S.138 NI Act | Company's Liability To Repay Cheque Amount Not Affected By Changes In Officeholders: Karnataka High Court

The Karnataka High Court has held in a cheque dishonour case that the legal obligation to repay the amount associated with the cheques is not altered by changes in officeholders, and the burden of proof rests with the company or its officers to rebut the presumption of liability.

Justice M Nagaprasanna added that the chairman of a company or other officers who sign cheques remain liable under Section 139 of the NI Act unless they can present evidence to prove that the cheques were not issued for payment of a legally enforceable debt or liability.

“The death of the signatory to the cheque, issued in favour of the Bank, would not absolve or diminish the value of the cheque, even if it is a blank cheque issued as a security. The Bank was always at liberty to present the said cheque for its realisation as it was a security at its hands and security is sought to be redeemed by such presentation.”

The petitioners Rajiv and others had approached the court seeking to quash the proceedings initiated against them under Section 138 of the Negotiable Instruments Act for dishonor of certain cheques.

The respondent State Bank of India in the case had alleged that the petitioner issued the cheques in question as security for a loan. The respondent claimed that the petitioner had failed to fulfil their assurance of repaying the loan, which led to the cheques being dishonoured.

On January 6, 2018, the Company applied to the Bank for the renewal of a credit facility amounting to Rs. 65 crores to finance a tie-up with JSL for harvesting and transportation. The application was approved on January 25, 2018, with the credit facility granted against security. As a security measure, the Company's Chairman, Siddappa B. Nyamagouda, issued a cheque for Rs. 90 crores.

However, Nyamagouda passed away after issuing the cheque. Subsequently, accused No. 2 assumed the position of Chairman, and the renewal and execution of loan-related documents between the Bank and the Company continued. However, the loan account turned into a non-performing asset, and when the Bank attempted to encash the security cheque on March 24, 2021, it bounced due to insufficient funds. This dishonoured cheque led to legal proceedings, including a legal notice issued on March 27, 2021, and the initiation of prosecution.

The petitioners contended that the liability was guaranteed by issuance of a cheque by the then Chairman in his personal capacity. Since the cheque was presented after the death of the person who had issued it and is, therefore, not valid in the eyes of law. The entire proceedings that are initiated on the strength of the cheque so issued by the then Chairman, after his death, is clearly a nullity in law.

The bench went through the records and noted that the cheque was drawn on Union Bank for an amount of Rs.90 crores by the then Chairman not in his personal capacity but for Jamkhandi Sugars Limited – the Company.

“Therefore, the cheque is issued on behalf of the Company. It is, therefore, in the considered view of the Court, the other accused cannot project themselves to be ignorant of this fact.”

It rejected the petitioner's arguments and concluded that the presumption of liability under Section 139 of the NI Act applies to a person who issues a signed blank cheque, even if it was filled in by someone other than the drawer. The court also stated that the death of the drawer does not affect this presumption when the cheque is issued on behalf of a company.

It also remarked that now, with the account becoming sticky, the accused wanted to show their hands off to the Bank with the deceptive plea that it was issued by the then Chairman in his personal capacity and since he is no more, they have nothing to do.

The bench said, 

“The office bearers of the Company who had stepped into the shoes of the Chairman or Directors of the Company cannot wash off their hands of their liability of repayment, as it is neither the money belonging to the Directors or the officers of the Bank, it is public money.”

Relying on the Supreme Court judgement in the case of Sripati Singh v. State of Jharkhand(2021), 

"The death of the drawer of the cheque cannot and will not efface such presumption, as the cheque is issued on behalf of the Company. The Company is in existence, so are the Chairman and Directors. Therefore, it is for the Company or its Chairman or Directors to rebut such presumption before the Court, as it is trite that, bearers of the office of a Company may come and go, the company remains.”

Accordingly, it dismissed the petition.

Appearance: Advocate B.O.Chandrashekar, Advocate V.M.Sheelavant for petitioners.

Advocate Abhilash.R for Respondent Bank.

Citation: 2023 LiveLaw (Kar) 395

Case Title: Rajiv & Others And State Bank of India

Case no: CRIMINAL PETITION No.6481 OF 2022 C/W CRIMINAL PETITION No.7203 OF 2022.

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