Supreme Court: Authorized Signatory Not A 'Drawer' Under NI Act, Cannot Be Ordered To Pay Compensation

Supreme Court: Authorized Signatory Not A 'Drawer' Under NI Act, Cannot Be Ordered To Pay Compensation

In a recent ruling, the Supreme Court clarified that an authorised signatory of a company cannot be considered the 'drawer' of a cheque and therefore cannot be directed to pay interim compensation under Section 143A of the Negotiable Instruments Act of 1881 (NI Act).

The bench, comprising Justices Vikram Nath and Prashant Kumar Mishra, emphasised that while authorised signatories act on behalf of a company, they do not assume the company's legal identity. This fundamental principle of corporate law means that authorised signatories bind the company through their actions but do not merge their legal status with that of the company. The High Court's interpretation of Section 143A was upheld, which specifies that 'drawer' refers specifically to the issuer of the cheque, not to the authorised signatory.

"Authorised signatories act on behalf of the company but do not assume the company's legal identity. This principle, fundamental to corporate law, ensures that while authorised signatories can bind the company through their actions, they do not merge their legal status with that of the company. This distinction supports the High Court's interpretation that the drawer under Section 143A refers specifically to the issuer of the cheque, not the authorised signatories," the bench said.

"The general rule against vicarious liability in criminal law underscores that individuals are not typically held criminally liable for acts committed by others unless specific statutory provisions extend such liability. Section 141 of the NI Act is one such provision, extending liability to the company's officers for the dishonour of a heck. The appellants' attempt to extend this principle to Section 143A, to hold directors or other individuals personally liable for interim compensation, is unfounded. The High Court rightly emphasised that liability under Section 141 arises from the conduct or omission of the individual involved, not merely their position within the company," the judgement stated.

Section 143A of the NI Act gives the court the power to order the 'drawer' of a dishonoured cheque to pay interim compensation to the complainant. The issue was whether the signatory of the cheque authorised by the company to issue the cheque could be considered a 'drawer' to attract liability under Section 143A of the NI Act.

Answering in the negative, Justice Vikram Nath upheld the impugned decision of the Bombay High Court, which held that the authorised signatory of the company could not be considered the drawer of the cheque to attract liability under Section 143A of the NI Act.

The High Court rejected the inclusion of authorised signatories within the definition of 'drawer'. It pointed out that the legislature's choice of words in Section 143A specifically targets the drawer of the cheque, whether an individual or a company, and does not extend liability to authorised signatories.

Contextually, the High Court stressed the finding that 'drawer' within the framework of the NI Act consistently refers to the party issuing the cheque. It dismissed arguments seeking to expand this definition to include authorised signatories, citing the need for consistency in statutory interpretation.

The Court observed that the legislative intent, as discerned from the plain language of Section 143A, aims to hold the drawer accountable and not the authorised signatory.

“The appellants' argument for a broader interpretation to include authorised signatories under Section 143A contradicts this principle and would lead to an unjust extension of liability not supported by the statutory text,” the Court added.

Reference was made to the case of N. Harihara Krishnan v. J. Thomas, where the Court held that an authorised signatory of a company could not be considered the drawer of the cheque.

“Every person signing the cheque on behalf of a company on whose account the cheque is drawn does not become the drawer of the cheque. Such a signatory is only a person duly authorised to sign the cheque on behalf of the company or drawer of the cheque,” the Court observed in N. Harihara Krishnan.

Referring to the precedent, the Court in the instant case said:

“The respondents correctly argued that an authorised signatory is not a drawer of the cheque, as established in N. Harihara Krishnan (Supra). This judgement clarified that a signatory is merely authorised to sign on behalf of the company and does not become the drawer.”

Distinguishing between the legal identity of the company and its authorised signatory, the Court observed that since both have separate legal personalities, the authorised signatory's act to issue a cheque on behalf of the company does not assume the company's legal identity, and they cannot be held liable for the default committed by the company.

“The distinction between legal entities and individuals acting as authorised signatories is crucial. Authorised signatories act on behalf of the company but do not assume the company's legal identity. This principle, fundamental to corporate law, ensures that while authorised signatories can bind the company through their actions, they do not merge their legal status with that of the company,” the Court said.

In conclusion, the Court affirmed that the High Court's interpretation of Section 143A of the NI Act, excluding authorised signatories from liability, is well-founded. The Court said that the authorised signatory only acts on behalf of the company to issue the cheque, and such an act by the authorised signatory would not make him the drawer of the cheque.

In a nutshell, the authorised signatory could not be made liable to pay interim compensation under Section 143A of the NI Act.