Section 138 NI Act: Legal demand notice to company is not required if it is issued to Managing Director [Read the Order]

Karnataka High Court has held that if the legal demand notice was issued to the managing director then knowledge of company about the demand can be assumed and cheque bouncecase can be maintained..

A bench of Justice Patil has passed the order in the case titled as Maxworth Realty India Ltd vs M.K.Veerendra Babu on 13.09.2019.

In the High Court, accused side argued that as per Section 138 of the N.I. Act, a notice has to be served on the accused. In the instant case, no notice has been served on accused No.1. Notice has been served as per Ex.P17 only on accused No.2. It is his further contention that if no notice has been issued to accused No.1-Company, then under such circumstances, there is no demand being made in writing by the holder of the cheque by issuance of a notice and in that light there is no cause of action to file the complaint. The right to file complaint arises only when the accused does not pay the amount within 15 days after receipt of notice in writing to the drawer of cheque. In other words cause of action arises to file the complaint for non-compliance of the conditions stipulated under Section 138 of the N.I. Act. It is his further submission that the liability of accused No.2 is that of vicarious liability as he being the Managing Director of accused No.1-Company. When there is no cause of action as against accused No.1 for non-issuance of notice, then under such circumstances, there is no offence committed by accused No.2 also.

HIgh Court noted the factual position as "But as could be seen from the notice at Ex.P17, it has been served on accused No.2 as a Chairman and Managing Director of M/S Maxworth Realty India Limited and even the reply given at Ex.P20 contains the same address".

High Court observed "The reason for creating vicarious liability is plainly that a juristic entity i.e., a Company would be run by living persons who are in charge of its affairs and who guide the action of that Company and if such juristic entity is guilty, ultimately it is the persons who are responsible for its affairs and they must be held responsible and convicted".

High Court then explained "Keeping in view the aforesaid ratio, as the Company being a legal entity, it cannot acquire knowledge as a human being, knowledge of a Company actually means, knowledge of the people who are having control over such Company. Generally it is the Chairman or Managing Director of a Company who will be having knowledge".

High Court further explained "As per the definition, the Managing Director is a person who is entrusted with substantial power of the management of the affairs of the Company. Notice served on the Managing Director would thus imply that the Company is made aware of the dishonour of the cheque and of the demand for payment of the dishonoured cheque as contemplated under Section 138 of the N.I. Act".

High Court then held "In the instant case, it is not in dispute that accused No.1 is a Company and accused No.2 is the Managing Director of accused No.1. When the statutory notice is issued to the Chairman and Managing Director of the Company and when both Company and the Managing Directors are the persons who are at the helms of the affairs of the Company, Company is vicariously liable. Under such circumstances, the contention of the learned Senior Counsel that there is no cause of action as the notice has not been served, is not having any force and the same is liable to be rejected".

Read the Order here:

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