[Khush Bhachawat is a III year B.A., LL.B. (Hons.) student at NALSAR University of Law, Hyderabad]
The Bombay High Court (“HC”) recently held that authorised signatory of a company who signs a cheque on its behalf is not a ‘drawer’ of the cheque and hence is not liable to pay interim compensation under section 143A of the Negotiable Instruments Act, 1881 (“NI Act”) in a case of dishonour of cheque. The issue stems from contradictory observations made by two judgments of the Supreme Court (“SC”) and a lack of authoritative ruling on the matter.
This post seeks to analyse the judgment of the Bombay HC which reads the contradictory observations of the SC harmoniously and attempts to provide clarity on the issue. The author discusses the liability of a company and its authorized signatories for dishonour of cheque, enquires into whether the signatory is a ‘drawer’ under the NI Act, and whether the signatory can be compelled to pay interim compensation for a default committed by the company. The author concludes by highlighting the importance of a company’s separate legal personality and treating the company as a distinct accused from its agents/representatives.
Liability of a Company and its Authorized Signatories for Dishonour of Cheque
Liability for dishonour of cheque when the offence is committed by a company is governed by section 141. A bare perusal of the section reveals that the company and every person who, when the offence was committed, was in charge of and was responsible to the company for the conduct of its business shall be deemed to be guilty of the offence. The primary liability is on the company and the person in charge of and responsible to the company is vicariously liable for such default by way of a deeming fiction. This Section is a departure from the general rule in criminal law against vicarious liability. Sub-section (2) of section 141 says that if the offence is committed with the consent or connivance, or neglect on the part of director, manager, secretary or other officer of the company, such person shall also be deemed to be guilty of the offence. In SMS Pharmaceuticals Ltd. v. Neeta Bhalla, the SC interpreted section 141 and observed that a director of a company who was not in charge of or responsible for the conduct of the business of the company at the relevant time, will not be liable unless the conditions under sub-section (2) are met. The Court held that a signatory of a dishonoured cheque is covered under sub-section (2) and no special averment about consent, connivance, or negligence would be necessary to make him liable. This is a settled proposition of law and has been reaffirmed by the SC in cases like K.K. Ahuja v. V.K. Vora, National Small Industries Corporation Ltd. v. Harmeet Singh Paintal, amongst others.
Whether the Authorized Signatory is a ‘Drawer’ of the Cheque
The genesis of the controversy lies in two seemingly contradictory observations of the SC in Aneeta Hada v. Godfather Travels and Tours Pvt. Ltd. decided by a three-judge bench and a subsequent division bench decision in N. Harihara Krishnan v. J. Thomas.
In Aneeta Hada, the Court was tasked to determine whether a complaint under section 138 read with section 141 of the NI Act was maintainable against a director or authorised signatory of a company without arraigning the company as an accused. The Court answered the question in the negative. In para 20 of the judgment, it made the following observation raising doubts on what seemed to be a settled proposition:
“20. Section 7 of the Act defines “drawer” to mean the maker of a bill of exchange or a cheque. An authorised signatory of a company becomes a drawer as he has been authorised to do so in respect of the account maintained by the company.”
Relying on this observation, the Respondents before the Bombay HC argued that the reference to ‘drawer’ of the cheque in sections 138, 141 and 143A must also necessarily include the authorized signatory of the cheque.
In N. Harihara, the Court was disposed with a similar issue as to whether prosecution against the signatory could be successfully maintained without prosecuting the company. The Court relied on para 59 of the judgment in Aneeta Hada and answered this question in the negative. Since the liability of the director (who was the authorized signatory) was only vicarious, he could not be called a drawer and could not be prosecuted without prosecuting the company. In paragraph 21 of the judgment, the Court held that “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.” Prima facie, this observation is contrary to the observation made in para 20 of Aneeta Hada. Curiously, while the Court in N. Harihara relied on Aneeta Hada, para 20 of the said judgment (which makes a contrary observation) was not discussed.
In the present case, the Bombay HC relied on N. Harihara and held that a person who signs a cheque on behalf of the company does not become the drawer. The Court rightly pointed that para 20 of Aneeta Hada constituted neither ratio nor obiter but was a mere stray observation. The question of whether an authorized signatory is a drawer never arose before the Court in Aneeta Hada and was not even argued. The Court only held that a company is a principal offender, and its authorized signatory is only vicariously liable under section 141(2). The Bombay HC interpreted para 20 in light of para 19 of the judgment which emphasizes on the person drawing a cheque ‘on the account maintained by him.’ Reading both the paragraphs together, a drawer would be the person who draws a cheque on an account maintained by him. In cases involving companies, the account from which the cheque is issued is in the name of the company and therefore the authorized signatory could not be a drawer.
Can the Authorized Signatory be Directed to Pay Interim Compensation Under section 143A of the Act?
Section 143A was introduced by way of the Negotiable Instruments Act (Amendment) Act, 2018. It empowers the Court to order the drawer to pay interim compensation of not more than 20% of the amount of the cheque to the complainant pending the dispute. Further, section 148 empowers the Appellate Court to order payment of a minimum of 20% of the fine or compensation awarded by the trial Court pending appeal against conviction. This amount is in addition to the interim compensation payable under section 143A.
In the present case, the Respondents contended that sections 143A and 148 should be purposively interpreted to allow Courts to direct an authorized signatory to pay interim compensation. Such a reading was sought to be justified by the deeming fiction under section 141. It was argued that under section 138, the Court had the discretion to impose a fine on the defaulting company. Considering the effect of section 141(2), the authorized signatory could also be held jointly liable for such fine. If the authorized signatory could be held liable under section 141(2) to pay the final relief of a fine imposed on a company under section 138, interim compensation being an interim relief in aid of the final relief, could also be imposed on such authorized signatory.
The Court rejected this contention on two grounds. Firstly, the liability for the punishment of persons specified in section 141(2) is triggered only after it is ‘proved’ that offence has been committed with their consent, connivance, or negligence. Interim compensation is usually awarded at the stage of recording of plea by the Magistrate. However, no evidence can be led to prove these factors at this stage and their liability cannot be established. Here, the idea of company’s separate legal personality also assumes significance. Directors serve as agents of companies and are not personally liable for their actions. A director can be held personally liable only if he acts beyond his powers, breaches his fiduciary duty, or commits fraud. The onus is on the drawer company to prove its innocence and lead evidence establishing a breach of fiduciary duty or an instance of fraud. However, an enquiry in this regard is not contemplated by section 143A and is not possible at the stage of interim compensation. Such an enquiry would frustrate the purpose of granting immediate interim compensation and cause delay in disposal of cases.
Secondly, section 141 does not contain any specific provision allowing the Court to direct persons other than drawer to pay interim compensation. Section 143A deals with the payment of interim compensation and confers specific power on Courts to direct only drawers and no one else to pay the amount. The Court referred to the statement of objects and reasons of the 2018 Amendment as well as the Lok Sabha debates to infer the intention of the legislature. The word ‘drawer’ in section 143A has a clear and unambiguous meaning. As per the settled rule of interpretation, where “the language of a provision is plain and unambiguous and capable of only one meaning, there is no question of the construction of a statute, as the provision speaks for itself.” By fastening the liability only on the drawer, the legislature intended to exclude anyone else from being made liable to pay interim compensation.
The Court also addressed the Respondent’s apprehension about the consequences of not holding an authorized signatory to be a drawer vis-a-vis sections 14 and 96 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) dealing with moratorium periods. It was argued that if the authorized signatory could not be directed to pay interim compensation, then the complainant would be rendered remediless as no claims could be made against the company undergoing Corporate Insolvency Resolution Process (“CIRP”). The Court pointed that section 143A was introduced after IBC and it can be assumed that the legislature was aware that companies undergoing CIRP could not be directed to pay interim compensation because of the moratorium period. Despite this, it chose to not include persons other than drawers under the ambit of section 143A thus giving further clarity on the correct interpretation of the provision.
While cases under the NI Act largely deal with matters of criminal procedure, this case clarifies that authorized signatories cannot be directed to pay interim compensation for a default committed by the company. The Bombay HC highlights the importance of the separate legal personality of a company and treats the company as a distinct accused from its agents/representatives. The Court also observed that under section 148 of the Act, order for deposit of minimum 20% of the fine/compensation can only be made against drawers (here, the company). In an appeal against conviction filed by persons other than drawer (here, its agents/representatives), depositing such a minimum sum is not necessary. However, the Appellate Court can direct deposit of the amount under section 389 of the Code of Criminal Procedure while considering the application for suspension of conviction or sentence. It must be noted that recently, the Delhi HC and the Kerala HC have also taken similar views holding that an authorized signatory does not become a drawer of the cheque. However, neither of these High Courts were dealing with the specific question of interim compensation. Although the Bombay High Court harmoniously interprets the contradictory observations made in Aneeta Hada and N. Harihara, a decisive ruling by the SC would put this issue to rest.
– Khush Bhachawat