VICARIOUS LIABILITY OF GUARANTOR IN CHEQUE DISHONOR CASES

[Mr. M. GOVINDARAJAN]

Cheque dishonor

Section 138 of the Negotiable Instruments Act, 1881 (‘Act’ for short) provides the punishment in case of cheque dishonor.  The said section provides that where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both.

Offences by companies

Sub-section (1) to Section 141 of the NI Act states that where a company commits an offence, every person who at the time the offence was committed was in charge of and was responsible to the company for the conduct of the business, as well as the company itself, shall be deemed to be guilty of the offence.   This section shall not render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.  Where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Liability of guarantor

It is used for any person to give guarantee for the loan granted to any other person or partnership firm as a partner or to a company as a Director.  The criminal liability arises under Section 138 of the Act read with Section 141 of the Act the liability will arise only if the concerned person in wholly in charge of the affairs of the firm or company during the alleged period.

In DILIP HARIRAMANI VERSUS BANK OF BARODA [2022 (5) TMI 424 - SUPREME COURT] Bank of Baroda, had granted term loans and cash credit facility to a partnership firm – Global Packaging on 04.10.2020 for Rs. 6,73,80,000/-.  Both the appellant and Simaiya Hariramani had furnished guarantees of the amount borrowed by the Firm from the Bank. In part repayment of the loan, the Firm, through its authorized signatory, Simaiya Hariramani, had issued three cheques of Rs. 25,00,000/- each on 17.10.2015, 27.10.2015 and 31.10.2015.  The said cheques were dishonored due to insufficiency of fund in the bank account. On 04.11.2015, the Bank, through its Branch Manager, issued a demand notice to Simaiya Hariramani under Section 138 of the Act.  The respondent Bank, through its Branch Manager, filed a complaint under Section 138 of the Act before the Court of Judicial Magistrate, Balodabazar, Chhattisgarh, against Simaiya Hariramani and the appellant. 

In the complaint it was contended that the Firm was a partnership firm with Simaiya Hariramani as its partner.   The Firm had availed term loans and cash credit.  The firm gave three cheques of Rs. 25,00,000/- each, which were dishonored due to ‘insufficient funds’.  Even after the demand notice, the accused had not deposited the amount. Thereby, a complaint under Section 138 of the Act was filed. During the cross examination the bank Manager    admitted that the demand notice had not been issued to the Firm and that no loan had been obtained by Dilip Hariramani and Simaiya Hariramani in their individual capacity.  The appellant and Simaiya Hariramani were convicted by the Judicial Magistrate First Class on 19.02.2019 under Section 138 of the Act and sentenced to imprisonment for six months.   They were also directed to pay compensation to the tune of Rs. 97,50,000/- under Section 357(3). 

The appellant and Simaiya Hariramani preferred an appeal against the order of trial court before Sessions Court which dismissed their appeal on 21.11.2019.  The Sessions Court modified the sentence awarded to imprisonment till the rising of the court and at the same time, enhanced the compensation amount under Section 357(3) from Rs. 97,50,000/- to Rs. 1,20,00,000/- with the stipulation that the appellant and Simaiya Hariramani shall suffer additional imprisonment for three months in case of failure to pay.

Then they filed appeal before the High Court which also dismissed the appeal on 12.10.2020.   The High Court observed that the liability under the Act is only upon the partners who are responsible for the firm for conduct of its business.  The High Court held that the prosecution of the applicants in personal capacity was not maintainable, appears to be out of place.   It is liability of a person as a partner of a firm that has to be given emphasis. Section 141 of the Act provides as to who shall be deemed as guilty and it mentions the person concerned not a company or the firm. Therefore, the complaint filed against the applicants was not against the provisions of law or against the provision under Section 141 of the Act.

Against the judgment of High Court the appellant filed the present appeal before the Supreme Court.  Simaiya Hariramani has not filed appeal against the judgment of High Court.  The Supreme Court considered the following issues to be take up in the present appeal for its decision-

• vicarious criminal liability of a partner; and
• whether a partner can be convicted and held to be vicariously liable when the partnership firm is not an accused tried for the primary/substantive offence.

The Supreme Court analyzed the provisions of the Act and Section 34 of the Drugs and Cosmetics Act, 1940 which is pari materia to Section 141 of the Act.

The Supreme Court observed that the expression ‘every person’, used in Section 141(1) of the Act, is wide and comprehensive enough to include a director, partner or other officers or persons. At the same time, it follows that a person who does not bear out the requirements of ‘in charge of and responsible to the company for the conduct of its business’ is not vicariously liable under Section 141 of the  Act. The burden is on the prosecution to show that the person prosecuted was in charge of and responsible to the company for conduct of its business.     A person liable under subsection (1) shall not be punished if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence. The onus to satisfy the requirements and take benefit of the proviso is on the accused.       

The Supreme Court further observed that Section 141(2) of the Act, does not state that the persons enumerated, which can include an officer of the company, can be prosecuted and punished merely because of their status or position as a director, manager, secretary or any other officer, unless the offence in question was committed with their consent or connivance or is attributable to any neglect on their part. The onus under sub-section (2) to Section 141 of the Act is on the prosecution and not on the person being prosecuted.  The term   ‘company’ means a body corporate and includes a firm or association of individuals, and a ‘director’ in relation to a firm means a partner in the firm.   Notwithstanding the legal position that a firm is not a juristic person, a partner is not vicariously liable for an offence committed by the firm, unless one of the twin requirements are satisfied and established by the prosecution.

The Supreme Court further observed that Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company.   Vicarious liability on the part of a person must be pleaded and proved and not inferred.

The Supreme Court observed that in the present case it is an admitted case of the respondent Bank that the appellant had not issued any of the three cheques, which had been dishonored, in his personal capacity or otherwise as a partner.   In the absence of any evidence led by the prosecution to show and establish that the appellant was in charge of and responsible for the conduct of the affairs of the firm, to mean ‘a person in overall control of the day-to-day business of the company or the firm’, the conviction of the appellant has to be set aside. 

The Partnership Act, 1932 creates civil liability. Further, the guarantor's liability under the Indian Contract Act, 1872 is a civil liability.  The Supreme Court held that the appellant may have civil liability and may also be liable under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. However, vicarious liability in the criminal law in terms of Section 141 of the Act cannot be fastened because of the civil liability. Vicarious liability under Section 141(1) of the 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 Section 141(2) of the 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 Supreme Court observed that the demand notice issued on 04.11.2015  by the Bank, through its Branch Manager, was served solely to Simaiya Hariramani, the authorized signatory of the Firm.  The complaint dated 07.12.2015 under Section 138 of the Act before the Court of Judicial Magistrate, Balodabazar, Chhattisgarh, was made against Simaiya Hariramani and the appellant.    Thus, in the present case, the Firm has not been made an accused or even summoned to be tried for the offence.  Such vicarious liability arises only when the company or firm commits the offence as the primary offender.

The Supreme Court allowed the appeal file by the appellant and set aside the appellant's conviction under Section 138 read with Section 141 of the Act.  The Supreme Court also set aside the judgment of the High Court confirming the conviction and order of sentence passed by the Sessions Court, and the order of conviction passed by the Judicial Magistrate First Class. 

Conclusion

From the above said judgment it is clear that the guarantor will never be made liable under the criminal Act since it creates only civil liability.  The remedy against the guarantor lies elsewhere.  Even the partners are also not vicariously liable unless the twin requirements are met as held by the Supreme Court in the above said case.