Cheque Bounce Case: Supreme Court Ruling on Company Liability in Himanshu vs. B. Shivamurthy

The case of Himanshu vs. B. Shivamurthy & Anr. revolved around the issue of dishonor of a cheque under Section 138 of the Negotiable Instruments Act, 1881. The appellant, Himanshu, had issued a cheque for the amount of Rs. 4,15,000 in favor of the respondent, B. Shivamurthy, for a loan taken for business purposes. The cheque was dishonored due to insufficient funds, and a criminal complaint was filed against the appellant. The case further involved the appellant’s argument about the legal standing of being sued personally, as he issued the cheque in his capacity as a director of a company. The Supreme Court, in this case, addressed several important aspects related to the liability of a person signing a cheque on behalf of a company.

Background of the Case

In December 2003, the complainant, B. Shivamurthy, loaned a sum of Rs. 4,15,000 to the appellant for his business. The appellant issued a cheque for the said amount, drawn on Karnataka Bank, Hosadurga, in favor of the complainant. The cheque, however, was returned by the bank on 29th December 2003 due to insufficient funds. A demand notice was issued to the appellant on 19th January 2004, which was served on him by 28th January 2004. The appellant failed to make the payment, and thus, a complaint was filed under Section 138 of the Negotiable Instruments Act.

The appellant contended that the cheque was issued by him not in his personal capacity but as a director of Lakshmi Cement and Ceramics Industries Ltd., a company. The appellant further claimed that the complaint should have been filed against the company, and not against him personally.

Arguments by the Appellant

The appellant made several key submissions in his defense:

• The cheque was issued by one of the directors of Lakshmi Cement and Ceramics Industries Ltd., a public limited company, and not in his individual capacity.
• As per the provisions of the Negotiable Instruments Act, a company, as a juristic person, should have been the primary party in the complaint, and the director should only be vicariously liable.
• The complaint was wrongly filed against the appellant personally and not against the company or its directors collectively.

Arguments by the Respondent

The respondent, B. Shivamurthy, argued that:

• The cheque was issued by the appellant in his personal capacity, and the complainant was unaware of the company’s involvement at that stage.
• The appellant had failed to honor the cheque despite being given proper notice of demand for payment.
• The appellant, as a signatory on the cheque, was directly liable for the dishonor of the cheque.

Supreme Court’s Observations

The Supreme Court, while examining the legal issues, referred to the principles laid down in previous cases, such as Aneeta Hada vs. Godfather Travels and Tours Private Limited and Charanjit Pal Jindal vs. L.N. Metalics, regarding the liability of directors in cheque bounce cases.

The Court referred to the case of Aneeta Hada vs. Godfather Travels and Tours Private Limited, where the Court held that the authorized signatory of a company could be held liable for the offence under Section 138 of the Negotiable Instruments Act, even in the absence of the company being named as an accused party. The Court reiterated the principle that vicarious liability could only be invoked after the company itself was found guilty of the offence.

The Court observed:

“For maintaining the prosecution under Section 141 of the Act, arraigning the company as an accused is imperative. The other categories of offenders can only be brought in the dragnet based on vicarious liability as stipulated in the provision itself.”

The Court further observed:

“A cheque issued by a director of a company in his capacity as a director does not automatically imply personal liability, unless the company itself is arraigned as an accused. The process of vicarious liability requires a clear legal connection between the signatory and the company’s actions.”

Final Judgment

The Supreme Court allowed the appeal and quashed the proceedings against the appellant. The Court ruled that the complaint under Section 138 of the Negotiable Instruments Act could not be maintained against the appellant without the company being named as an accused. The Court held:

“The appellant could not be personally prosecuted for the dishonor of the cheque in the absence of the company being named as an accused. The proceedings against the appellant under Section 138 of the Act are quashed.”

The Court further directed that any future legal proceedings should be taken against the company and its directors collectively, if necessary.

Conclusion

The judgment in this case is important for clarifying the scope of vicarious liability in cheque bounce cases involving companies. The Supreme Court has emphasized that for a director to be held liable under Section 138, the company itself must first be arraigned as an accused party. This ruling ensures that legal proceedings in cheque dishonor cases are conducted in accordance with the principles of corporate responsibility and vicarious liability.

Petitioner Name: Himanshu.
Respondent Name: B. Shivamurthy & Anr..
Judgment By: Justice Dhananjaya Y. Chandrachud, Justice Hemant Gupta.
Place Of Incident: India.
Judgment Date: 17-01-2019.

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