Supreme Court: Authorized Signatories Not Liable for Interim Compensation in Cheque Dishonour Cases

In a significant ruling, the Supreme Court of India has definitively settled a contentious issue in cheque dishonour cases, holding that authorized signatories of companies cannot be held personally liable for interim compensation under Section 143A of the Negotiable Instruments Act, 1881.

Background of the Case:

The dispute arose when Shri Gurudatta Sugars Marketing Pvt. Ltd. entered into agreements with Cane Agro Energy (India) Ltd. between September 2016 and June 2017 for the supply of sugar, against which advance payments totaling Rs. 63.46 crores were made. Upon Cane’s failure to fulfill its obligations, it issued cheques totaling Rs. 51.64 crores, which were subsequently dishonoured due to insufficient funds. The appellant sought interim compensation under Section 143-A of the NI Act, which the Judicial Magistrate initially granted.

The Bombay High Court, however, set aside the Magistrate’s order, ruling that the authorized signatory, who was not the drawer of the cheque, could not be held liable under Section 143-A for interim compensation. The court interpreted that the term ‘drawer’ specifically refers to the entity that issues the cheque, not its signatories.

The Supreme Court emphasized the distinction between the company and its representatives, maintaining that while the company can be held liable under Section 143-A, its authorized signatories cannot be personally directed to pay interim compensation.

Key Points of the Judgement:

1. Definition of “Drawer”: The Court stressed that Section 143A’s use of the term “drawer” relates expressly to the issuer of the cheque, which under normal circumstances is the company itself rather than one of its authorized signatories.
2. Distinction Between company and Signatories: The court’s decision affirmed the basic principle of corporate law, which makes a distinction between a corporation and the individuals who are representing it legally.
3. Strict Interpretation of Penal Provisions: The Court rejected arguments in favor of a broader, purposive interpretation of Section 143A, emphasizing the significance of strictly interpreting penal statutes.
4. Limited Vicarious Liability: The Court made it clear that personal liability for interim compensation under Section 143A does not extend to company officers’ criminal liability under Section 141 of the Act.
5. Legislative goal: By placing accountability on the drawer (the company) rather than on individuals operating on its behalf, Section 143A seeks to give payees of dishonoured cheques with temporary relief. The finding is in line with this legislative goal.

Justice Vikram Nath, writing for the bench, stated: 

            “27. In conclusion, it was submitted that the primary liability for an offence under Section 138 is that of the company itself and the company’s management is only subsequently and  vicariously liable. Thus, it is only the company that is to be considered as the drawer of the cheque. Consequently, a strict interpretation of Section 143-A would mean that it is only the drawer-company’s liability to pay the interim compensation as the provision does not provide for an interim compensation to be paid by the employees or the management or the signatory of the company.“

The Judgement clarifed the liability of companies in cheque bounce cases. It may also influence future legal strategies in similar disputes and provide relief to signatories of the companies who are being held for personal liabilities.

To enhance your legal career as a corporate lawyer or to setup your own private practice you must acquire practical legal skills, Inculcatelaw offers comprehensive courses to enhance your legal knowledge. Follow us on Linkedin and Instagram

Submit your blog on submissions.inculcatelaw@gmail.com.

Click Here to read judgement/order.