Supreme Court Clarifies Cheque Dishonour Law on Liability of Persons in Charge of Company/Firm

Context: Cheque Dishonour Law

The Supreme Court of India restored a complaint in a cheque bounce case filed by Neeraj Kumar, the Power of Attorney (POA) holder of a firm, after noting that he had been duly authorized by the sole proprietor and had personal knowledge of the facts. The appellant challenged the Allahabad High Court's decision, which had quashed the complaint filed under Section 138 of the Negotiable Instruments Act, 1881 (NI Act).

The Supreme Court of India in S.P. Mani and Mohan Dairy v. Dr. Snehalatha Elangovan has clarified two important aspects under the Negotiable Instruments Act, 1881 ("NI Act"):

1. Vicarious Liability of Partners: The Court held that vicarious liability can be imposed on the partners of a firm, provided the complaint contains specific averments regarding the partner’s role within the firm. This ruling emphasizes the importance of clearly establishing a partner's involvement when initiating legal proceedings.

   
   

2. Quashing of Complaints under Section 138 and 141 of the NI Act: The Court also ruled that complaints under Section 138 (dishonour of cheque) and Section 141 (offenses by companies and firms) of the NI Act can be quashed if the accused can provide unimpeachable and incontrovertible evidence proving that they were not involved in the issuance of the dishonoured cheque.

Supreme Court of India ruling on cheque dishonour law – Clarifying liability in cheque bounce cases.

Factual Background:

S.P. Mani and Mohan Dairy (“SP Dairy”) is a business engaged in the production and supply of milk and milk products. It supplied its products to a partnership firm (“Firm”), in which Dr. Snehalatha Elangovan (“Snehalatha”) was one of the partners. The Firm issued a cheque signed by a partner, other than Snehalatha, which was dishonoured due to insufficient funds. In response, SP Dairy issued a statutory notice to the Firm and its two partners, and subsequently filed a complaint under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) with the Judicial Magistrate, Erode.

In her defense, Snehalatha filed an application under Section 482 of the Code of Criminal Procedure, 1973 (“CrPC”) before the Madras High Court, seeking to quash the complaint. She argued that the Firm had been dissolved well before the cheque was issued, and the accounts between the parties had already been settled. Moreover, she claimed that she was not in charge of the Firm’s affairs at the time the cheque was issued. The High Court quashed the proceedings, primarily on two grounds: (1) there was no evidence to indicate that Snehalatha was responsible for the Firm's operations, and (2) the complaint did not fulfill the necessary requirements of Section 141 of the NI Act, as it only reproduced the statutory language without specific allegations regarding her role.

SP Dairy appealed the High Court’s order before the Supreme Court, which set aside the High Court's decision. The Supreme Court found that the complaint and statutory notice contained clear and specific averments, stating that Snehalatha had given her consent and had knowledge of the cheque’s issuance. This was deemed sufficient to put her on trial for the alleged offence. Furthermore, the Court noted that Snehalatha’s assertion of non-responsibility for the Firm’s affairs was insufficient to quash the proceedings. She was expected to present unimpeachable and incontrovertible evidence to support her claim, which she failed to do.

Issue address by Supreme Court 

The legal issue addressed by the Supreme Court in this case has significant implications for determining the circumstances under which an individual can be held liable under Section 141(1) of the NI Act for being in charge of or responsible for the company at the time the offence occurred. This ruling provides further clarity on the interpretation of cheque dishonour law in cases involving firms and partnerships.

Observations of the Supreme Court :

The Division Bench comprising Justice B.R. Gavai and Justice K.V. Viswanathan clarified that Section 142 of the Negotiable Instruments Act (NI Act) mandates that complaints under Section 138 must be filed in writing by the payee or the holder of the cheque. The Court emphasized that the complaint in this case met the requirements of Section 142, thereby allowing the case to proceed.

Key Points Discussed:

1. Section 142 of the NI Act:

The Court reiterated that this section bars the court from taking cognizance of any offence under Section 138 unless the complaint is filed in writing by the payee or the holder of the cheque. It highlighted that the complaint filed in the present case adhered to this legal requirement.

2. Legal Precedents Referenced:

• National Small Industries Corporation Limited v. State (NCT of Delhi) (2009): The judgment established that in cases involving companies, the company is considered the complainant, and an authorized employee can represent it.

• TRL Krosaki Refractories Limited v. SMS Asia Private Limited (2022): In cases where a company is the payee, the authorized employee can represent the company, and a sworn statement affirming the knowledge of the authorized person is sufficient.

3. Personal Knowledge Requirement:

The High Court had questioned the sufficiency of Neeraj Kumar's personal knowledge of the transaction. However, the Supreme Court found that Neeraj Kumar, as the manager of the appellant firm, was responsible for the day-to-day business and thus had knowledge of the relevant transactions that led to the cheque's issuance.

4. Section 200 of the Cr.P.C.:

The Bench noted that the affidavit filed by Neeraj Kumar did not specify his personal knowledge about the facts of the case. However, given his role in the firm, this was not seen as a defect in the complaint. The Court held that Neeraj Kumar's position as the manager, entrusted with handling business affairs, made him sufficiently knowledgeable.

Inherent Powers under Section 482 of the Cr.P.C.:

The Bench cautioned that inherent powers under Section 482 of the Cr.P.C. should only be exercised sparingly and with great caution. The High Court’s interference in this case was not justified, as there was no reason to prevent the trial from proceeding. The Court emphasized that the issue of knowledge and authorization could be addressed during the trial, not before.

Supreme Court's Ruling:

The Court clarified that any disputes regarding the authorization of the person prosecuting the complaint, or if it is proven that the complainant had no knowledge of the transaction, could be raised and addressed during the trial. The accused can challenge these points in the course of the proceedings. However, the Court emphasized that the dismissal or quashing of the complaint at the initial stage would not be justified.

The Court further held that the issues of proper authorization and knowledge are matters for the trial, and should not be decided prematurely.

Conclusion:

The Supreme Court allowed the appeal, quashing the Allahabad High Court's judgment and restoring the complaint. This ensures that the case will proceed to trial, where the matters of authorization and knowledge will be thoroughly examined.

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