SC explains law of conviction u/s 138 of NI Act of authorised signatories/guarantors

Supreme Court explains law of conviction u/s 138 of NI Act on authorised signatories of firm/companies. civil liability vs Vicarious liability

ABCAUS Case Law Citation
ABCAUS 3589 (2022) (05) SC

Important case law relied referred:
Monaben Ketanbhai Shah and Another vs. State of Gujaratand Others (2004) 7 SCC 15
Aneeta Hada vs. Godfather Travels and Tours Private Ltd (2012) 5 SCC 661
State of Karnataka vs. Pratap Chand and Others (1981) 2 SCC 335
National Small Industries Corporation Limited vs. Harmeet Singh Paintal and Another
Girdhari Lal Gupta v. D.H. Mehta and Another

In the instant case, the appeal was filed by the authorised signatories of a firm (the appellants) against the order of the Hon’ble High Court in dismissing their appeal against conviction u/s 138 of the Negotiable Instrument Act 1881 (the NI Act).

The Bank had granted term loans and cash credit facility to the partnership firm. Both the signatories had also furnished guarantees of the amount borrowed by the Firm from the Bank.

In part repayment of the loan, the Firm, through its authorised signatory had issued three cheques. However, the cheques dishonoured on presentation due to insufficient funds. Subsequently, a demand notice was issued by the Branch Manager under Section 138 of the NI Act.

Later, the bank filed a complaint under Section 138 of the NI Act before the Court of Judicial Magistrate. However, the firm was not made an accused.

The appellant was convicted by the Judicial Magistrate under Section 138 of the NI Act and sentenced to imprisonment along with payment of compensation under Section 357(3) of the Code of Criminal Procedure, 1973.

Sessions Court dismissed the appeal of the appellant. The High Court also dismissed the appeal based on Hon’ble Supreme Court judgment and observed that and observes that the liability under the NI Act is only upon the partners who are responsible for the firm for conduct of its business.

The Hon’ble Supreme Court observed that admittedly the appellant had not issued any of the dishonoured cheques, in their personal capacity or otherwise as a partner.

The Hon’ble Supreme Court stated that in absence of any evidence to show and establish that the appellant was in charge of and responsible for the conduct of the affairs of the firm and therefore, conviction has to be set aside.  The Court referred to its judgment where it was held that the appellant cannot be convicted merely because he was a partner of the firm which had taken the loan or that he stood as a guarantor for such a loan.

The Apex Court stated that the Partnership Act, 1932 creates civil liability. Further, the guarantor’s liability under the Indian Contract Act, 1872 is a civil liability. The appellant may have civil liability and may also be liable under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. However, vicarious liability in the criminal law in terms of Section 141 of the NI Act cannot be fastened because of the civil liability.

The Hon’ble Supreme Court went on to clarify that vicarious liability under sub-section (1) to Section 141 of the NI Act can be pinned when the person is in overall control of the day-to-day business of the company or firm.  Vicarious liability under sub-section (2) to Section 141 of the NI Act can arise because of the director, manager, secretary, or other officer’s personal conduct, functional or transactional role, notwithstanding that the person was not in overall control of the day-to-day business of the company when the offence was committed.  

Vicarious liability under sub-section (2) is attracted when the offence is committed with the consent, connivance, or is attributable to the neglect on the part of a director, manager, secretary, or other officer of the company.

Referring to catena of judgments of own, the Hon’ble Supreme Court stated that the provisions of Section 141 impose vicarious liability by deeming fiction which presupposes and requires the commission of the offence by the company or firm. Therefore, unless the company   or firm has committed the offence as a principal accused, the persons mentioned in sub-section (1) or (2) would not be liable and convicted as vicariously liable. Section 141 of the NI Act extends vicarious criminal liability to officers associated with the company or firm when one of the twin requirements of Section141 has been satisfied, which person(s) then, by deeming fiction is made vicariously liable and punished. However, such vicarious liability arises only when the company or firm commits the offence as the primary offender.

As a result, the Hon’ble Supreme Court allowed the appeal and set aside  the  appellant’s  conviction  under   Section  138  read  with Section 141 of the NI Act.

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