2025 (1) TMI 58 - HC - Indian Laws

Section 138 NI Act proceedings against directors invalid without company as primary accused

Devender Sharma & Others Versus Durga Devi

HC held that proceedings under Section 138 NI Act against company directors/officers cannot continue when the company itself was not impleaded as accused ... Dishonour of cheque - Company has not been impleaded, as accused, in this case - whether the proceedings cannot be initiated and allowed to be continued against the company? HELD THAT:- Admittedly, the said Company has neither been impleaded, as, accused in the complaint, under Section 138 of the NI Act, nor in the legal notice issued against the Company, before filing the complaint. Even otherwise, the Company cannot now be impleaded as accused, in this case, as before filing the complaint under Section 138 NI Act, certain legal formalities have to be completed by the complainant, i.e., issuance of legal notice, demanding the money, within the stipulated period. The nonprosecution of the company, from whose account the cheque was issued and dishonored, is fatal, noncurable illegality and shall lead to the dismissal of the complaint, being legally defective and not properly constituted. Conclusion - The prosecution for cheque dishonor under Section 138 of the NI Act requires the company to be named as an accused. Directors and officers can only be held vicariously liable if the company is prosecuted. Petition allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the complaint under Section 138 of the Negotiable Instruments Act (NI Act) is maintainable against the directors and cashier of a company without the company being impleaded as an accused.Whether the issuance of a cheque by the directors and cashier of a company, without sufficient funds, can attract personal liability under Section 138 of the NI Act.Whether the non-prosecution of the company, whose account was used to issue the dishonored cheque, constitutes a fatal defect in the legal proceedings.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Maintainability of Complaint Without Company as AccusedRelevant Legal Framework and Precedents: Section 138 and Section 141 of the NI Act, as interpreted in the Supreme Court cases of Aneeta Hada v. Godfather Travels and Tours Pvt. Ltd. and Himanshu v. B. Shivamurthy.Court's Interpretation and Reasoning: The court emphasized that for prosecution under Section 138, the company must be arraigned as an accused. The directors and other officers can only be vicariously liable if the company is prosecuted.Key Evidence and Findings: The complaint and legal notice were issued only against the directors and cashier, not the company.Application of Law to Facts: The court found that the absence of the company as an accused is a non-curable defect, rendering the complaint unsustainable.Treatment of Competing Arguments: The petitioners argued that the complaint was not maintainable without the company being an accused, while the respondent contended that the directors and cashier were liable. The court sided with the petitioners based on established legal precedents.Conclusions: The complaint was deemed not maintainable due to the non-impleading of the company.Issue 2: Personal Liability of Directors and CashierRelevant Legal Framework and Precedents: Section 141 of the NI Act and relevant Supreme Court judgments.Court's Interpretation and Reasoning: The court reiterated that directors and other officers can only be held liable if the company is prosecuted and found guilty.Key Evidence and Findings: The cheque was issued from the company's account, and the directors and cashier acted on behalf of the company.Application of Law to Facts: The court applied the principle that the company is the principal offender, and vicarious liability for directors and officers arises only if the company is prosecuted.Treatment of Competing Arguments: The court rejected the argument that directors and officers could be held liable independently of the company.Conclusions: The directors and cashier cannot be held personally liable without the company being prosecuted.Issue 3: Non-Prosecution of the CompanyRelevant Legal Framework and Precedents: Supreme Court precedents emphasizing the necessity of prosecuting the company.Court's Interpretation and Reasoning: The court held that the non-prosecution of the company is a fatal defect that cannot be remedied.Key Evidence and Findings: The company was not named as an accused in the complaint or legal notice.Application of Law to Facts: The court applied the legal requirement that the company must be prosecuted for the complaint to be valid.Treatment of Competing Arguments: The court dismissed arguments that the complaint could proceed without the company.Conclusions: The complaint was dismissed due to the non-prosecution of the company.3. SIGNIFICANT HOLDINGSVerbatim Quotes of Crucial Legal Reasoning: 'For maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative.'Core Principles Established: The prosecution for cheque dishonor under Section 138 of the NI Act requires the company to be named as an accused. Directors and officers can only be held vicariously liable if the company is prosecuted.Final Determinations on Each Issue: The court quashed the proceedings against the directors and cashier, ruling that the complaint was not maintainable without the company being an accused. The court clarified that this dismissal does not preclude the complainant from pursuing other legal remedies, such as a civil suit for recovery.