S.141 NI Act | Signatory Cannot Be Made Vicariously Liable In A Sole Proprietary Trading: Andhra Pradesh High Court

The Andhra Pradesh High Court has held that a signatory cannot be made vicariously liable under Section 141 of N.I. Act,1881 in a sole proprietary trading.

The petitioner/A2, was the authorized signatory to the sole proprietorship of A1 and had approached the Court by way of a Criminal Revision petition against the orders of the lower Court which had convicted him under sections 138 and 141 of the NI Act.

Justice Venkata Jyothirmai Pratapa relied on Raghu Lakshminarayanan v. Fine Tubes and held that a sole proprietorship cannot be the same as a 'company' as referred to under section 141 of the NI Act.

"Therefore, it is clear from the above ruling that a sole-proprietorship concern cannot be brought within the ambit of Section 141 of the N.I. Act. A sole proprietorship concern possesses no separate legal identity on its own and is merely a business name of the proprietor. Therefore, any reference made to proprietorship firm means and includes the proprietor and any reference made to proprietor, includes such concern. There is no question of treating such concerns as equivalent to a company, partnership firm, or even association of individuals," it held.

The Bench further held that a sole proprietor being an independent individual can only be prosecuted under section 138 of the NI Act, and in no way can vicarious liability be attached to the employees of the Sole proprietor.

The criminal proceedings were set into motion upon the defacto complainant preferring private complaints before the Magistrate under section 200 of the IPC against A1 and A2.

In his complaints, he contended that he had supplied rice worth 18 Lakhs to the Sole proprietorship/A1 on credit basis. A1 to clear the credit, issued four cheques, two of them for five lakhs and two of them for three lakhs.

When the defacto complainant tried to encash the cheques, the cheques were allegedly returned with an endorsement of 'insufficient funds'. Hence, he was compelled to initiate 4 legal proceedings (one for each cheque that was returned) against A1, the sole proprietor and A2, the authorized signatory of A1.

The Trial Court held that both A1 and A2 are guilty of the offence punishable under section 138 of the NI Act, and sentenced them to suffer imprisonment for a period of 1 year and pay a fine of INR10,000/-

The argument advanced by the petitioner, in the present revision petition was twofold. Firstly, it was contended that since the authorized signatory/A2 was not a signatory on the cheques nor were the cheques drawn in his name, he could not be held guilty on the mere ground of being an employee of the A1 proprietorship.

Secondly, A2 contended that A1 had already admitted to being the sole proprietor and this was a fact that was established. And when it was already admitted that A1 is the only proprietor, the question of vicarious liability does not arise.

The Bench held that only the person who draws the cheque from an account maintained by him can be liable under section 138. The Bench further noted that Petitioner is neither a signatory nor were the dishonoured cheques drawn from his bank account. Even otherwise, none of the complaints show that there is a joint account.

"Coming to Accused No.2/Petitioner, he is a Manager and Authorised Signatory, he cannot be prosecuted on the allegation that he was involved in the business of the proprietorship concern of which someone else (Accused No.1 herein) is the proprietor. In that view of the matter, since Accused No.1 is a proprietor of sole trading concern, only the proprietor can be liable under Section 138 of NI Act as the proprietorship concerned and the proprietor are one and the same. Simply put, Accused No.2 being an authorized signatory cannot be held vicariously liable," it concluded.

With these observations, the petitions were allowed and proceedings were quashed.

Criminal Petition Nos.,564, 566, 569 and 572 of 2020

Counsel for petitioner: V.R. Reddy Kovvuri

Counsel for respondent: Ms. Prasanna Lakshmi

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