IndiaCorpLaw

Supreme Court on Prosecuting a Company for Cheque Dishonour

The Supreme Court in N. Harihara Krishnan v. J. Thomas ruled yesterday on certain procedural aspects relating to the offence under section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) of dishonour of a cheque issued by a company. It held that any failure to include the company as an accused in the complaint at the outset (i.e. within the limitation period) would be fatal to the prosecution of such company. This is so even if the initial complaint was validly filed (and within time) against the signatory of the cheque.

The case involved a sale of properties to Dakshin Granites Pvt. Ltd. (“Dakshin”), for which Dakshin issued a cheque worth Rs. 39,00,000 (rupees thirty nine lakhs) towards the balance consideration payable. The cheque was signed by the appellant, Mr. Harihara  Krishnan, who is also a director of Dakshin. When the cheque was dishonoured, the respondent/complainant, Mr. J. Thomas, issued a notice to Mr. Krishnan. Having received no response to the notice, Mr. Thomas lodged a complaint under section 138 of the NI Act against Mr. Krishnan. However, he failed to lodge a complaint against Dakshin. There is no doubt on the facts that Mr. Krishnan drew the cheque on behalf of Dakshin, thereby making Dakshin the drawer of the cheque.

Mr. Thomas subsequently sought to implead Dakshin in the complaint, which the trial court granted. This was despite the fact that the application to implead Dakshin was filed after the expiry of the limitation period set out in section 142 of the NIA Act. Against this, Mr. Krishnan filed an appeal before the High Court, which also ruled in favour of Mr. Thomas, but it did so by condoning the delay of 1,211 days in impleading the company, i.e. Dakshin, as the accused. It is against these orders that Mr. Krishnan appealed to the Supreme Court, which found in his favour by disagreeing with both the courts below.

The Supreme Court first began with an analysis of the scheme under the NI Act that deals with the offence of dishonour of cheques. It is clear that the offence is committed by the drawer of the cheque, which in this case happens to be the company (which was represented by Mr. Krishnan). The Court relied upon its earlier judgment in Aneeta Hada v. Godfather Travels & Tours Private Limited (2012) 5 SCC 661, which had arrived “at the irresistible conclusion that for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative”. In the present case, the Supreme Court noted:

21. … The High Court failed to appreciate that the liability of the appellant (if any in the context of the facts of the present case) is only statutory because of his legal status as the DIRECTOR of DAKSHIN. Every person signing a cheque on behalf of a company on whose account a cheque is drawn does not become the drawer of the cheque. Such a signatory is only a person duly authorised to sign the cheque on behalf of the company/drawer of the cheque. If DAKSHIN/drawer of the cheque is sought to be summoned for being tried for an offence under Section 138 of THE ACT beyond the period of limitation prescribed under THE ACT, the appellant cannot be told in view of the law declared by this Court in Aneeta Hada that he can make no grievance of that fact …

Second, the Supreme Court was concerned with the question of whether cognizance was to be taken under section 138 of the NI Act of the “offence” or the “offender”. In other words, taking cognizance of the offence would mean that once the same has been accomplished, further offenders may then be impleaded at a later stage (irrespective of the limitation period). O the other hand, if the cognizance relates to the offender, then all offenders will have to be impleaded within the requisite limitation period. Here, the Court ruled that the provisions of the Code of Criminal Procedure, 1973 (“CrPC”) would not be applicable to offences under section 138 of the NI Act, due to which congnizance ought to be taken of the offenders and not the offence. The Supreme Court elaborated:

24. By the nature of the offence under Section 138 of THE ACT, the first ingredient constituting the offence is the fact that a person drew a cheque. The identity of the drawer of the cheque is necessarily required to be known to the complainant (payee) and needs investigation and would not normally be in dispute unless the person who is alleged to have drawn a cheque disputes that very fact. The other facts required to be proved for securing the punishment of the person who drew a cheque that eventually got dishonoured is that the payee of the cheque did in fact comply with each one of the steps contemplated under Section 138 of THE ACT before initiating prosecution. Because it is already held by this Court that failure to comply with any one of the steps contemplated under Section 138 would not provide “cause of action for prosecution”. Therefore, in the context of a prosecution under Section 138, the concept of taking cognizance of the offence but not the offender is not appropriate. Unless the complaint contains all the necessary factual allegations constituting each of the ingredients of the offence under Section 138, the Court cannot take cognizance of the offence. Disclosure of the name of the person drawing the cheque is one of the factual allegations which a complaint is required to contain. Otherwise in the absence of any authority of law to investigate the offence under Section 138, there would be no person against whom a Court can proceed. There cannot be a prosecution without an accused. The offence under Section 138 is person specific. Therefore, the Parliament declared under Section 142 that the provisions dealing with taking cognizance contained in the CrPC should give way to the procedure prescribed under Section 142. Hence the opening of non-obstante clause under Section 142. It must also be remembered that Section 142 does not either contemplate a report to the police or authorise the Court taking cognizance to direct the police to investigate into the complaint.

Finally, the Supreme Court was concerned with the question of whether the delay on the part of the complainant in impleading Dakshin can be condoned, which it answered in the negative. The facts seem to suggest that the complainant was aware that the cheque was drawn on the account of Dakshin, and he nevertheless failed to arraign the company within the limitation period.

Although this decision is embedded largely in the procedural aspects of initiating and maintaining prosecution for offences of cheque dishonour, it has important implications when a cheque is drawn by a company. Given that a cheque will necessarily have to be signed by an authorized signatory of the company (whether a director, officer or other suitable person), it is not sufficient to bring a complaint against the actual signatory. It is also necessary to bring an action (within the stipulated time) against the company itself. In the absence of bringing an action against the company, which is the drawer of the cheque, there is a grave risk that the criminal action against other persons (such as the signatory) may be fraught with difficulties. While these are largely matters of criminal procedure, they also revolve around the separate legal personality of the company whereby it would be necessary to treat the company (i.e. the drawer of the cheque) as a distinct accused from that of its agent or representative (i.e. the signatory of the cheque).