Supreme Court: While deciding whether, when a director is convicted under Section 138 of the Negotiable Instruments Act (NI Act), in the absence of the company’s conviction due to a legal impediment such as winding up, the appellate court can mandate deposit of 20% of the compensation under Section 148 of the NI Act, a Division Bench of Aravind Kumar* and N.V. Anjaria, JJ., referred the matter to the larger bench for an authoritative determination of the issue.
Factual Matrix
In the instant matter, the Steel Authority of India Ltd. (SAIL) (Respondent–Complainant), entered into a Memorandum of Understanding dated 17-04-2012 with Shiv Mahima Ispat Private Limited (Respondent 3-accused company) for supply of steel. During the financial year 2012–2013, the accused company placed orders for 208.01 metric tonnes of HR coils, which were dispatched from Bokaro Steel Plant to Jaipur under multiple invoices dated 25-12-2012 and 26-12-2012.
Towards payment of the supplied goods, the accused company issued a cheque dated 03-01-2013 for ₹4,82,72,269/-, signed by the appellant, who was a director of the accused company. Upon presentation, the cheque was returned unpaid with the endorsement “Exceeds Arrangement”.
After complying with statutory requirements under Section 138 of the Negotiable Instruments Act, 1881, SAIL filed a criminal complaint before the competent Magistrate against the company and its directors. Simultaneously, SAIL also initiated winding-up proceedings against the accused company before the Rajasthan High Court. By order dated 22-04-2016, the accused company was ordered to be wound up, and the winding-up attained finality on 01-12-2016. Consequently, prosecution under Section 138 NI Act survived only against the appellant, the company having been rendered incapable of being proceeded against due to liquidation.
Trial Court’s Proceedings
The Trial Court convicted the appellant under Section 138 of the NI Act, sentenced him to two years’ simple imprisonment and directed payment of ₹8.10 crores as compensation under Section 357(3) CrPC, with a default sentence of six months’ imprisonment.
Appellate Court’s Proceedings
The appellant preferred an appeal under Section 374 CrPC and sought suspension of sentence under Section 389 CrPC. The Appellate Court suspended the sentence but imposed a condition requiring the appellant to deposit 20% of the compensation amount, in terms of Section 148 of the NI Act.
The appellant sought exemption from the deposit and contended inter alia that the company had already been wound up; partial recovery had been effected through the Official Liquidator; he was not the “drawer” of the cheque; imposition of deposit would result in double recovery, and the requirement rendered his statutory appeal illusory.
The appellant’s exemption application was rejected, and the High Court, by the impugned order, affirmed the deposit condition, imposed costs of ₹5 lakhs, and restrained the appellant from alienating personal assets.
Moot Point
When a director of an accused company is convicted under Section 138 of the NI Act, without the company itself being convicted due to some existing ‘legal snag’ – such as winding up, liquidation, or any similar scenario -can the appellate court, while hearing the appeal filed by the director challenging his conviction and sentence, impose a condition of depositing 20% of the amount as prescribed under Section 148 of the Act?
Court’s Analysis
The Court observed that the appellant was not a casual or nominal director, but the signatory to the dishonoured cheque, and was found by the trial court to be in charge of and responsible for the conduct of the business of the company at the relevant time. It was noted that the proceedings against the company had not failed on merits but had abated due to a legal impediment, namely winding up. The Court further noted that the appellant had availed multiple remedies, sought repeated indulgence from courts at different stages, and that the complainant had already been driven into prolonged litigation despite a recorded conviction.
The Court reiterated the settled position that under Section 141 of the NI Act, vicarious criminal liability can be fastened upon persons who were in charge of and responsible for the conduct of the business of the company at the time of commission of the offence.
Relying on Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661, the Court reaffirmed that ordinarily, prosecution of directors without arraigning the company is impermissible. However, the Court emphasised on the well-recognised exception that where the company cannot be prosecuted due to a legal impediment, proceedings may validly continue against the persons falling within the category contemplated by Section 141.
“The only exception arises where, due to a legal impediment, the company cannot be prosecuted, in such circumstances, the prosecution may proceed solely against the ‘category of persons’. … Where a complaint has been properly filed against both the company and the ‘category of persons’, but during the pendency of the proceedings the company goes into liquidation, winding-up, or faces any other legal snag, the prosecution will continue only against the ‘category of persons’ and not against the company.”
The Court held that liquidation and winding up of the company constitutes such a legal snag, and once this condition is satisfied, conviction of the director alone does not suffer from any legal infirmity.
The Court further reaffirmed that vicarious liability under Section 141 is distinct from the concept of “drawer” under Section 138. The expression “drawer”, as defined under Section 7 of the NI Act, refers to the maker of the cheque, i.e., the person on whose account the cheque is drawn.
The Court observed that Section 148 was introduced to remedy the systemic abuse of appellate processes, whereby convicted drawers routinely secured suspension of sentence and delayed payment of compensation for years, thereby frustrating the object of Section 138.
“The mischief targeted by the amendment was not merely the delay in trial, but the erosion of confidence in the cheque as a reliable negotiable instrument of commerce. By obligating the Appellate Court to consider a pre-deposit, the Legislature sought to infuse financial discipline and ensure that convictions under Section 138 attain practical efficacy, rather than remain symbolic judicial declarations.”
The Court reiterated that Section 148 is compensatory and remedial in nature, intended to preserve the credibility of cheque transactions and to prevent appeals from being used as instruments of delay.
Relying on Surinder Singh Deswal v. Virender Gandhi, (2019) 11 SCC 341, the Court reiterated that the expression “may” in Section 148 has been judicially construed as “shall”, making the deposit requirement mandatory in ordinary circumstances.
The Court acknowledged that decisions such as Jamboo Bhandari v. MP State Industrial Development Corpn. Ltd., (2023) 10 SCC 446 and Muskan Enterprises v. State of Punjab, (2024) SCC OnLine SC 4107, recognised a narrow and limited discretion with the appellate court to grant exemption from deposit in exceptional circumstances.
The Court distinguished the judgments in Shri Gurudatta Sugars Marketing (P) Ltd. v. Prithviraj Sayajirao Deshmuk, 2024 SCC OnLine SC 1800 and Bijay Agarwal v. Medilines, 2024 SCC OnLine SC 4094, relied upon by the appellant, and observed that those cases dealt with authorised signatories or non-executive directors, against whom liability under Sections 143-A or 148 was sought to be imposed without establishing that they were in charge of the company’s affairs.
The Court asserted that in contrast to above mentioned cases, the present appellant was found, on evidence, to be a director actively managing the affairs of the company, and whose prosecution continued only because the company could not be proceeded against. The Court held that extending the ratio of Gurudatta Sugars (Supra) or Bijay Agarwal (Supra) to such cases would defeat the object of Section 148 and allow convicted persons to circumvent statutory safeguards merely by invoking the company’s liquidation.
The Court held that merely because the company could not be prosecuted or convicted on account of a legal snag, it cannot be said that the director who stands convicted must, in every such case, be automatically exempted from the requirement of deposit under Section 148. The Court cautioned that treating all such cases as exceptional would defeat the very purpose of Section 148 and encourage dilatory tactics.
Court’s Decision
The Court held that a director of a company cannot be granted a blanket exemption from the deposit contemplated under Section 148 of the NI Act, as suggested in Bijay Agarwal (Supra) and whether such exemption is warranted must necessarily depend upon the factual matrix of each individual case.
The Court noted that while Gurudatta Sugars (Supra) and Bijay Agarwal (Supra) adopted a strict construction of the term “drawer”, Surinder Singh Deswal (Supra) emphasised the mandatory and purposive nature of Section 148. In cases such as the present one, where a director alone stands convicted because the company cannot be prosecuted due to a legal snag, the interplay between Section 141 and Section 148 raises a substantial question of law of general public importance.
The Court opined that the issue in the present case could not be conclusively answered without an authoritative pronouncement reconciling the aforesaid lines of Gurudatta Sugars (Supra) and Bijay Agarwal (Supra) and clarifying the true scope of Section 148 in such situations.
“As a Bench of co-equal strength, we are bound by the principles of judicial discipline and, therefore, cannot take a different view on our own. In light of the substantial interpretative question involved, we deem it appropriate that the matter would require to be considered by a Larger Bench.”
Accordingly, the Court deemed it appropriate that the matter be placed before a Larger Bench of the Supreme Court for an authoritative determination of the issue “Whether, upon a conviction under Section 138 read with Section 141, the appellate deposit contemplated by Section 148 may be directed against a convicted director/authorized signatory, or whether such deposit is confined to the juristic “drawer/company” alone in all scenarios?”, so as to ensure uniformity, certainty and consistency in the application of Section 148 of the NI Act.
[Bharat Mittal v. State of Rajasthan, Special Leave Petition (Crl.) No.12327 of 2025, Decided on 18-12-2025]
*Judgment by Justice Aravind Kumar