Cheque Dishonour | No Vicarious Liability On Directors If Company Acquitted Of Offence Under NI Act: Kerala High Court

The Kerala High Court recently held that the directors of a company are not liable to be convicted for an offence under Section 138 ('Dishonour of Cheque') of the Negotiable Instruments Act ('NI Act') when the company itself is not found to have committed the offence. 

In setting aside an order of the trial court and acquitting the petitioner, a single bench of Justice Sophy Thomas observed:

"The liability of persons referred to in Section 141 of the N.I. Act ('Offences by Companies') is co-extensive with that of the company, firm or association of individuals, in a prosecution under Section 138 of the N.I Act. When it is found that the company has not committed the offence, and it is acquitted, its directors are not liable to be convicted, for the offence for which the company has been acquitted." 

The first respondent in the present case filed the complaint against the revision-petitioner, who was the Managing Director of Omnitech Information Systems Pvt. Ltd, for the dishonour of a cheque worth Rs 10 lakh which had been issued by the latter to the former.

The Company had been named as the first accused in the complaint, with the revision-petitioner/Managing Director being the 2nd accused and the other Directors making up the other accused persons. 

The trial court found all the accused guilty under Section 138 of the NI Act, and sentenced the first accused company to pay a fine, and the other accused directors, including the revision-petitioner, to both fine and simple imprisonment. 

The Appellate Court while acquitting the other respondents, including the company, only upheld the conviction of the revision-petitioner, although his substantive sentence was modified and reduced.

It was argued by the revision-petitioner that when his company had been acquitted of the offence under Section 138 of the NI Act, he could not be held vicariously liable for the offence committed by the Company. He added that the cheque had been issued in his capacity as the Managing Director of the Company, and as such he could not be held liable any longer. 

The Court perused a plethora of precedents such as Pramod v. Velayudhan (2005), Aneeta Hada v. Godfather Travels and Tours Private Ltd (2012), and Siby Thomas v. Somany Ceramics Ltd (2023), which laid down that commission of an offence under Section 138 of the NI Act by a juristic person is a prerequisite for proceeding against a person referred to under Section 141 of the N.I Act and hold them guilty. 

The Court noted that the revision-petitioner had issued the cheque in his capacity as the Managing Director of the Company. It found that when the Company had been acquitted by the appellate court, the Managing Director could also not be held guilty of any offence committed by the Company.

"No appeal or revision has seen preferred by the complainant/1st respondent against the acquittal of the 1st accused-company. So, that verdict has become final. So much so, the revision petitioner Managing Director cannot be held liable as the company was acquitted, finding that no offence was committed by the company. The revision petitioner in his personal capacity did not owe any amount to the complainant/1st respondent and Ext.P2 cheque was issued not towards discharge of any personal liability of the revision petitioner. He issued that cheque, in his capacity as the Managing Director of the company. Since the company is acquitted, its Managing Director, cannot have any liability, dehors the liability of the company," the Court added.

It thus set aside the impugned order and acquitted the revision-petitioner of the offence. 

Counsel for the Revision Petitioner: Advocate C.P. Peethambaran

Counsel for the Respondent: Public Prosecutor Renjith George

Citation: 2023 LiveLaw (Ker) 693

Case Title: Afsal Hussain v. K.S. Muhammed Ismail & Anr. 

Case Number: CRL.REV.PET NO. 1060 OF 2008

Click Here To Read/Download The Order