DIRECTORS CAN BE PROSECUTED UNDER SECTION 138 OF NEGOTIABLE INSTRUMENT ACT IF THE COMPANY IS NAMED

The High Court of Madhya Pradesh has pronounced vide its Order dated 09.06.2020 in the case of Bhupendra Suryawanshi v. Sai Traders[M. Cr. C No. 735 of 2020] that a representative of a company cannot be prosecuted under Section 138 of Negotiable Instrument Act, 1881 (‘the N.I. Act’) unless the company is impleaded as a party.

The said provision aims to prohibit dishonesty on the part of the drawer of cheque. Currently dishonour of cheque is a criminal offence and punishable with imprisonment up to one year or fine which is double the amount of dishonored cheque or both.

Brief Facts of the Case

Sai Traders (‘Respondent’) is a trade firm had filed a Complaint through its proprietor against Mr Bhupendra Suryawanshi(‘Petitioner’) who is the chairman of a company namely ‘Well Built Industry India Ltd., Kalyan Pura, Ashta, District-Sehore’ (‘the Company’). The Complaint states that the Petitioner borrowed Rs. 2,00,000/- from the Respondent on 14.08.2016 for business purposes. He assured the Respondent that he would return the same within a period of four months. But, after expiry of the stipulated period, the Respondent demanded his money and the Petitioner gave him cheque dated 25.11.2017 amounting to Rs. 2,00,000/-.

On 18.01.2018, when cheque was deposited in the bank, the same was dishonoured due to “stop payment” instructions by the Petitioner. Thereafter, the Respondent sent a Demand Notice and filed a Complaint before the Judicial Magistrate First Class (‘JMFC’). The JMFC framed the charges against the Petitioner, vide Order dated 20.05.2019. Being aggrieved by the said Order, the Petitioner approached the High Court for quashing the Complaint.

Petitioner’s Contention

The Petitioner stated that the Complaint was not maintainable against him as a Chairman of the Company as the Respondent had not made the Company a party to case. Hence, in view of the provision of Section 141 N.I. Act, which speaks about the offences by Companies, the proceedings under Section 138 N.I. Act are bad in law.

Section 141 of N.I. Act deals with the offences committed by companies. The said Section states that if an offence is committed by a company under Section 138 of the N.I. Act, every person, who 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. Further, it provides that no person shall be liable to be punished if he proves that an offence was not committed under his knowledge or he has exercised all reasonable care to prevent the offence.

High Court Decision and Observations

The High Court relied on a landmark Judgment passed by the Hon’ble Apex Court in the case of National Small Industries Corpn. Ltd. Vs Harmeed Singh Paintal  [(2010) 3 SCC 330], which settled the principle of vicarious liability of the Director/Managing Director/Joint Director of company as well as principle regarding necessity of specific averment in the complaint.

In light of the aforesaid Judgment, this Court ordered that “the person (Director/Managing Director/Joint Director/other officers and employees) of Company cannot be prosecuted under Section 138 of N.I. Act unless the Company is impleaded as an accused”. The Court further relied on the following Judgments of the Apex Court in the cases of S.M.S. Pharmaceuticals Lts. Vs. Neeta Bhalla and Another, [(2005) 8 SCC 89], K.K. Ahuja Vs. V.K.Vora [2009 (10) SCC 48], and National Small Industries Corpn. Ltd (Supra).

The Court also observed that a demand notice was served only on the Petitioner/Accused, there was no demand notice against Company, and therefore, without arraying the company as an accused in the Complaint, the Petitioner cannot be prosecuted for the offence under Section 138 N.I. Act.

Hence, the Petition was allowed and the Complaint was quashed. Consequently, the Order dated 20.05.2019 passed by learned JMFC was set aside.

Lakshmi Vishwakarma

Associate

The Indian Lawyer & Allied Services