Employee of Proprietorship Cannot Face Cheque-Bounce Prosecution, but Strategic Silence to Statutory Notice May Invite Cheating Case: Punjab and Haryana High Court

Case Name: Rahul Sharma v. M/s IAG Automation Pvt. Ltd.

Date of Judgment: 21 August 2026

Citation: CRM-M No. 29598 of 2023

Bench: Hon’ble Mr. Justice Jasjit Singh Bedi

Held: The Punjab and Haryana High Court held that an employee of a sole proprietorship cannot be prosecuted under Section 138 of the Negotiable Instruments Act, 1881 merely because he conducted business dealings or corresponded with the complainant on behalf of the concern. A proprietorship concern is neither a company nor a partnership firm and, therefore, the principle of vicarious liability under Section 141 of the NI Act cannot be extended to its employees. In the case of a cheque drawn on the account of a proprietorship concern, liability under Section 138 ordinarily rests upon the proprietor who maintains the account and signs the cheque. The Court consequently quashed the cheque-dishonour complaint and summoning order against the petitioner, who was neither the proprietor nor the signatory of the disputed cheque.

The Court, however, held that the petitioner and his father, who was the actual proprietor and signatory, could not derive an unqualified advantage from their failure to respond to the statutory demand notice. Their silence prevented the complainant from being informed, within the limitation period, about the identity of the person legally responsible for the cheque. Describing such conduct as indicative of dishonest intent, the Court granted the complainant liberty to initiate appropriate criminal proceedings for cheating or other applicable offences against the petitioner, the proprietor or the other accused.

Summary: M/s IAG Automation Pvt. Ltd. instituted a complaint under Section 138 of the Negotiable Instruments Act after a cheque for ₹11,32,639, dated 25 June 2018, was dishonoured. The cheque had allegedly been issued towards discharge of an existing legal liability. Following dishonour, the complainant issued a statutory demand notice, but no payment or reply was received. On 14 November 2018, the Judicial Magistrate First Class, Panchkula summoned the accused in the resulting complaint.

Rahul Sharma approached the High Court under Section 482 of the Code of Criminal Procedure seeking quashing of the complaint, summoning order and all consequential proceedings against him. He contended that M/s Crystal Chemicals & Engineers was a sole proprietorship owned by his father, Vinod Kumar Sharma. His father was also the signatory of the dishonoured cheque, whereas the petitioner was merely an employee of the concern. He argued that only the proprietor and signatory could be prosecuted under Section 138 and that no vicarious criminal liability could be imposed upon an employee of a proprietorship concern.

The complainant argued that the petitioner had personally handled its business dealings with the concern, exchanged emails and other correspondence, and delivered the disputed cheque. It was submitted that the petitioner had represented himself as the person conducting the business and that the question of his actual capacity should be determined during trial. The complainant also emphasised that neither the petitioner nor his father had replied to the statutory notice to disclose that Vinod Kumar Sharma was the sole proprietor and signatory.

The High Court relied upon the Supreme Court’s decision in Raghu Lakshminarayanan v. Fine Tubes, 2007 (2) RCR (Criminal) 571, which distinguishes a sole proprietorship from a company, partnership firm or association of individuals. A proprietorship has no separate juristic identity independent of its proprietor. Consequently, the statutory framework for fastening vicarious liability upon directors, partners or persons responsible for the affairs of a company under Section 141 of the NI Act does not apply to employees of a proprietorship.

The Court found it undisputed that Vinod Kumar Sharma was the sole proprietor of M/s Crystal Chemicals & Engineers and had signed the cheque in question. Although the petitioner had conducted business dealings with the complainant and exchanged correspondence on behalf of the concern, those circumstances could not make him criminally liable under Section 138 when he neither maintained the account nor signed the cheque. Penal liability under the NI Act must be construed strictly and cannot be enlarged to include a person whom the statutory language excludes.

The Court nevertheless took serious exception to the failure of both the petitioner and the proprietor to respond to the statutory demand notice. Had the petitioner promptly clarified that he was only an employee and that his father was the proprietor and signatory, the complainant could have proceeded against the legally responsible person within the prescribed period. Instead, the complainant was confronted with this defence only during the quashing proceedings, by which time a fresh prosecution under Section 138 against the proprietor could face limitation barriers.

Referring to Bijoy Kumar Moni v. Paresh Manna, 2025 (1) RCR (Criminal) 265; Sanjabij Tari v. Kishore S. Borcar, 2025 (4) RCR (Criminal) 420; Kuntegowda v. Thurubaiah, 2026 SCC OnLine SC 1485; and Sanjeev Vijaya Rao Betigeri v. Bharti Telemedia Ltd., CRM-M No. 30361 of 2019, decided on 13 August 2026, the Court observed that failure to reply to a statutory notice may support an inference in favour of the complainant, though such an inference must depend upon the facts of each case. While that silence could not cure the fundamental defect in the Section 138 prosecution, it could be relevant in examining whether the parties possessed dishonest intent and committed an independent offence such as cheating.

Decision: The High Court allowed the petition to the extent of quashing Criminal Complaint, the summoning order passed by the Judicial Magistrate First Class, Panchkula, and all consequential proceedings against Rahul Sharma. It held that only Vinod Kumar Sharma, being the proprietor and signatory of the cheque drawn on the proprietorship’s account, could attract liability under Section 138 of the NI Act.

At the same time, the Court granted the complainant liberty to lodge an appropriate FIR or institute a private criminal complaint against Rahul Sharma, Vinod Kumar Sharma or the other accused within 60 days from receipt of the judgment. It directed that if such proceedings were initiated within that period, the delay in their institution would not be questioned by the concerned court or police authorities.