 lakh, were dishonored with the endorsement “payment stopped by drawer.”
The trial court convicted both the company and Agarwal under Section 138 NI Act for cheque dishonor. Agarwal was sentenced to pay a fine of ₹40 lakh and, in default, to undergo six months of simple imprisonment. On appeal, the Sessions Court suspended the sentence but directed Agarwal to deposit 20% of the fine as compensation under Section 148(1). This condition was upheld by the Karnataka High Court, prompting the appeal to the Supreme Court.
Key Legal Issues
1. Liability of Authorized Signatories:
The primary issue was whether an authorized signatory of a company cheque could be considered the “drawer” under Section 148 NI Act, thereby bearing the obligation to deposit compensation.
2. Interpretation of Sections 143A and 148:
Both provisions empower courts to direct compensation payments during trial and appeal stages, respectively. The appellant argued that these provisions applied only to the “drawer” of the cheque.
3. Vicarious Liability under Section 141:
The judgment also examined the extent to which directors or officers of a company could be held liable under the NI Act.
Supreme Court’s Observations
1. Definition of “Drawer” Under the NI Act:
The Court scrutinized Sections 143A and 148 of the NI Act, which empower trial and appellate courts to direct compensation payments from the “drawer” of a dishonored cheque. The Court emphasized the precise definition of a “drawer” as the issuer of the cheque, holding that an authorized signatory signing on behalf of a company does not meet this definition.
“The term ‘drawer’ referred to in Sections 143A and 148 means the drawer of the cheque concerned,” the Court observed.
Citing its earlier judgment in Shri Gurudatta Sugars Marketing Pvt. Ltd. vs. Prithviraj Sayajirao Deshmukh, the Court reaffirmed that an authorized signatory, by virtue of their position, is not automatically the “drawer” and cannot be made liable to deposit compensation.
2. Distinction Between Company and Authorized Signatory:
The Court reiterated the principle of corporate separateness, emphasizing that a company is a distinct legal entity, and its liabilities do not automatically transfer to its officers or directors unless specific conditions under Section 141 of the NI Act are met. The judgment highlighted that:
“Authorized signatories act on behalf of the company but do not assume the company’s legal identity. This distinction is fundamental to corporate law.”
3. Strict Interpretation of Penal Statutes:
The Court underscored the importance of strict interpretation of penal provisions under the NI Act, especially those that extend vicarious liability. It held that penal statutes cannot be expanded to impose obligations on individuals who do not directly fall within the statutory definitions.
“The principle of strict construction must guide the interpretation of provisions imposing liability under penal statutes,” the Court noted.
4. Applicability of Section 148 NI Act:
The Court clarified that the power to direct deposit under Section 148 NI Act is limited to the “drawer” of the cheque and cannot extend to individuals merely acting as authorized signatories. It noted that while Section 141 of the NI Act allows for vicarious liability in some cases, such liability must be specifically proven and does not arise solely from the individual’s role as a director or signatory.
“Merely being an authorized signatory does not suffice to impose liability for interim or additional compensation under Section 148,” the Court observed.
5. Failure of High Court to Address Key Issues:
The Supreme Court criticized the Karnataka High Court for failing to consider these crucial aspects when directing the appellant to deposit 20% of the compensation under Section 148. It held that the appellate court should have assessed whether the appellant, as an authorized signatory, could be categorized as the “drawer” before imposing the condition.
The Supreme Court’s Decision
Based on its observations, the Supreme Court allowed the appeals filed by Bijay Agarwal. The key points of the decision were as follows:
1. Setting Aside the High Court’s Order:
The Court quashed the Karnataka High Court’s order dated January 9, 2024, which had upheld the direction requiring the appellant to deposit 20% of the compensation amount as a condition for suspending the sentence.
“The impugned order dated 09.01.2024 passed by the High Court is set aside,” the Court stated.
2. Restoration of Sentence Suspension Without Compensation Deposit:
The Court restored the orders of the Sessions Court suspending the appellant’s sentence but set aside the condition requiring a 20% deposit under Section 148(1). It held that the suspension of the sentence should continue on the original terms, which involved only the execution of a bond.
3. Direction for Expeditious Disposal:
Recognizing the delay in resolving the dispute, the Supreme Court directed the appellate court to dispose of the pending appeals expeditiously.
“The First Appellate Court shall endeavor to dispose of the appeals expeditiously,” the judgment noted.
4. Clarification on Authorized Signatories and Section 148:
The Court held unequivocally that authorized signatories of cheques cannot be deemed “drawers” under Section 148 and, therefore, cannot be directed to deposit compensation unless vicarious liability under Section 141 is specifically established.
“An authorized signatory of the cheque is not the drawer of the cheque under Section 148 NI Act,” the Court concluded.
Setting aside the orders of the Karnataka High Court and the Sessions Court, the Supreme Court ruled that Agarwal could not be directed to deposit 20% of the compensation amount under Section 148(1) NI Act since he was not the drawer of the cheques. The appeals were allowed, and the sentence suspension orders were restored without the compensation deposit condition.
