Cheque Dishonour Complaint Against Trustee Maintainable

Source: Supreme Court  

Why in News? 

Recently, Justices Ahsanuddin Amanullah and Prashant Kumar Mishra held that a cheque dishonour complaint under the Negotiable Instrument Act, 1881 NI Act is maintainable against a trustee who signed the cheque on behalf of a trust, even if the trust itself is not made an accused, since a trust is not a juristic person and liability rests on the signing trustee. 

• The Supreme Court held this in the matter of Sankar Padam Thapa v. Vijaykumar Dineshchandra Agarwal   (2025).

What was the Background of Sankar Padam Thapa v. Vijaykumar Dineshchandra Agarwal   (2025) ? 

• William Carey University, owned by the Agriculture Crafts Trades and Studies Group of Institutions (ACTS Group), was facing a severe financial crisis. The ACTS Group entered into a Memorandum of Understanding with Orion Education Trust (Orion) on 12th October 2017 to hand over the University's management and administration to Orion. 
• The Respondent was the Chairman of Orion Education Trust. As Chairman, he authorized the Appellant to liaise with governmental authorities and facilitate the administrative transition of the University from ACTS Group to Orion. 
• Pursuant to this arrangement, the Respondent, as authorized signatory of Orion, issued a cheque dated 13th October 2018 for Rs. 5,00,00,000/- (Rupees Five Crores) in favour of the Appellant for services rendered. The cheque was drawn on Kotak Mahindra Bank, Vadodara Branch. 
• When the Appellant presented the cheque at his ICICI Bank Branch, Shillong on 7th December 2018, it was dishonoured with the endorsement "insufficient funds". 
• The Appellant issued a legal notice under Section 138 of the Negotiable Instruments Act, 1881 on 19th December 2018, which the Respondent received on 27th December 2018. Subsequently, the Appellant filed complaint case No. 44(S)/2019 before the Trial Court against the Respondent personally for offences under Sections 138 and 142 of the Negotiable Instruments Act and Section 420 of the Indian Penal Code. 
• The Respondent challenged the complaint's maintainability on the ground of non-joinder of necessary parties, arguing that Orion Education Trust, being a juristic entity and the principal accused, had not been added as a party. He contended that without the Trust being named as an accused, no vicarious liability could be placed on him. 
• The High Court of Meghalaya allowed the Respondent's petition and quashed the complaint and summoning order dated 11th February 2019, holding that the Trust must be made an accused. The Appellant then appealed to the Supreme Court.

What were the Court’s Observations? 

• The Supreme Court held that a Trust, as defined under the Indian Trusts Act, 1882, is an obligation and not a legal entity or juristic person. Unlike a company, a Trust does not have a separate legal existence and cannot sue or be sued in its own name. Section 13 of the Trusts Act places the obligation to maintain and defend suits on the Trustees, not the Trust itself. A Trust operates only through its Trustees, who are the legal entities responsible for managing Trust property. 
• The Court reiterated the principles from SMS Pharmaceuticals Ltd. v. Neeta Bhalla (2005) and K K Ahuja v V K Vora (2009), holding that the signatory of a dishonoured cheque is clearly responsible for the incriminating act and is covered under Section 141 of the Negotiable Instruments Act. When a person holds a position such as Chairman or Managing Director and signs a cheque, he is prima facie responsible for the day-to-day business and can be prosecuted without making substantive averments about his specific responsibilities. 
• The Court concluded that when a cause of action arises due to dishonour of a cheque and a complaint is initiated under the Negotiable Instruments Act, the complaint is maintainable against the Trustee who signed the cheque, without the requirement to array the Trust as an accused. Since only Trustees are liable and answerable for acts done on behalf of the Trust, there is no legal requirement for the Trust to be made a party in proceedings under the Negotiable Instruments Act. 
• The Supreme Court allowed the appeal, set aside the High Court's judgment, and restored the criminal proceedings against the Respondent to the Trial Court. The Court overruled several contrary High Court decisions that had held a Trust to be a juristic person capable of prosecution under the Negotiable Instruments Act, clarifying that such decisions wrongly equated a Trust with a company. 

What is Section 138 and 141 of NI Act ? 

• Section 138 of the Negotiable Instruments Act, 1881 
  • Section 138 of the Negotiable Instruments Act deals with the offence of dishonour of cheques for insufficiency of funds.  
  • This provision, inserted in Chapter 17 of the Act in 1988, specifically addresses situations where a cheque drawn to discharge a debt is returned unpaid by the bank. 
  • Essential Elements: The offence is established when a cheque is dishonoured due to insufficient funds or if the amount exceeds the arrangement made with the bank. The drawer becomes criminally liable irrespective of the nature of the underlying transaction. Essential conditions include the existence of a legally enforceable debt or liability, issuance of a cheque in discharge of that debt, and subsequent dishonour of the cheque. 
  • Procedure for Prosecution: Upon dishonour, the payee must issue a written notice to the drawer within thirty days of receiving information about the dishonour. The drawer then has fifteen days from receipt of notice to make payment. If payment is not made within this period, a complaint must be filed within one month of the expiry of the fifteen-day notice period. The complaint can be filed in a court within whose jurisdiction the payee's bank is situated. 
  • Punishment: Conviction under Section 138 can result in imprisonment extending up to two years and/or a fine extending up to twice the amount of the cheque or debt.
• Section 141 of the Negotiable Instruments Act, 1881 
  • Section 141 establishes the principle of vicarious liability when offences under the Act are committed by companies. This provision holds individuals associated with a company personally liable for the company's actions. 
  • Scope of Liability: If an offence under Section 138 is committed by a company, every person who was in charge of and responsible for the conduct of the business of the company shall be deemed guilty. The Explanation defines "company" to include any body corporate, firm, or other association of individuals. 
  • Proof of Liability: Establishing liability requires proving active involvement in the company's business and a direct link to the offence. Mere designation as director or nominal head is insufficient. The complaint must specifically spell out how the accused was in charge of or responsible for the company's business. 
  • Sub-section (2) provides that if the offence was committed with the consent, connivance, or due to neglect of any director, manager, secretary, or other officer, such person shall also be deemed guilty. 
  • Defences Available: An accused can escape liability by proving the offence was committed without his knowledge or that he exercised due diligence to prevent it. However, the burden of proof lies on the accused. Government nominees as directors are exempted from prosecution under this provision.