A Section 138 prosecution against a company’s director is untenable without arraigning the company.

The complainant alleged that, during business dealings, he and his family members transferred approximately ₹94 lakhs to the petitioner’s company and associated entities for the supply of stone chips.

The petitioner, described as the Managing Director and authorised signatory of Sona Infracon Pvt. Ltd., issued a cheque for ₹40 lakhs bearing an endorsement that it was issued only as security and would be returned upon payment.

The cheque was presented on 10 January 2022 and again on 24 January 2022, but was dishonoured after payment had been stopped.

A statutory notice was issued on 1 February 2022, following which Complaint Case No. 360 of 2022 was instituted under Section 138 of the Negotiable Instruments Act, 1881 (“N.I. Act”).

The company allegedly maintaining the bank account on which the cheque was drawn was not arraigned as an accused; only the petitioner was impleaded in his individual capacity with reference to his designation as Managing Director.

The Magistrate took cognizance under Section 138 of the N.I. Act on 16 August 2022 and issued summons.

Subsequently, by order dated 1 February 2024, the Magistrate directed the petitioner to pay interim compensation equivalent to 20% of the dishonoured cheque amount under Section 143-A of the N.I. Act.

The petitioner challenged both orders under Section 482 of the Code of Criminal Procedure, 1973 (“Cr.P.C.”).

Whether a complaint under Sections 138 and 141 of the N.I. Act is maintainable against the Managing Director or authorised signatory when the company, being the drawer of the cheque and the primary offender, has not been arraigned as an accused?

Whether the petitioner’s contention that the cheque was issued only as security and that the underlying amounts had already been paid could be adjudicated at the stage of exercising inherent jurisdiction under Section 482 Cr.P.C.?

Whether the High Court could exercise jurisdiction under Section 482 Cr.P.C. despite the criminal trial having progressed to the stage of recording the accused’s statement under Section 313 Cr.P.C.?

Whether the order directing payment of interim compensation under Section 143-A of the N.I. Act could survive after quashing the cognizance order and consequential proceedings?

The Court applied Sections 138 and 141 of the N.I. Act, holding that the company on whose account the cheque was drawn is the primary offender and that prosecution of its directors or authorised signatories through vicarious liability ordinarily requires the company to be arraigned as an accused.

Relying on Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661, the Court treated arraignment of the company as an express condition precedent for attracting vicarious liability under Section 141.

The same principle was reaffirmed through Himanshu v. B. Shivamurthy, (2019) 3 SCC 797, Bijoy Kumar Moni v. Paresh Manna & Anr., (2026) 5 SCC 380, and Manjula Kapoor v. State of Himachal Pradesh & Anr., 2026 SCC OnLine SC 1521.

Under Sripati Singh (since deceased) through his son Gaurav Singh v. State of Jharkhand & Anr., (2022) 18 SCC 614, a security cheque may attract Section 138 if the debt has matured and remains unpaid, but whether payment was made and whether the cheque continued to be only a security instrument are ordinarily triable factual questions.

The Court further applied Section 482 Cr.P.C., relying on Anand Kumar Mohatta v. State (NCT of Delhi), (2019) 11 SCC 706, to hold that inherent jurisdiction may be exercised at an advanced stage where continuation of proceedings would constitute abuse of process, and Section 143-A of the N.I. Act as the statutory basis for interim compensation.

The Court found from the complaint itself that the relevant transactions were conducted through the company’s account and that the cheque had been issued by the petitioner on behalf of the company.

Since the company was not made an accused, the foundational requirement for fastening vicarious liability upon the petitioner under Section 141 was absent.

This was considered a fundamental and fatal defect in the complaint, not a disputed factual matter capable of being cured during trial.

The Court declined to determine conclusively whether the cheque was a security cheque or whether the alleged payments had discharged the liability, observing that those matters involved competing factual claims and would ordinarily require evidence.

However, the unresolved merits of the security-cheque issue did not prevent quashing because the complaint was legally unsustainable at its inception due to non-impleadment of the company.

The advanced stage of the trial also did not bar relief under Section 482 Cr.P.C.; although the Court ordinarily exercises restraint at such a stage, continuation of proceedings founded on a fundamentally defective complaint would itself amount to abuse of process.

Since the cognizance order was quashed, the consequential order directing interim compensation under Section 143-A could not independently survive.

Exercising jurisdiction under Section 482 Cr.P.C., the Court quashed the Magistrate’s cognizance order dated 16 August 2022 and all consequential proceedings in Complaint Case No. 360 of 2022.

The order dated 1 February 2024 directing payment of 20% interim compensation under Section 143-A of the N.I. Act was also quashed.

Both criminal miscellaneous applications were allowed.

The Court clarified that the quashing was based on the fatal procedural and legal defect in the complaint and was not an adjudication on the merits of the complainant’s allegations; the complainant remained at liberty to pursue any other remedy available in law.