Recently, the Supreme Court held that directors or persons in charge of a company cannot face prosecution for cheque bounce cases unless the company itself is arraigned as an accused under the provisions of the Negotiable Instruments Act, 1881. The Court emphasised that corporate liability must first be established before extending vicarious liability to individuals associated with the company.
The case arose from an appeal by Bijoy Kumar Moni challenging a judgment of the Calcutta High Court. The High Court had overturned the concurrent findings of the trial court and the sessions court, which had convicted Paresh Manna, a director of Shilabati Hospital Pvt. Ltd., under Section 138 of the Negotiable Instruments Act. The cheque in question, issued on April 28, 2006, for ₹8,45,000, was drawn on Standard Chartered Bank, Calcutta, and subsequently dishonoured. The trial court at Ghatal had sentenced Manna to one year of imprisonment, and the sessions court affirmed this. However, the Calcutta High Court set aside the conviction, reasoning that Manna, as the director signing the cheque on behalf of the company, could not be held liable without the company itself being implicated.
The appellant argued that Manna should be held criminally liable for the dishonour of the cheque, given his role as the signatory and director of the company. It was contended that the lower courts had appropriately established guilt, and the High Court erred in setting aside the concurrent findings.
The Apex Court bench, comprising Justice J.B. Pardiwala and Justice R. Mahadevan, provided a detailed explanation of the principle underlying corporate liability in the context of Section 138 of the Negotiable Instruments Act, 1881. The Court observed that corporate entities, being artificial persons, lack the physical ability to perform actions themselves. Instead, they function through human agents, such as directors or officers, who act on their behalf within the scope of their authority. The bench clarified that the legal framework under Section 138 of the NI Act treats the company as the principal offender in cheque bounce cases. Liability for dishonoured cheques primarily rests with the company, as it is the drawer of the cheque. The Court emphasised that only when the company is held liable as the principal offender can the liability be extended, through a legal fiction, to its directors or those responsible for the company’s operations.
The Court further elaborated that establishing the company’s culpability is a prerequisite for invoking vicarious liability against individuals associated with the company. This ensures that individuals are not prosecuted in isolation without the primary liability of the company being determined. By reiterating this principle, the Court reinforced the statutory intent behind Section 138, which is to maintain a balance between ensuring accountability and preventing unwarranted prosecution of individuals without due cause.
Dismissing the appeal, the Top Court affirmed the Calcutta High Court's decision, holding that directors or persons in charge cannot be prosecuted in cheque bounce cases unless the company is also arraigned as an accused. This judgment reinforces the foundational principle of corporate liability and ensures adherence to the statutory framework of the Negotiable Instruments Act.
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