Sole Proprietor's Family Members Can't Be Held Vicariously Liable U/S 141 NI Act: Calcutta High Court

The Calcutta High Court on 29 July held that vicarious liability under Section 141 of the Negotiable Instruments Act cannot be imposed on family members of a sole proprietor merely by alleging that they are partners of the proprietorship concern.

Justice Uday Kumar quashed the criminal proceedings against Prakash Sharma, who was prosecuted under Sections 138 and 141 of the NI Act in connection with the dishonour of two cheques allegedly issued by S.R. Telematics. He held:

"Section 141 of the NI Act does not apply to a sole proprietorship. A proprietorship lacks an independent corporate personality separate from its owner, and family members cannot be held vicariously liable for it. A close domestic or familial relationship within a household cannot serve as a proxy for a registered partnership deed to anchor criminal liability under Section 141."

The complainant initiated proceedings after two cheques dated 20 February 2020, allegedly issued towards an outstanding liability of Rs. 2.34 lakh, were dishonoured on 24 April 2020 with the remark “Account Closed”.

After the accused failed to respond to a statutory notice dated 22 May 2020, the complainant filed the complaint. Sharma approached the High Court after the Judicial Magistrate rejected his plea seeking his removal from the proceedings in December 2021.

He argued that S.R. Telematics was a sole proprietorship owned by his mother and not a partnership firm. He contended that he was neither the proprietor nor a signatory to the cheques. He further submitted that his father, who was alleged to be the drawer of the cheques, had died on 23 November 2017, before the cheques were issued.

The Court held that the complainant could not invoke Section 141 of the Negotiable Instruments Act by merely claiming that Sharma was a partner of his mother's sole proprietorship. It held that a sole proprietorship does not have an independent legal identity separate from its owner and that a family relationship cannot create vicarious criminal liability under the Act. It observed:

"The complainant's bold assertion that the petitioner acted as a "partner" of a sole proprietorship concern belonging to his mother is a legal absurdity. Criminal liability under a summary penal statute cannot be widened by crude implications or speculative logic. The failure of the complainant to recognize that a proprietorship concern cannot be sued as an independent juristic entity separate from its master constitutes a fundamental defect that invalidates the invocation of Section 141 against anyone else under the banner of that entity."

It also held that the banking mandate stood automatically revoked upon the death of the account holder under Section 201 of the Indian Contract Act. It observed that a deceased person cannot maintain an active account for the purpose of attracting liability under Section 138 of the Negotiable Instruments Act.

Further, the Court held that even if Sharma had handed over his deceased father's pre-signed cheques, he could not be held liable under the Negotiable Instruments Act as he was neither the drawer nor the account holder. It stated:

"The complainant's narrative that the petitioner handed over his late father's pre-signed cheques does not save the prosecution under the NI Act. Even if true, the petitioner is not the drawer of the cheques, nor is the account maintained by him."

Lastly, the Bench noted that any alleged deception involving the use of a deceased person's pre-signed cheques would attract general criminal law relating to cheating or forgery and not prosecution under the Negotiable Instruments Act.

Accordingly, the High Court quashed the order dated 7 December 2021 passed by the Judicial Magistrate and the criminal proceedings against Sharma.

For Petitioner: Pawan Kumar Gupta, Ld. Sovan Bera, Puja Beriwal, S. Nesar, S. Sett, Advocates

For Respondent: Manju Ararwal, Senior Advocate, Anju Manot, Anita Pandey, Advocates