Proprietor Liable for Cheques Signed by Authorized Signatory: 'Principal Cannot Evade Liability: PH High Court"

Punjab and Haryana High Court sets precedent, affirming liability of proprietors under Section 138 of the NI Act even if cheques are signed by an authorized agent. - The Punjab and Haryana High Court has ruled that the proprietor of a proprietorship firm can be held liable for cheque dishonor under Section 138 of the Negotiable Instruments Act, even if the cheque was signed by an authorized signatory and not by the proprietor himself. The judgment, delivered by Justice Deepak Gupta, emphasizes that the liability for a dishonored cheque issued by a sole proprietorship cannot be evaded by delegating signing authority.

M/s Advance Technological Products, a proprietorship firm engaged in importing and distributing electronic components, filed multiple complaints against M/s Delta Electronics and its proprietor, Kapil Gupta. The complaints arose from the dishonor of cheques totaling ₹1,43,68,005/-, issued by the accused firm's authorized signatory. The cheques were returned unpaid with the remark "payments stopped by drawer."

After the trial court summoned the accused under Section 138 of the NI Act, the revisional court exonerated both the proprietor, Kapil Gupta, and the proprietorship firm. The complainant, M/s Advance Technological Products, challenged this order in the High Court.

Justice Gupta underscored that a proprietorship firm is not a separate legal entity from its proprietor. Therefore, the proprietor is accountable for the actions of authorized signatories acting on behalf of the firm. "The promise to pay, inherent in the issuance of a cheque, will still be considered to have been made by the sole proprietorship firm," the court stated.

The court elaborated on the application of Sections 138 and 141 of the NI Act, clarifying that while Section 141 pertains to companies and partnerships, Section 138 imposes liability on individuals and entities directly issuing cheques. The judgment noted, "A sole proprietorship firm or its sole proprietor cannot evade liability under Section 138 by taking refuge in the fact that cheques were signed by an authorized signatory."

Justice Deepak Gupta remarked, "The mandate giver, the proprietor of the firm, cannot shrug off the liability under the Act by harping on the fact that he is not the signatory of the cheque. The cheques were issued on the account maintained by the proprietorship firm, and the proprietor shall remain responsible for the dishonor of the cheque."

The High Court's decision reinstates the trial court's summoning order against both the sole proprietor and the proprietorship firm, setting a precedent for similar cases. This judgment reaffirms that sole proprietors cannot escape liability for financial instruments issued on their firm's behalf, ensuring accountability and reinforcing the integrity of financial transactions.

Date of Decision: July 1, 2024

M/S Advance Technological Products vs. Kapil Gupta