SECTION 143-A NI ACT- DIRECTOR & AR NOT LIABLE?

 

Section 143-A NI Act- Director & AR not liable?

 

The provisions of Section 138 of Negotiable Instruments Act relating to offence for bouncing of cheques have undergone periodical changes and in pursuance thereto Section 143-A is inserted in 2018 in the statute book with a view to accord the opportunity to a complainant to seek recovery up to 20% of the cheque amount as interim compensation, if prima facie case is made out. The authorities in this regard are many and it has already been delved in greatly before in my earlier write ups, however, the recent issue revolve around the fact that if company is an accused and its Director and authorized signatory are arrayed as a party, whether the Director/s or Authorised signatory, shall be liable under the provisions of Section 143-A of Negotiable Instruments Act or not?

The Supreme Court, recently, on July 24^th 2024 had the occasion to deal with the aforesaid issue in a matter reported as 2024 INSC 551 and captioned as SHRI GURUDATTA SUGARS MARKETING PRITHVIRAJ SAYAJIRAO DESHMUKH & ORS arising out of Special leave Petition ( Criminal) No. 8849-8850.

To put the facts in perspective, the Appellant had filed an application under Section 143-A, NI Act against respondent Nos. 1 to 3 seeking interim compensation from the respondents during the pendency of the criminal proceedings before the Judicial Magistrate and the Judicial Magistrate directed each of the respondents to pay 4% of the total cheque amount as interim compensation to the appellant within 60 days. The respondents were also granted extension to pay the interim compensation.

When the interim compensation was not paid, the Appellant had preferred an application under Section 421, CrPC read with Section 143-A(5), NI Act seeking execution of the said order for recovery of interim compensation as if it were a fine. The order of interim compensation was challenged by the respondents before the High Court and the High Court had stayed the operation of the order impugned therein.

 

During the pendency of the above application, the High Court, in a batch of Writ Petitions and Criminal Application dealing with the same issue and the question of law framed for decision was as under:

Whether the signatory of the cheque, authorized by the "Company", is the "drawer" and whether such signatory could be directed to pay interim compensation in terms of section 143A, NI Act leaving aside the company?

The High Court vide its final judgment and order dated 08.03.2023 held that the signatory of the cheque is not a ‘drawer’ in terms of Section 143-A, NI Act and cannot be directed to pay interim compensation under Section 143A.

The basis of judgment of High Court

1.   The High Court had observed that under Section 7 of the Negotiable Instruments Act, the maker of a bill of exchange or cheque is termed the "drawer," and the person directed to pay is called the "drawee." The drawer is the individual who issues the cheque. It was further observed that Sections 138, 143A, and 148 of the NI Act fall under Chapter XVII, which pertains to penalties for the dishonour of certain cheques due to insufficient funds. A plain reading of Section 138 highlights that the drawer must have an account with sufficient funds to cover the cheque. According to the high court, the primary liability under Section 138 is on the drawer, who must ensure that there are adequate funds in the account at the time the cheque is presented. Additionally, the offence under Section 138 is not complete until a demand notice is served on the drawer, emphasizing the drawer's responsibility. In other words, the drawer is considered the principal offender, if the cheque is returned unpaid, subject to meeting of the necessary conditions before and after the cheque is dishonoured.

2.   The general rule of criminal liability was analysed by the High Court and it was noted that general rule in criminal cases are against vicarious liability, thus, if individual are not held criminally liable for the acts of others. However, this principle is subject to exceptions created by specific statutory provisions extending liability to additional parties. No doubt, Section 141, NI Act is one such provision that extends criminal liability for dishonour of a cheque committed by a company to its officers. The Court emphasized that liability under Section 141 arises from the conduct, act, or omission of the person involved, not merely their position in the company. The provision establishes vicarious liability for officers of the company, such as signatories of the cheque, managing directors, or those in charge of its affairs, by legal fiction. Thus, while the drawer of the cheque remains primarily liable, Section 141 broadens liability to include others associated with the company's management, ensuring accountability beyond the drawer alone.

3.  Authorised signatory cannot be equated to the company

The High Court went on to distinguish legal entities and individuals acting as authorized signatories within the framework of the NI Act. It was held that while individuals may sign cheques as authorized representatives of companies, they do not assume legal identity of the company itself. A legal entity, such as a corporation or company, is an artificial creation of the law endowed with rights, duties, and the capacity to sue and be sued independently of the individuals who manage or represent it. The Court emphasized that an authorized signatory, despite acting on behalf of a company, remains distinct as an individual under the law. This distinction is crucial as it clarifies that the actions and obligations undertaken by an authorized signatory are attributable to the company they represent, but do not merge their legal status with that of the company itself. Thus, while an authorized signatory may bind the company, through their actions, they do not transform into a legal entity in the eyes of law.

4.   The High Court on the basis of the principle of statutory interpretation, particularly in relation to Sections 143A and 148 of the NI Act had discussed the dichotomy between interpreting statutes based on their plain language versus applying purposive construction. According to the high court, when the statutory language is clear and unambiguous, it speaks for itself, and there is no need for further interpretation. The natural and ordinary meaning of words should prevail unless the legal context necessitates a different interpretation to align with the legislative intent or to avoid absurd outcomes.

5.   It was also deliberated that legislative intent should guide the interpretation of statutes, with all parts of a statute considered together to discern the overall purpose and by taking into account the legislative objectives and the broader framework of the law. This holistic approach ensures that statutory interpretation remains embedded to the lawmakers' intentions and inconsistencies or injustices that may arise from a literal reading of isolated provisions should be avoided.

6.   A great deal of emphasis was put on as regards the interpretation of the  Section 143A of the Act and without resorting to other rules of interpretation. The term 'drawer' in Section 143A was construed to have a clear and unambiguous meaning, referring specifically to the person who issues the cheque. Referring to the Statement of Objects and Purposes of the Negotiable Instruments (Amendment) Act, 2018, the High Court noted that the purpose of Section 143A is to provide interim relief to payees of dishonoured cheques by imposing liability on the drawer. This aligns with the legislative intent to curb frivolous litigations and expedite resolution of cheque dishonour cases.

7.   According to the High Court, there cannot be inclusion of authorized signatories within the definition of 'drawer'. The legislature specifically targets the drawer of the cheque,as per section 143 A of NI Act,  whether an individual or a company, and does not extend liability to authorized signatories. The High Court underscored that the term 'drawer' carries a specific legal meaning within the NI Act. It highlighted the cases where Courts consistently interpreted 'drawer' to refer strictly to the issuer of the cheque, reinforcing its decision to uphold this interpretation.

The reliance was placed by the high Court on the following judicial precedents:

i. Nazir Ahmad v. King Emperor AIR 1936 Privy Council 253

ii. Central Bank of India v. Ravindra (2002) 1 SCC 367

iii. Noor Mohammed v. Khurram Pasha (2022) 9 SCC 23

 

8.   The High Court, also dealt with the reliance placed upon Aneeta Hada v. godfather travels and tours Pvt. Ltd. (2012) 5 SCC 661  and N. Harihara Krishnan v. J. Thomas, (2018) 13 SCC 663  observed that while Aneeta Hada (supra). No doubt, whereas Aneeta Hada (Supra) underscored the necessity of involving the company as an accused to maintain a prosecution under Section 141 NI Act, but, N. Harihara Krishna (supra) clarified that an authorized signatory is not considered the "drawer" under Section 138 of the NI Act. These judgments guided the High Court in interpreting provisions of the NI Act regarding vicarious liability and the definition of the term "drawer" within the statutory framework.

9.   Hence, the High Court had set aside the order of the ld Judicial Magistrate directing the respondents to pay interim compensation, as per principles of section 143 of Negotiable Instruments Act.

Aggrieved, the appellant had preferred the present appeal before the Supreme Court on the following premises:

(i)     It was submitted that if a Director, Managing Director, Chairman, Promotor of a company can be arrayed as accused under Section 141, NI Act despite not being a signatory to the cheque, then it is only fair that one or more of such individuals be held liable to pay interim compensation.

(ii)     That to provide some relief to the complainant, the provision for interim compensation is contemplated under section 143-A of the Act and it is only fair therefore, that  this be done through payment of interim compensation by the director or any such person in charge of the company. This would be in alignment with the purposes and objectives of the provision.

(iii)       As the company was admitted to CIRP, thus,  it is only the directors who can be directed to pay interim compensation in furtherance of the object of the provision in light of the CIRP proceedings against the company, the payees of the dishonoured cheque cannot be left with no interim relief, thereby defeating the purpose of Section 143- A and causing injustice to the payees already suffering due to the pending litigation.

The Findings of Supreme Court

(i)          The Supreme Court has held in SHRI GURUDATTA SUGARS (Supra)  para no. 28, as under:

 

“28. The High Court's interpretation of Section 7 of the NI Act accurately identified the "drawer" as the individual who issues the cheque. This interpretation is fundamental to understanding the obligations and liabilities under Section 138 of the NI Act, which makes it clear that the drawer must ensure sufficient funds in their account at the time the cheque is presented. The appellants' argument that directors or other individuals should also be liable under Section 143A misinterprets the statutory language and intent. The primary liability, as correctly observed by the High Court, rests on the drawer, emphasizing the drawer's responsibility for maintaining sufficient funds”.

(ii) The Supreme Court in the aforesaid judgment on the aspect of vicarious liability has held as under:

29. The general rule against vicarious liability in criminal law underscores that individuals are not typically held criminally liable for acts committed by others unless specific statutory provisions extend such liability. Section 141 of the NI Act is one such provision, extending liability to the company's officers for the dishonour of a cheque. The appellants' attempt to extend this principle to Section 143A, to hold directors or other individuals personally liable for interim compensation, is unfounded. The High Court rightly emphasized that liability under Section 141 arises from the conduct or omission of the individual involved, not merely their position within the company”.

(iii)     The Supreme Court has also delved on the issue of the distinction between legal entities and individuals acting as authorized signatories and it was held to be crucial. It was held that Authorized signatories act on behalf of the company but do not assume the company's legal identity. This principle, fundamental to corporate law, ensures that while authorized signatories can bind the company through their actions, they do not merge their legal status with that of the company. This distinction supports the High Court's interpretation that the drawer under Section 143A refers specifically to the issuer of the cheque, not the authorized signatories.

(iv)   According to Supreme Court, the principle of statutory interpretation, particularly in relation to Sections 143A and 148, was also correctly applied by the High Court. The Court emphasized that when statutory language is clear and unambiguous, it should be given its natural and ordinary meaning. The legislative intent, as discerned from the plain language of the statute, aims to hold the drawer accountable.

(v)         The appellants' argument for a broader interpretation to include authorized signatories under Section 143A cannot be accepted as it contradicts this principle and would lead to an unjust extension of liability not supported by the statutory text.

(vi)          The reliance by the appellant on Aneeta Hada (Supra), is misplaced and out of context. No doubt, this case underscored the necessity of involving the company as an accused to maintain a prosecution under Section 141, however, it does not support the extension of liability to authorized signatories under Section 143A. The judgment nowhere lays down that directors or authorised signatories would come under the ambit of ‘drawer’ for the purposes of Section 143A.

(vii)   An authorized signatory is not a drawer of the cheque, as established in N. Harihara Krishnan (Supra). This judgment clarified that a signatory is merely authorized to sign on behalf of the company and does not become the drawer. The respondents' interpretation aligns with the principle that penal statutes should be interpreted strictly, particularly in determining vicarious liability. The judgment in K.K. Ahuja (2009) 10 SCC 48  further supports this approach, emphasizing that penal provisions must be read strictly to determine liability.

The Supreme Court in SHRI GURUDATTA SUGARS (Supra) has thus upheld the judgment of high court and concluded in para 35 as under:

35. In conclusion, the High Court’s decision to interpret 'drawer' strictly as the issuer of the cheque, excluding authorized signatories, is well-founded. This interpretation aligns with the legislative intent, established legal precedents, and principles of statutory interpretation. The primary liability for an offence under Section 138 lies with the company, and the company’s management is vicariously liable only under specific conditions provided in Section 141. The appellants' submissions are thus rejected, and the High Court’s judgment is upheld. This decision maintains the clarity and consistency of the law regarding cheque dishonour cases, ensuring that liability is appropriately assigned to the responsible parties under the NI Act. Therefore, the question of law put before this Court is answered in the negative”.

                                  __________

 

Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com