Section 138 NI Act – No vicarious liability for dishonouring a check simply because a person was a partner or vouched for a loan: Supreme Court

The Supreme Court ruled on Monday that a person cannot be convicted of the offense of dishonouring a check under Section 138 of the Negotiable Instruments Act simply because they were a partner in the business that had contracted the loan or that it had acted as guarantor for such a loan.

Vicarious liability under section 141 of the NI Act cannot be imposed on a person simply because civil liability under the Partnerships Act rests with the partner, the Court said in that case. Dilip Hariramani versus Bank of Baroda.

“The Partnership Act 1932 creates civil liability. Further, the liability of the guarantor under the Indian Contracts Act 1872 is civil liability. The appellant may have civil liability and may also be liable in under the Banks and Financial Institutions Debt Collection Act, 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act 2002. However, liability for the act of another in criminal law under NI s. day-to-day activities of the business or enterprise Vicarious liability under subsection (2) arises where the offense is committed with the consent, connivance or is attributable to the negligence of a director, manager, secretary or other officer of the company” a bench consisting of judges Ajay Rastogi and Sanjiv Khanna watched.

The Court added that unless the company or business commits the offence, vicarious liability under section 141 cannot arise.

“..unless the company or enterprise committed the offense as the principal defendant, the persons mentioned in paragraph (1) or (2) would not be liable and held liable as a result of Section 141 of the NI Act extends vicarious criminal liability to officers associated with the corporation or enterprise when one of the two requirements of Section 141 has been satisfied, which ( s) person(s) then, considering the fiction, is made vicariously liable and punished” said the court.

The panel ruled on an appeal challenging the appellant’s conviction for refusing to honor a check issued by a company with which he was a partner. The check was signed by another partner. The company was not implicated in the complaint.

The Supreme Court noted that it was the appellant, of course, who did not issue any of the dishonored checks, either personally or otherwise as a partner. In the absence of evidence establishing that the appellant was responsible for the conduct of the business of the firm for the issuance of checks, the conviction must be quashed, added the Court.

“Section 141 of the NI Act extends vicarious criminal liability to officers associated with the corporation or enterprise where one of the two requirements of Section 141 has been satisfied, which person(s) (s) then, considering the fiction, is vicariously liable and punished.However, such vicarious liability only exists where the company or business commits the offense as a main perpetrator of the offence”, the Court observed.

“The appellant cannot be convicted solely because he was a partner in the company which had contracted the loan or that he stood surety for such a loan”, declared the Court allowing the appeal.

Case Title: Dilip Hariramani v Bank of Baroda

Reference: 2022 LiveLaw (SC) 457

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