Recovery Based On Cheque | Company Cannot File Suit Based on Cheque Issued to Individual Director: Karnataka High Court

Karnataka High Court, in the case of ABC Trading Company Ltd. v. Ruben Colaco, ruled that a company could not file a suit for recovery of money based on a cheque issued in the personal name of its Managing Director. The court dismissed the appeal filed by ABC Trading Company, affirming that the cheque in question was issued to the individual, V.G. Siddartha Hegde, and not to the company. This ruling reaffirms the legal distinction between a company as a separate entity and its directors or shareholders.

The appellant, ABC Trading Company Ltd., engaged in coffee trading, filed a suit in 2008 before the Senior Civil Judge, Chikmagalur, seeking recovery of ₹2,159,653 from the defendant, Ruben Colaco, a coffee planter. The company claimed that the defendant had received fertilizers and advances from the company and had agreed to settle the outstanding amount through coffee consignments, which were not delivered as promised.

On January 12, 2005, the defendant issued a cheque for ₹1,407,456 in favor of the company’s Chairman and Managing Director, V.G. Siddartha Hegde, to settle the dues. However, when the cheque was presented to the bank, it was dishonored due to insufficient funds. Despite issuing a legal notice, the defendant failed to repay the amount, prompting the company to file the suit.

The defendant, in his written statement, contended that the company had insisted on a blank cheque when advancing the sum of ₹500,000. He admitted signing the cheque but denied any direct transactions with Siddartha Hegde in his personal capacity, claiming that the cheque was meant for the company.

The trial court, in its judgment dated December 2, 2010, dismissed the company’s suit. It held that the cheque had been issued in the personal name of V.G. Siddartha Hegde, not in the name of ABC Trading Company. The court found that there was no resolution or authorization from the company allowing Siddartha Hegde to file the suit on behalf of the company. Additionally, the legal notice and other documents submitted by the company were in Siddartha Hegde’s personal name, further supporting the conclusion that the company lacked the standing to sue based on the cheque.

Aggrieved by this decision, ABC Trading Company filed an appeal before the Karnataka High Court under Section 96 of the Code of Civil Procedure, challenging the dismissal of the suit.

The primary legal question was whether ABC Trading Company had the locus standi to file a suit for recovery of money based on a cheque issued in the personal name of its Chairman and Managing Director, V.G. Siddartha Hegde. The company argued that the cheque was issued to Hegde as a representative of the company, and the amount was owed to the company for business transactions.

On the other hand, the defendant maintained that the cheque was a personal one, issued under pressure when the company advanced a sum of money. He further argued that the company had no direct involvement with the cheque, which was issued to an individual, and thus had no legal basis to file the suit.

The Karnataka High Court, led by Justices S.G. Pandit and C.M. Poonacha, examined the facts of the case and the documents presented. The court noted that the cheque in question, dated January 12, 2005, was indeed drawn in the name of V.G. Siddartha Hegde in his personal capacity and not in the name of ABC Trading Company. The court observed:

"It is relevant to note that from the certified copy of the cheque dated 13.01.2005... the said cheque has been drawn in the name of Sri. V.G. Siddartha Hegde and not in the name of the plaintiff."

Additionally, the court pointed out that the legal notice issued to the defendant, as well as other related documents, had been issued on behalf of Siddartha Hegde individually, not the company. The court emphasized the well-established legal principle that a company is a separate legal entity distinct from its directors or shareholders, and thus ABC Trading Company could not interchangeably use its own name and that of its Chairman in legal proceedings.

The court also rejected the appellant’s argument that the case should be remanded for further consideration, stating that there were no valid grounds to overturn the trial court’s findings. The judges noted that the appellant had failed to demonstrate that the company had any legal right to file the suit based on a cheque issued in an individual’s name.

The Karnataka High Court dismissed the appeal, affirming the trial court’s ruling that ABC Trading Company had no standing to sue based on the cheque issued to V.G. Siddartha Hegde. The court reiterated that a company and its directors are separate legal entities, and a company cannot initiate a legal action based on transactions involving an individual director’s personal dealings.

This judgment highlights the importance of maintaining the legal distinction between a company and its officers in commercial transactions and legal disputes.

Date of Decision: September 30, 2024

ABC Trading Company Ltd. v. Ruben Colaco​.