Guarantor not liable under 138 0f N.I. Act – Apex Court

A person cannot be found guilty of dishonoring a check under Section 138 of the Negotiable Instruments Act just because he was a partner in the company that took the loan or because he was a guarantor for such a loan, according to the Supreme Court (DILIP HARIRAMANI VERSUS BANK OF BARODA D.D 9th May 2022)

Two issues raised before the Apex Court in Dilip Harmani vs Bank of Baroda (i) vicarious criminal liability of a partner; and (ii) whether a partner can be convicted and held to be vicariously liable when the partnership firm is not an accused tried for the primary/substantive offence.

Facts - Bank of Baroda, had granted term loans and cash credit facility to a partnership firm – M/s. Global Packaging on 04th October 2012 for Rs.6,73,80,000/-. It is alleged that in part repayment of the loan, the Firm, through its authorized signatory, Simaiya Hariramani, had issued three cheques of Rs. 25,00,000/- each on 17th October 2015, 27th October 2015, and 31st October 2015. However, the cheques were dishonored on presentation due to insufficient funds. The Bank, through its Branch Manager, issued a demand notice to Simaiya Hariramani under the NI Act. After that Bank filed a complaint under Section138 of the NI Act. The Firm was not made an accused. Simaiya Hariramani and the appellant, as per the cause title, were shown as partners of the Firm. Appellant Convicted by Judicial Magistrate and same was upheld by Session Court and High Court. Appellant approached Apex Court.

Apex Court observed that Sub-section (1) to Section 141 of the NI Act states that where a company commits an offence, every person who at the time the offence was committed was in charge of and was responsible to the company for the conduct of the business, as well as the company itself, shall be deemed to be guilty of the offence. The expression ‘every person’ is wide and comprehensive enough to include a director, partner or other officers or persons. At the same time, it follows that a person who does not bear out the requirements of ‘in charge of and responsible to the company for the conduct of its business’ is not vicariously liable under Section 141 of the NI Act. The burden is on the prosecution to show that the person prosecuted was in charge of and responsible to the company for conduct of its business. The proviso, which is an exception, states that a person liable under subsection (1) shall not be punished if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence. The onus to satisfy the requirements and take benefit of the proviso is on the accused. Still, it does not displace or extricate the initial onus and burden on the prosecution to first establish the requirements of sub-section (1) to Section 141 of the NI Act. The proviso gives immunity to a person who is otherwise vicariously liable under sub-section (1) to Section 141 of the NI Act.

Apex Court held that admitted fact is that none of the three checks dishonored by the bank had been issued by the appellant in his role as an individual or as a partner. There was no evidence presented by the prosecution to indicate or establish that the appellant was in control of or accountable for the management of the firm's activities, hence his conviction must be overturned. Just though the appellant was a partner in the business that took the loan and acted as a guarantee for it does not mean he is guilty.

Apex court observed that The Partnership Act, 1932 creates civil liability. Further, the guarantor's liability under the Indian Contract Act, 1872 is a civil liability. The appellant may have civil liability and may also be liable under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. However, vicarious liability in the criminal law in terms of Section 141 of the NI Act cannot be fastened because of the civil liability.

Apex Court held that Section 141 of the N.I. Act imposes vicarious culpability by declaring a presupposition and a requirement for the organization or firm to commit the offence. Consequently, unless the corporation or firm is the primary perpetrator of the offence, the individuals listed in sub-sections (1) and (2) would not be accountable and convicted as vicariously culpable. One of the two conditions for vicarious criminal culpability under the NI Act is met by an official of a corporation or firm. Appeal allowed Conviction Set aside.

D.D- MAY 09, 2022.

DILIP HARIRAMANI VERSUS BANK OF BARODA