Cheque Bounce Case: Supreme Court Dismisses Prosecution for Non-Arraignment of Company

The Supreme Court of India, in N. Harihara Krishnan v. J. Thomas, dealt with an important issue concerning the prosecution of individuals under Section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred to as “the Act”). The case revolved around a cheque dishonor where the individual accused was prosecuted without impleading the company, on whose behalf the cheque was allegedly issued. The Court ruled in favor of the appellant, setting aside the lower court’s decision.

This judgment reaffirms that in cases where a cheque is issued by a company, the company must be made a party to the proceedings. If the company is not impleaded as an accused, the prosecution against an individual signatory cannot be maintained.

Background of the Case

The case originated from a business transaction between Norton Granites & Spinners (P) Ltd. (referred to as “NORTON”) and Srivari Exports (referred to as “the FIRM”).

• On May 14, 2007, NORTON sold three parcels of land to the FIRM through registered sale deeds.
• The appellant, N. Harihara Krishnan, was the managing partner of the FIRM.
• The respondent, J. Thomas, acted as a power of attorney holder for NORTON.
• On August 10, 2012, the appellant allegedly issued a cheque for Rs. 39 lakhs in favor of the respondent.
• The cheque was drawn on the account of Dakshin Granites Pvt. Ltd. (referred to as “DAKSHIN”).
• On August 28, 2012, the cheque was presented for collection but was returned unpaid due to account closure.
• The respondent issued a statutory notice on September 10, 2012, which was served on the appellant on September 14, 2012.
• No payment was made within the stipulated 15 days, leading to the filing of a complaint under Sections 138 and 142 of the Act.

Arguments by the Petitioner (Appellant – N. Harihara Krishnan)

The appellant contended that the prosecution was legally unsustainable due to the following reasons:

• The cheque was issued from the account of DAKSHIN, a company, and not from his personal account.
• Under the ruling in Aneeta Hada v. Godfather Travels & Tours Pvt. Ltd. (2012) 5 SCC 661, a company must be impleaded as an accused for vicarious liability to apply.
• The complaint was filed against him alone, without including DAKSHIN as an accused.
• The respondent sought to rectify this error by filing an application under Section 319 of the Code of Criminal Procedure (CrPC) to implead DAKSHIN, which was an afterthought and legally impermissible.
• The statutory period for filing a complaint against DAKSHIN had long expired, making its later inclusion invalid.

Arguments by the Respondent (J. Thomas)

The respondent countered the arguments as follows:

• The trial court had already taken cognizance of the offense under Section 138 of the Act, and the appellant was the signatory of the cheque.
• DAKSHIN could still be impleaded at a later stage, as the cause of action had already arisen.
• The appellant was fully aware that the cheque had been dishonored, and non-payment made him liable.
• The delay in impleading DAKSHIN was justified since the respondent only became aware of its involvement during the trial.

Supreme Court’s Observations

The Supreme Court, comprising Justice J. Chelameswar and Justice S. Abdul Nazeer, held that the prosecution was flawed due to the absence of the company (DAKSHIN) as an accused.

The Court cited its ruling in Aneeta Hada and reiterated:

“For maintaining prosecution under Section 141 of the Act, arraigning the company as an accused is imperative. Other categories of offenders can only be brought into the dragnet on the touchstone of vicarious liability.”

The Court further emphasized:

“Since the cheque in question was drawn on the account of DAKSHIN, the person primarily liable for punishment under Section 138 of the Act would be DAKSHIN. The appellant, being only a signatory, could not be prosecuted independently.”

Key Legal Principles Affirmed

This judgment reaffirmed several crucial legal principles:

• Company Must Be Arraigned: If a cheque is drawn from a company’s account, the company must be made a party to the proceedings under Section 141 of the Act.
• Vicarious Liability is Secondary: Directors or signatories can only be held liable if the company is first prosecuted.
• Statutory Limitations: Any application to implead a company after the statutory period is invalid.
• Strict Compliance with Negotiable Instruments Act: The Court reinforced that all procedural requirements must be met for a valid prosecution under Section 138.

Supreme Court’s Ruling

The Supreme Court ruled in favor of the appellant and made the following orders:

• The prosecution against N. Harihara Krishnan was quashed.
• The order of the Madras High Court, which upheld the lower court’s decision to continue proceedings, was set aside.
• The respondent’s application under Section 319 CrPC to implead DAKSHIN was rejected.
• The Supreme Court imposed a cost of Rs. 1,00,000 on the respondent.

Impact of the Judgment

This judgment has far-reaching implications:

• Strengthens legal safeguards against wrongful prosecution under the Negotiable Instruments Act.
• Clarifies that a company must be a party for prosecution under Section 138 when the cheque is issued from its account.
• Ensures that procedural lapses, such as late impleading of entities, do not result in an unjust trial.
• Protects directors and officers from being individually targeted without due process.

Conclusion

The Supreme Court’s decision in N. Harihara Krishnan v. J. Thomas provides a clear precedent that prosecution under Section 138 of the Negotiable Instruments Act must strictly comply with legal formalities. If a cheque is issued by a company, the company itself must be prosecuted first, before any individual can be held vicariously liable.

This ruling ensures that signatories to cheques are not unfairly prosecuted without proper legal backing and safeguards the procedural integrity of the Act.

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