Signatory Not Liable for Sole Proprietor's Debts: Andhra Pradesh High Court

Signatory Not Liable for Sole Proprietor's Debts: Andhra Pradesh High Court

The Andhra Pradesh High Court has determined that Section 141 of the Negotiable Instruments Act (NI Act), 1881 does not impose vicarious liability on signatories in sole proprietorship businesses.

The petitioner, designated as A2 and acting as the authorized signatory for the sole proprietorship identified as A1, filed a Criminal Revision Petition seeking to overturn the orders of the lower court, which had convicted him of offences under Sections 138 and 141 of the NI Act.

Justice Venkata Jyothirmai Pratapa referred to the case of Raghu Lakshminarayanan v. Fine Tubes and concluded that, according to section 141 of the NI Act, a sole proprietorship cannot be equated with a 'company.'

In light of the precedent established in the above-mentioned case, Justice Pratapa found that a sole proprietorship cannot be equated with a "company" within the meaning of Section 141 of the NI Act. Due to the inherent absence of a separate legal entity in a sole proprietorship, any reference to "proprietorship firm" or "proprietor" inherently encompasses both. Thus, sole proprietorships cannot be considered analogous to companies, partnerships, or even individual associations.

Further, the Court determined that, as independent individuals, sole proprietors are subject to prosecution only under Section 138 of the NI Act. Vicarious liability for employee actions cannot be imposed upon them.

The initiation of criminal proceedings against A1 and A2 before the Magistrate was prompted by the filing of private complaints by the de facto complainant under Section 200 of the Indian Penal Code.

The complainant alleged that he had supplied rice, valued at ₹18 lakh, to A1, a sole proprietorship, on a credit basis. To settle the outstanding amount, A1 issued four cheques, two for ₹5 lakh each and two for ₹3 lakh each.

The cheques, upon presentation for encashment, were returned bearing endorsements of "insufficient funds." Consequently, the defacto complainant commenced four legal proceedings, one for each returned cheque, against A1, the sole proprietor, and A2, the authorised signatory of A1.

Finding both A1 and A2 guilty under Section 138 of the NI Act, the Trial Court sentenced them to one year imprisonment and a ₹10,000 fine.

The petitioner's revision petition advanced a two-pronged argument. Firstly, it was contended that since the authorised signatory, A2, neither signed the cheques nor were they drawn in his name, he could not be held guilty solely on the basis of being an employee of the A1 proprietorship.

Secondly, A2 contended that A1's established status as the sole proprietor, as confirmed by his own admission, precluded the application of vicarious liability in his case.

The Bench held that Section 138 liability attaches only to the person who draws the cheque from his account. Since the petitioner neither signed nor drew the dishonoured cheques from his account or a joint account, he cannot be held liable.

The Court granted the petitions and quashed the proceedings, observing that Accused No. 2/Petitioner, in his capacity as Manager and Authorized Signatory, cannot be prosecuted for alleged involvement in the business of the proprietorship concern owned by Accused No. 1. Given that Accused No. 1 is the sole proprietor, only the proprietor can be held liable under Section 138 of the NI Act, as the proprietorship and the proprietor are legally indistinguishable. Therefore, Accused No. 2, despite being an authorized signatory, cannot be vicariously liable.