Liability of Authorized Signatory of a Company to Pay Interim Compensation Under the Negotiable Instruments Act, 1881

The Bombay High Court (“HC”) recently ruled that an authorised signatory of a company who signs a cheque on its behalf is not a ‘drawer’ of the cheque and thus is not obligated to pay interim compensation under section 143A of the Negotiable Instruments Act, 1881 (“NI Act”) in the event of cheque dishonour. The problem derives from two inconsistent Supreme Court (“SC”) decisions and a lack of authoritative rule on the subject.

Company and Authorised Signatories’ Liability for Cheque Dishonour

Section 141 governs liability for cheque dishonour when the violation is committed by a firm. A cursory reading of the provision indicates that the firm and anybody who was in control of and responsible to the company for the conduct of its business at the time the act was committed are both guilty of the offence. The firm bears the principal obligation, and the person in control of and accountable for the company is held vicariously liable for the default through the use of a deeming fiction.

This Section deviates from the normal rule of criminal law prohibiting vicarious culpability. Section 141, sub-section (2), states that if the act is done with the permission, connivance, or negligence of a director, manager, secretary, or other officer of the firm, that person is also judged guilty of the offence. In SMS Pharmaceuticals Ltd. v. Neeta Bhalla, the Supreme Court interpreted section 141 and held that a director of a corporation who was not in control of or accountable for the conduct of the company’s business at the relevant time is not liable unless the requirements set forth in sub-section (2) are satisfied.

The Court determined that a signatory to a dishonoured cheque is covered by sub-section (2) and that no additional averment concerning permission, connivance, or carelessness is required to hold him accountable. This is a well-established legal principle that has been upheld by the Supreme Court in judgements such as K.K. Ahuja v. V.K. Vora and National Small Industries Corporation Ltd. v. Harmeet Singh Paintal, among others.

The Authorised Signatory’s status as a ‘Drawer’ of the Cheque

The dispute stems from two seemingly contradicting statements made by the Supreme Court in Aneeta Hada v. Godfather Travels and Tours Pvt. Ltd., determined by a three-judge bench, and a subsequent division bench judgement in N. Harihara Krishnan v. J. Thomas. In Aneeta Hada, the Court was requested to decide whether a complaint under Section 138 read with Section 141 of the NI Act might be brought against a company’s director or authorised signatory without arraigning the corporation as an accused. The Court declined to answer the question. It made the following comment in paragraph 20 of the judgement, casting doubt on what appeared to be an accepted proposition:

“20. Section 7 of the Act defines “drawer” to mean the maker of a bill of exchange or a cheque. An authorised signatory of a company becomes a drawer as he has been authorised to do so in respect of the account maintained by the company.”

On the basis of this remark, the Respondents before the Bombay High Court contended that the reference to the ‘drawer’ of the cheque in sections 138, 141, and 143A must obviously include the authorised signature of the cheque.

Can the Act’s Section 143A direct the Authorised Signatory to pay Interim Compensation?

The Negotiable Instruments Act (Amendment) Act of 2018 included Section 143A. It allows the Court to compel the drawer to pay the complaint interim compensation of up to 20% of the value of the cheque until the resolution of the dispute. Furthermore, section 148 allows the Appellate Court to mandate payment of a minimum of 20% of the fine or compensation issued by the trial Court while the case is being appealed. This sum is in addition to the interim compensation provided by section 143A.

In the case of SMS Pharmaceuticals Ltd. v. Neeta Bhalla, the Respondents argued that Articles 143A and 148 should be read broadly to empower courts to order an authorised signatory to pay interim compensation. According to section 138, the Court has the authority to impose a fine on the defaulting corporation. Given the implications of Section 141(2), the authorised signatory might be held jointly and severally responsible for such fine. If the authorised signature is judged accountable under section 141(2) to pay the final relief of a fine imposed on a corporation under section 138, interim compensation, which is an interim remedy in aid of the final relief, may also be imposed on such authorised signatory.

The Court rejected this argument for two reasons which are as follows:

• Firstly, the obligation for punishment of those named in section 141(2) is triggered only if it is ‘shown’ that the offence was committed with their permission, connivance, or carelessness. Interim compensation is often provided at the stage of the Magistrate’s recording of the plea. However, no proof can be shown at this time to substantiate these elements, and their responsibility cannot be demonstrated. The concept of a company’s unique legal identity is equally important here.
• Second, section 141 has no express provision for the Court to order anyone other than the drawer to pay interim compensation. Section 143A addresses the payment of interim compensation and gives Courts special authority to instruct only drawers to pay the sum. The Court inferred the legislature’s aim from the declaration of goals and reasons of the 2018 Amendment as well as the Lok Sabha discussions. Section 143A’s word ‘drawer’ has a clear and obvious meaning.

Inference

While most cases under the NI Act deal with criminal process, this judgement explains that authorised signatories cannot be ordered to pay interim compensation for a corporate default. The Bombay High Court emphasises the importance of a corporation’s unique legal identity and sees the firm as a different accused from its agents/representatives. The Court further noted that under Section 148 of the Act, an order for deposit of at least 20% of the fine/compensation can be granted solely against drawers (in this case, the corporation). Depositing such a minimal sum is not required in an appeal filed by parties other than the drawer (here, its agents/representatives).