In a landmark ruling under the Negotiable Instruments Act, 1881, the Supreme Court examined whether a complaint for dishonour of a cheque can be filed against a signing trustee without impleading the trust itself. The case grapples with the legal status of trusts as juristic entities, the scope of trustee liability, and the interpretation of Section 141, raising critical questions about who can be held accountable for obligations executed on behalf of a trust. Read on to explore how the Court clarified these nuanced issues and delineated the responsibilities of trustees under the NI Act.
Brief Facts:
The case arose from a financial crisis at a private university managed by a trust, which led the sponsoring body to hand over its administration to another educational trust. The respondent, as chairman of the managing trust, authorized the appellant to liaise with government authorities during the transition. After completion, the respondent issued a cheque of Rs. 5 crores to the appellant for services rendered, which was later dishonored due to insufficient funds. The appellant served a statutory notice under the NI Act and subsequently filed a complaint under Section 138 and Section 142 of the NI Act and Section 420 IPC. The respondent challenged the complaint before the High Court, arguing non-joinder of the trust as a necessary party, resulting in the quashing of the proceedings. The appellant then appealed to the Supreme Court, questioning whether the complaint against the chairman could proceed without impleading the trust.
Contentions of the Appellant:
The appellant contended that a trust cannot be sued as it is not a legal entity under the Indian Trusts Act, 1882, only trustees can maintain or defend suits to protect trust property, and a trust does not qualify as an “association of individuals” under the NI Act. Reliance was placed on multiple precedents affirming this principle. Further, the appellant argued that there is no requirement to plead specific involvement in the trust’s day-to-day affairs, as the respondent, acting as chairman and signing the cheque, is prima facie responsible for the trust’s obligations, akin to a managing director. Relevant case law was cited to support this position.
Contentions of the Respondent:
The respondent contended that a trust is a juristic person capable of suing and being sued, and under Section 141 of the NI Act, the term “company” and “other association of individuals” includes a trust, making it liable under Section 138. The respondent supported the High Court’s quashing of the complaint, relying on precedents recognizing trusts as capable of prosecution or being prosecuted.
Observation of the Court:
The Court examined the maintainability of a complaint under the Negotiable Instruments Act, 1881 (NI Act) against the Chairman/Trustee of a Trust for a dishonored cheque issued on the Trust's behalf, without impleading the Trust as an accused.
The Court reaffirmed the principles from "SMS Pharmaceuticals Ltd. v Neeta Bhalla" and "K K Ahuja v V K Vora", emphasizing that under Section 141 of the NI Act, persons like Managing Directors or Joint Managing Directors are presumed "in charge of, and responsible to the company for the conduct of the business of the company" by virtue of their office. The signatory of a dishonored cheque is liable under sub-section (2) of Section 141. Extending this, the Court noted in "Sunita Palita v Panchami Stone Quarry" that "the Managing Director or Joint Managing Director would admittedly be in charge of the company and responsible to the company for the conduct of its business by virtue of the office they hold as Managing Director or Joint Managing Director. These persons are in charge of and responsible for the conduct of the business of the company and they get covered under Section 141 of the NI Act. A signatory of a cheque is clearly liable under Sections 138/141 of the NI Act."
Further, in "S P Mani and Mohan Dairy v Dr Snehalatha Elangovan", the Court clarified that to escape liability, the accused must prove the offence occurred without their knowledge or despite due diligence, while highlighting the first proviso to Section 141(1), stated, "The primary responsibility of the complainant is to make specific averments in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no legal requirement for the complainant to show that the accused partner of the firm was aware about each and every transaction. On the other hand, the first proviso to sub-section (1) of Section 141 of the Act clearly lays down that if the accused is able to prove to the satisfaction of the Court that the offence was committed without his/her knowledge or he/she had exercised due diligence to prevent the commission of such offence, he/she will not be liable of punishment."
On whether a Trust is a juristic person under the NI Act, the Court relied on "Pratibha Pratisthan v Manager, Canara Bank" in the context of the Consumer Protection Act, 1986, holding that a Trust is not a 'person' and thus "cannot be a complainant and cannot file a consumer dispute under the provisions of the Act." Interpreting Section 3 and Section 13 of the Indian Trusts Act, 1882, the Court observed that a Trust is "an obligation annexed to the ownership of property", with Trustees bound "to maintain and defend all such suits" for its preservation. Endorsing Kerala High Court's view in "K P Shibu v State of Kerala", the Court stated, "Thus, it is clear from the above provisions that all the trustees are the owners of the property, but they are obliged to use the same in a particular manner. If a number of trustees exist, they are the joint owners of the property. The trustees are bound to maintain and defend all suits, for the preservation of the trust-property and the assertion or protection of the title thereto. Thus, it appears that the “Trust” is not capable of suing and being sued in a court of law, even though the trustees can maintain and defend suits for the preservation and protection of the trust-property. Therefore, a “Trust” is not a juristic person or a legal entity, as the juristic person has a legal existence of its own and hence it is capable of suing and being sued in a court of law. Thus, it appears that a “Trust” is not like a body corporate, which has a legal existence of its own and therefore can appoint an agent."
The Court distinguished trusts from companies, relying on Salomon v A. Salomon & Co. Ltd., which held that a company is a separate legal person from its shareholders, and Tata Engineering and Locomotive Co. Ltd. v State of Bihar, affirming that a corporation possesses a legal entity entirely distinct from its members. Overruling contrary views of the Kerala, Bombay, Madras, and Orissa High Courts that classified trusts under “association of individuals” in Section 141’s Explanation via ejusdem generis, the Court held such reasoning erroneous, emphasizing that trusts represent obligations, not juristic entities like companies or firms.
The Court clarified that pending references questioning Pratibha Pratisthan v Manager, Canara Bank do not suspend its binding authority. High Courts must decide cases based on existing law and follow earlier binding precedents until explicitly overruled, as per National Insurance Company Ltd. v Pranay Sethi and Union Territory of Ladakh v Jammu and Kashmir National Conference, stating, “It is not open, unless specifically directed by this Court, to await an outcome of a reference or a review petition, as the case may be. It is also not open to a High Court to refuse to follow a judgment by stating that it has been doubted by a later Coordinate Bench. In any case, when faced with conflicting judgments by Benches of equal strength of this Court, it is the earlier one which is to be followed.”
Focusing on the NI Act, the Court held that complaints are maintainable against a signing trustee without impleading the trust, and stated “Hence, the question posed is answered in the affirmative. When a cause of action arises due to an alleged dishonour of cheque and a complaint is initiated under the NI Act, the same is maintainable against the Trustee who has signed the cheque, without the requirement to array the Trust also as an accused.”
The decision of the Court:
Under the light of the foregoing discussion, the Court allowed the appeal, quashed the impugned judgment, and restored the proceedings in Criminal Case to be proceeded with expeditiously in accordance with law.
Case Title: Sankar Padam Thapa Vs. Vijaykumar Dineshchandra Agarwal
Case No: Special Leave to Appeal (Criminal) No.4459/2023
Coram: Hon’ble Mr. Justice Ahsanuddin Amanullah, Hon’ble Mr. Justice Prashant Kumar Mishra
Advocate for Appellant: AOR Aditya Singh, Advs. Shubham Singh, Kamal Kishor, Vaseem
Advocate for Respondent: AOR Pallavi Pratap, Sr. Adv. Ardhendumauli Prasad, Advs. Dinesh Gangwani, Amjid Maqbool, Prachi Pratap, Prashant Pratap
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