The Supreme Court on Monday held that criminal liability for cheque bounce cases under Section 138 of the Negotiable Instruments Act (NI Act) cannot be fastened on a person merely because he was a partner at the firm which had taken the loan or that he stood as a guarantor for such a loan [Dilip Hariramani vs Bank of Baroda].
A Bench of Justices Ajay Rastogi and Sanjiv Khanna held that vicarious liability in the criminal law in terms of Section 141 of the NI Act cannot be fastened merely because of civil liability which falls on partner of a firm.
“Vicarious liability under sub-section (1) to Section 141 of the NI Act can be pinned when the person is in overall control of the day-to-day business of the company or firm. Vicarious liability under sub-section (2) to Section 141 of the NI Act can arise because of the director, manager, secretary, or other officer’s personal conduct, functional or transactional role, notwithstanding that the person was not in overall control of the day-to-day business of the company when the offence was committed. Vicarious liability under sub-section (2) is attracted when the offence is committed with the consent, connivance, or is attributable to the neglect on the part of a director, manager, secretary, or other officer of the company,” the Court held.
Pertinently, the Court held that the provisions of Section 141 impose vicarious liability by deeming fiction which presupposes and requires the commission of the offence by the company or firm.
“Therefore, unless the company or firm has committed the offence as a principal accused, the persons mentioned in sub-section (1) or (2) would not be liable and convicted as vicariously liable. Section 141 of the NI Act extends vicarious criminal liability to officers associated with the company or firm when one of the twin requirements of Section 141 has been satisfied, which person(s) then, by deeming fiction, is made vicariously liable and punished,” the Court said.
Vicarious liability is when one party is held partly responsible for the unlawful actions of a third party.
The judgment came in an appeal in which the appellant, a partner at a firm, challenged his conviction under Section 138. The trial court had convicted him and the Chattisgarh High Court had upheld the same leading to the appeal before the top court.
By way of background, Bank of Baroda (respondent) had granted term loans and cash credit facility to a partnership firm – M/s. Global Packaging.
In part repayment of the loan, the firm, through its authorised signatory, Simaiya Hariraman, had issued three cheques. However, the cheques were dishonoured on presentation due to insufficient funds.
The bank then filed a complaint under Section 138 before the Court of Judicial Magistrate, Balodabazar, Chhattisgarh, against Simaiya Hariramani and the appellant. The firm was not made an accused.
Simaiya Hariramani and the appellant, as per the cause title, were shown as partners of the firm.
The Supreme Court at the outset noted that it was “an admitted case of the respondent Bank that the appellant had not issued any of the three cheques, which had been dishonoured, in his personal capacity or otherwise as a partner.”
In the absence of evidence to establish that the appellant was responsible for the conduct of affairs at the firm towards the issuance of the cheques, the Bench noted that as per the Supreme Court decision in Girdhari Lal Gupta vs DH Mehta and Another, the conviction has to be set aside.
The top court in that case had observed that a partner on whom vicarious liability can be imposed under the NI Act refers to mean ‘a person in overall control of the day-to-day business of the company or the firm’.
Accordingly, the Bench in the present case observed,
“The appellant cannot be convicted merely because he was a partner of the firm which had taken the loan or that he stood as a guarantor for such a loan.”
The apex court explained that the Partnership Act of 1932 and the Indian Contracts Act create civil liabilities, which the appellant may still be liable under as per the Recovery of Debts Due to Banks and Financial Institutions Act of 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002.
“However, vicarious liability in the criminal law in terms of Section 141 of the NI Act cannot be fastened because of the civil liability,” the Court made it clear.
The appellant was, thus, acquitted, and his conviction by the courts below was set aside.
Senior Advocate PK Dubey and advocate Ravi Sharma appeared for the appellant-accused.
Read Judgment here