The Madras High Court has reaffirmed that a sole proprietor cannot evade criminal liability under Section 138 of the Negotiable Instruments Act merely because a cheque was signed by a mandate holder rather than the proprietor personally. The judgment clarifies that the statutory presumptions under Sections 118 and 139 apply when the cheque is drawn on the proprietor’s business account, shifting the burden to the accused to disprove the existence of a legally enforceable debt.
Background & Facts
The Dispute
The appellant, S.Suganya, proprietor of M/s. Ramgopal Sizing Mills, filed a criminal complaint against the first respondent, D. Murugesan, proprietor of M/s. Lakshmi Enterprises, for dishonour of a cheque issued in discharge of a loan. The cheque, dated 17.07.2009 and bearing No. 880341, was drawn on the City Union Bank, Erode Branch, for Rs. 30,000. It was signed by Vijayakumar, the second son of the accused and mandate holder of the business account. The cheque was returned unpaid on 20.07.2009 with the reason "Account Closed".
Key Facts
- The loan of Rs. 30,000 was advanced by the appellant to the first respondent on 10.04.2009 for urgent business purposes.
- The cheque (Ex.P1) was issued as a discharge of this debt.
- The first respondent closed the bank account on 30.06.2009, prior to the cheque’s presentation.
- The first respondent admitted in his defence (Ex.D1) that he had not surrendered the cheque book or informed the bank of the closure.
- The first respondent acknowledged that his son Vijayakumar was the mandate holder and managed the business operations.
- The appellant issued a legal notice (Ex.P3) on 25.07.2009, demanding payment within 15 days. The notice was received but no reply or payment was made.
- The complaint was filed on 15.09.2010 before the Judicial Magistrate No.1, Erode.
- The appellant examined two witnesses: PW1 (S. Ramgopal, power of attorney) and PW2 (S. Suganya, proprietor).
- The defence examined one witness: DW1 (D. Murugesan, the accused proprietor).
- Defence documents (Ex.D1 to D3) included the reply notice and bank closure proof, but no testimony from Vijayakumar or bank officials was adduced.
Procedural History
- 10.04.2009: Loan advanced by appellant to respondent.
- 17.07.2009: Cheque (Ex.P1) issued and presented for payment.
- 20.07.2009: Cheque dishonoured by bank with reason "Account Closed".
- 25.07.2009: Legal notice (Ex.P3) issued by appellant.
- 15.09.2010: Criminal complaint filed before Judicial Magistrate No.1, Erode (S.T.C.No.1222 of 2010).
- 22.09.2015: Trial Court convicted the accused under Section 138 NI Act and sentenced him to three months’ simple imprisonment.
- 29.02.2016: Lower Appellate Court (II Additional Sessions Judge, Erode) allowed the appeal (Crl.A.No.131 of 2015) and acquitted the accused.
- 23.02.2026: Criminal Appeal heard and reserved by Madras High Court.
- 25.03.2026: Judgment pronounced by Justice M. Nirmal Kumar.
The Parties' Positions
For the Appellant
- The cheque was issued by a mandate holder on behalf of the sole proprietorship.
- The statutory presumptions under Sections 118 and 139 of the NI Act apply.
- The accused failed to rebut the presumption that the cheque was issued for a legally enforceable debt.
- The accused admitted to closing the account without surrendering the cheque book or informing the bank.
- The accused did not examine his son Vijayakumar or bank officials to substantiate his claim of misuse.
- Reliance on Raghu Lakshminarayanan v. Fine Tubes and M. Vairavan v. T.M. Selvaraj to establish that sole proprietors are liable for cheques drawn on business accounts.
For the Respondent
- The cheque was signed by Vijayakumar, not the accused.
- The accused and his son were estranged and not in communication.
- The cheque was allegedly misused by Vijayakumar without authority.
- The appellant failed to produce books of account to prove the loan transaction.
- Reliance on Sri Murugan Financiers v. P.V. Perumal to argue that absence of books undermines the claim.
Relief Sought
The appellant sought setting aside of the acquittal order dated 29.02.2016 and restoration of the conviction and sentence passed by the Trial Court on 22.09.2015.
The Legal Issue
The central question was whether a sole proprietor can be held criminally liable under Section 138 of the Negotiable Instruments Act for a cheque signed by a mandate holder, when the cheque is drawn on the proprietor’s business account and the proprietor admits to having control over the account and cheque book.
Arguments Presented
For the Appellant
The appellant’s counsel argued that the statutory presumptions under Sections 118 and 139 of the NI Act are triggered when a cheque is drawn on a business account and signed by an authorised signatory. The accused, as the sole proprietor of M/s. Lakshmi Enterprises, was legally responsible for the actions of his mandate holder. The accused admitted to closing the account on 30.06.2009 without surrendering the cheque book or informing the bank, thereby creating a risk of misuse. The burden then shifted to the accused to prove the cheque was not issued for a legally enforceable debt, which he failed to do. The appellant relied on Raghu Lakshminarayanan v. Fine Tubes to establish that a sole proprietor and his business are one and the same for liability purposes, and on M. Vairavan v. T.M. Selvaraj to rebut the argument that failure to produce books of account invalidates the claim, since the appellant was not a financier.
For the Respondent
The respondent contended that the cheque was not signed by him and was allegedly misused by his estranged son, Vijayakumar. He argued that the absence of books of account and failure to produce the mandate holder as a witness rendered the appellant’s claim unproven. He relied on Sri Murugan Financiers v. P.V. Perumal to assert that the burden of proving the loan transaction lay with the complainant, especially since the transaction was not documented. He claimed the trial court erred in applying statutory presumptions without independent scrutiny of the evidence.
The Court's Analysis
The Court observed that the lower appellate court erred in shifting the burden of proof entirely onto the appellant. The issuance of the cheque (Ex.P1) on the business account of M/s. Lakshmi Enterprises, signed by the mandate holder, triggered the statutory presumptions under Sections 118 and 139 of the NI Act. The accused did not dispute the authenticity of the signature or the account’s ownership. He admitted to closing the account and retaining the cheque book without informing the bank or taking any action against his son.
"The 1st respondent admits that he has not informed the bank officials and not produced any document to prove that he surrendered the cheque book and remaining cheque leaves and not took any steps against his second son Vijayakumar for misusing the cheque (Ex.P1)."
The Court held that the accused’s defence was speculative and unsupported by evidence. The failure to examine Vijayakumar or bank officials rendered his claim of misuse implausible. The Court distinguished Sri Murugan Financiers v. P.V. Perumal, noting that the appellant was not a financial institution but a small business owner engaged in a one-time commercial transaction. The absence of books of account was not fatal to the case.
The Court further held that the principle in Raghu Lakshminarayanan v. Fine Tubes was squarely applicable: a sole proprietor is the legal entity behind the business, and any cheque drawn on the business account, even if signed by an agent, binds the proprietor. The lower appellate court’s conclusion that the appellant failed to prove the debt was perverse and contrary to the evidence.
The Verdict
The criminal appeal is allowed. The judgment dated 29.02.2016 of the II Additional Sessions Judge, Erode, acquitting the accused, is set aside. The conviction and sentence dated 22.09.2015 by the Judicial Magistrate No.1, Erode, are restored and confirmed. The accused is directed to undergo three months’ simple imprisonment. The trial court is directed to secure the accused for sentence execution. In the event the accused offers to repay the cheque amount of Rs. 30,000 and compound the offence, the trial court may entertain such an application.
What This Means For Similar Cases
Sole Proprietors Are Liable for Mandate Holder Cheques
- Practitioners must argue that Section 138 NI Act liability extends to sole proprietors even when cheques are signed by mandate holders, provided the cheque is drawn on the business account.
- The mere fact that the proprietor did not personally sign the cheque does not negate liability.
- The burden shifts to the accused to prove the cheque was not issued for a legally enforceable debt.
Failure to Secure Cheque Book Is Fatal to Defence
- If an accused closes a business account but retains the cheque book without informing the bank or reporting misuse, the defence of fraud or forgery will be viewed with suspicion.
- Courts expect prompt action - failure to report misuse or to examine the alleged wrongdoer (e.g., a family member or employee) weakens the defence.
Books of Account Are Not Mandatory for Non-Financiers
- The absence of books of account or income tax returns cannot be used to discredit a complainant who is not in the business of lending.
- The statutory presumption under Section 139 NI Act is sufficient to establish the debt, absent credible rebuttal.
