Corporate Updates 07 June 2014

Case Law:

In a complaint under Section 138 of Negotiable Instrument Act 1881 (“the Act”), whether all persons to the joint account are liable for dishonor of Cheque or not ?

The Supreme Court of India in the matter of Aparna A Shah Vs. Sheth Developers (P) Ltd held that the joint account holder cannot be held liable unless he has also signed and issued the cheque in question. In other words, all persons to the joint account must sign and only in that event, all such persons shall be liable for dishonor of cheque under Section 138 of the Act.

Facts of the Case

1. M/s. Sheth Developers Private Ltd. (the respondent) is a company incorporated under the provisions of the Companies Act 1956 and is engaged in the Business of Land Development and Construction. Aparna A. Shah (the appellant) and Ashish Shah, her husband, are the Land Aggregators and Developers who have been in the said business for the last 15 years and are the owners of certain lands in and around Panvel.

2. According to the appellant, the respondent Company expressed interest to start in developing a Township Project and a Special Economic Zone (SEZ) project in Panvel. One of the broker introduced the respondent company with the appellant and Ashish Shah, who were also looking for a suitable person, in developing the said land On believing the said representations, the respondent-Company requested for inspection of the title documents in respect of the said land, the appellant and her husband agreed for the same upon the entrustment of a token amount of Rs. 25 crores with an understanding between the parties that the said amount would be returned if the project is not materialize. Agreeing the same, the respondent-Company issued a cheque of Rs. 25 crores in favour of the appellant herein and her husband. However, for various reasons, the proposed joint venture did not materialize and it was claimed by the appellant herein that the whole amount of Rs. 25 crores was spent in order to meet the requirements of the initial joint venture in the manner as requested by the respondent-Company. According to the appellant, again the respondent Company expressed interest to start a new project and to take financial facilities from their bank in order to submit a tender for the purchase of a mill land and to take financial facilities from their bank.

3. On an understanding between the respondent and the appellant, a cheque of Rs. 25 crores was issued by the husband of the appellant from their joint account. It is the case of the appellant that in breach of the aforementioned understanding, on 05.02.2009, the respondent deposited the cheque with IDBI Bank at Cuffe Parade, Mumbai and the said cheque was dishonoured due to “insufficient funds”. On 18.02.2009, a statutory notice under Section 138 of the Act, was issued to the appellant and her husband asking them to repay the sum of Rs. 25 crores. Aggrieved by the orders of the competent authority, the appellant has filed the appeal by way of special leave.

Judgement

1. Supreme Court holds that under Section 138 of the Act, it is only the drawer of the cheque who can be prosecuted. In the case on hand, admittedly, the appellant is not a drawer of the cheque and she has not signed the same. Though cheque contains name of the appellant and her husband, the fact remains that her husband alone put his signature. In addition to the same, a bare reading of the complaint was also the affidavit of examination-in-chief of the complainant and a bare look at the cheque would show that the appellant has not signed the cheque.

2. Also holds that under Section 138 of the Act, in case of issuance of cheque from joint accounts, a joint account holder cannot be prosecuted unless the cheque has been signed by each and every person who is a joint account holder.

3. The said principle is an exception to Section 141 of the Act which would have no application in the case on hand. The proceedings filed under Section 138 cannot be used as an arm twisting tactics to recover the amount allegedly due from the appellant.

4. It cannot be said that the complainant has no remedy against the appellant but certainly not under Section 138. The culpability attached to dishonor of a cheque can, in no case “except in case of Section 141 of the Act” be extended to those on whose behalf the cheque is issued. This Court reiterates that it is only the drawer of the cheque who can be made an accused in any proceeding under Section 138 of the Act.

Conclusion

In case of issuance of cheque from joint accounts, it is only the drawer of the cheque who can be prosecuted and other joint account holder cannot be prosecuted unless the cheque has been signed by each and every person who is a joint account holder u/s 138 of Act. To put it clear, no one is to be held criminally liable for an act of another.