The Legal Problem: Who Is Liable For Bounced Cheques Issued By Trusts

A. Introduction:

The treatment of dishonoured cheques has long been a cornerstone of financial accountability under Indian law. Yet, for decades, a persistent ambiguity clouded one question — who bears criminal liability when a cheque issued by a Trust is dishonoured?

Unlike companies or firms, a Trust under the Indian Trusts Act, 1882, is not a separate legal entity but an obligation executed through its Trustees. This raised a crucial interpretive dilemma: could a Trust fall within the meaning of a “company” or “other association of individuals” under Section 141 of the Negotiable Instruments Act, 1881 (“NI Act”), and therefore be prosecuted for cheque dishonour under Section 138?

With no authoritative ruling from the Supreme Court, various High Courts adopted differing views — one view treats a Trust as an association of individuals to extend liability under the NI Act, while another view is that criminal prosecution could not lie against a non-juristic entity. This divergence resulted in considerable uncertainty in cheque dishonour prosecutions.

The Hon'ble Supreme Court in Sankar Padam Thapa v. Vijaykumar Dineshchandra Agarwal, 2025 SCC Online SC 2194 settled this interpretive conflict and took a view that a Trust is not a “company” or “association of individuals” under Section 141 of the NI Act, and that liability under the NI Act falls solely with the Trustee(s) who actually issued or signed the cheque. This article analyses the historical confusion, the Court's reasoning, and the far-reaching implications of this landmark pronouncement.

B. The Pre-Sankar Padam Thapa Era: A Labyrinth of Conflicting Interpretations:

To appreciate the significance of the Sankar Padam Thapa judgment, it is imperative to understand the legal backdrop against which it emerged. The core of the controversy revolved around the interpretation of Section 138 and, more critically, Section 141 of the NI Act.

Understanding the Legal Framework:

• Section 138 of the NI Act: This section criminalizes the dishonour of a cheque for insufficiency of funds, prescribing punishment of imprisonment or fine, or both. It primarily targets the person who issued the cheque.

• Section 141 of the NI Act (Offences by Companies): This section extends the liability for an offence under Section 138 to individuals associated with a company or "other association of individuals" when the offence is committed by a company or association of individuals. Specifically, it states: "If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. "The explanation clarifies that "company" includes a body corporate or other association of individuals.

C. The Nature of a Trust under Indian Law:

Central to the debate was the fundamental legal character of a 'Trust'. Under the Indian Trusts Act, 1882, a Trust is not a juristic person or a separate legal entity similar to a company or a registered society. Instead, it is an obligation annexed to the ownership of property, arising out of a confidence reposed in and accepted by the owner (the Trustee), for the benefit of another (the beneficiary). The Trustees are the legal owners of the Trust property and manage its affairs, but they do so in a fiduciary capacity. The Trust itself cannot sue or be sued in its own name; rather, it is the Trustees who act on its behalf.

D. The Judicial Divide and its Ramifications:

Given the distinct nature of a Trust, the question arose whether it could be subsumed under the expansive phrase “other association of individuals” in the explanation to Section 141 of the NI Act. This led to a significant divergence of opinions among various High Courts:

1. The View for Inclusion (Trusts as "Association of Individuals"): Some High Courts adopted a broader interpretation, holding that a Trust, being managed by a group of Trustees for a common purpose, could indeed be considered an "association of individuals." The rationale behind this view was often to ensure that entities, irrespective of their specific legal form, did not escape liability for cheque dishonour, thereby upholding the legislative intent of Section 138.Proponents of this view argued that if a Trust could open a bank account, issue cheques, and engage in financial transactions, it should also be held accountable for the dishonour of those cheques. They emphasized the collective action of Trustees in managing the Trust's affairs. This interpretation often led to a Trust being impleaded as an accused, alongside the signatory Trustees, complicating the prosecution process and raising questions about how a non-juristic entity could be 'punished'.
2. The View Against Inclusion (Trust is Not an "Association of Individuals"): Conversely, a significant number of High Courts maintained that a Trust, lacking a separate legal personality, could not be treated as a "company" or "other association of individuals" for the purposes of Section 141. This view emphasized the strict interpretation of penal statutes, arguing that criminal liability could not be extended by implication. The Courts highlighted the fundamental distinction between a Trust (an obligation) and a corporate body (a legal person).They contended that since the Trust itself could not be imprisoned or fined in its own name, and its assets were held by Trustees, the liability should squarely fall on the individuals who acted on its behalf, the Trustees. This approach often resulted in the quashing of a complaint where the Trust was named as an accused, leading to procedural delays and frustration for complainants.

E. The Landmark Clarification: Sankar Padam Thapa v. Vijaykumar Dineshchandra Agarwal, 2025 SCC OnLine SC 2194.

The Hon'ble Supreme Court, in Sankar Padam Thapa, meticulously examined the legislative intent behind Section 141 of the NI Act and the inherent nature of a Trust under Indian law. The judgment provides a comprehensive and unambiguous resolution to the long-standing debate.

The Supreme Court's Incisive Rationale:

1. Nature of a Trust Reaffirmed: The Court unequivocally reiterated that a Trust, as defined under the Indian Trusts Act, 1882, is not a juristic person. It is an arrangement, an obligation, and not an entity capable of holding property, suing, or being sued in its own name. The legal ownership of the property settled in a Trust vest in the Trustees.
2. Strict Interpretation of Penal Statutes: The Court emphasized the well-established principle that penal provisions, especially those creating vicarious liability like Section 141, must be interpreted strictly. Any ambiguity must be resolved in favour of the accused. Extending the definition of "company" or "other association of individuals" to include a Trust, which fundamentally lacks a separate legal personality, would amount to judicial overreach and an expansive interpretation not supported by the plain language of the statute.
3. Distinction from "Company" or "Association of Individuals": The Supreme Court drew a clear distinction between a Trust and entities like companies, firms, or other associations of individuals that possess a distinct legal identity or are capable of collective action and liability in their own name. A 'company' is a separate legal entity, capable of entering into contracts, owning property, and being sued. A 'firm' (partnership) is also treated as an "association of individuals" for certain legal purposes, where partners are collectively liable. A Trust, however, operates through its Trustees, who are the actual legal persons acting on its behalf. The Trust itself is merely the purpose or the obligation.
4. Focus on the Trustee's Personal Liability: The Court concluded that since the Trust itself cannot act, it is the Trustees who manage its affairs, operate its bank accounts, and sign cheques and hence, the responsibility for the dishonour of a cheque issued on behalf of a Trust must also squarely fall upon the individual Trustee(s) who signed the cheque and were responsible for the Trust's financial management.

Key Holdings of the Judgment:

Based on its comprehensive analysis, the Supreme Court laid down the following definitive principles:

1. A Trust is not a 'person' or 'company' or 'other association of individuals' within the ambit of Section 141 of the Negotiable Instruments Act, 1881. Consequently, a Trust cannot be prosecuted as an accused for the offence of cheque dishonour under Section 138 read with Section 141 of the NI Act.The complaint for dishonour of a cheque issued on behalf of a Trust can be directly maintained against the Trustee(s) who signed the cheque and were responsible for the conduct of the business or affairs of the Trust.
2. There is no requirement to implead the Trust itself as an accused in the complaint. Naming the Trust as an accused would be a futile exercise, as it is not a legal entity capable of being prosecuted or punished under the NI Act.

F. Implications and the Path Forward: A New Era of Clarity and Accountability:

The Sankar Padam Thapa judgment marks a watershed moment in Indian jurisprudence concerning the liability of Trusts under the NI Act. Its implications are far-reaching and beneficial for all stakeholders:

1. For Complainants (Payees/Beneficiaries): Simplified Prosecution: Complainants no longer need to grapple with the complex question of whether to name the Trust as an accused. They can directly proceed against the signatory Trustee(s), streamlining the legal process.
2. Reduced Litigation Hurdles: The judgment eliminates a common ground for quashing complaints, which previously arose when Trusts were incorrectly impleaded as accused, thereby reducing procedural delays and enhancing the efficiency of justice delivery. By pinning liability on the individual Trustees, the judgment ensures that those responsible for the financial mismanagement of a Trust leading to cheque dishonour are held accountable, upholding the sanctity of commercial transactions.
3. For Trustees: Heightened Personal Responsibility: The ruling unequivocally places the onus of financial prudence and compliance with the NI Act on individual Trustees. This necessitates greater diligence in managing Trust funds and ensuring sufficiency of funds in the Trust's bank account before issuing cheques.
4. Importance of Due Diligence: Trustees must exercise extreme caution and ensure that all financial decisions, particularly those involving the issuance of cheques, are made with proper authorization and a clear understanding of the Trust's financial position.
5. Clarity on Liability: While the judgment clarifies that the Trust itself cannot be prosecuted, it reinforces that the individuals acting on its behalf bear the legal consequences of their actions.
6. For the Legal Landscape and Judicial System: Uniformity and Consistency: The judgment resolves the conflicts amongst the divergent views of the High Courts, ensuring consistency, legal certainty and predictability.
7. Reduced Judicial Burden: By providing a clear legal position, the judgment will likely reduce the number of appeals and revisions arising from conflicting interpretations, thereby easing the burden on the higher judiciary.
8. Reinforcement of Legal Principles: The decision reaffirms fundamental principles of corporate criminal liability, strict interpretation of penal statutes, and the distinct legal character of various entities under Indian law. It underscores that criminal liability cannot be imposed by analogy or expansive interpretation where the statute does not explicitly provide for it.
9. Enhanced Accountability in Trust Management: By making individual Trustees directly liable, the judgment promotes greater transparency and accountability in the administration and financial management of Trusts, which often handle significant public or charitable funds.

Conclusion:

The Supreme Court's ruling in Sankar Padam Thapa v. Vijaykumar Dineshchandra Agarwal decisively closes a long-standing gap in cheque dishonour jurisprudence. By holding that a Trust, not being a juristic person, cannot be prosecuted under Section 141 of the NI Act, the Court has reaffirmed foundational principles of criminal law — particularly, that vicarious liability must be expressly provided by statute and cannot be inferred by analogy.

Equally important is the Court's affirmation that Trustees, who control the financial affairs and issue cheques on behalf of the Trust, bear personal responsibility for their acts. This strikes a careful balance between enforcing financial discipline and respecting the distinct legal nature of Trusts.

Beyond its immediate impact, the judgment enhances clarity, uniformity, and accountability in commercial dealings involving Trusts. It also reinforces judicial restraint in expanding penal provisions beyond their textual limits — a principle vital to preserving the integrity of statutory interpretation. In essence, the decision not only strengthens confidence in negotiable instruments law but also brings coherence to an area of jurisprudence long marked by uncertainty.

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