Trusts and Liability Under the Negotiable Instruments Act: Supreme Court Clarifies Trustee Accountability

The Supreme Court in Sankar Padam Thapa vs. Vijaykumar Dineshchandra Agarwal establishes that a Trust lacks independent legal personality, holding that trustees or chairpersons who issue cheques on its behalf are personally liable under Section 138 of the Negotiable Instruments Act (NI Act),1881 with legal responsibility resting on them rather than the Trust.

Background

The Agriculture Crafts Trades and Studies Group of Institutions (ACTS Group), which managed William Carey University in Shillong, faced severe financial difficulties and consequently entered a Memorandum of Understanding (MoU) on 12 October 2017 with the Orion Education Trust, transferring the university’s administrative and financial control. The Respondent, Vijaykumar Dineshchandra Agarwal, Chairman of Orion Education Trust, issued a cheque of ₹5 crores to the Appellant, Sankar Padam Thapa, for facilitating the transition process. When the cheque was presented for payment, it was dishonoured due to insufficient funds, leading to the issuance of a statutory notice under Section 138 of the NI Act, and the filing of a criminal complaint under Sections 138 and 142 of the NI Act and Section 420 of the IPC. The Trial Court took cognisance and summoned the Respondent, but the High Court of Meghalaya, by its order dated 21 November 2022, quashed the complaint on the ground that the Orion Education Trust, on whose behalf the cheque was issued, was not made an accused. The Appellant challenged this before the Supreme Court, arguing that a Trust is not a juristic person and that proceedings against its Trustee or Chairman are valid even in the absence of the Trust being arrayed as a party, prompting the Court to examine the extent of trustee liability under the NI Act.

Key Findings of the Supreme Court on Trusts and Liability under the NI Act

1. Trust is Not a Juristic Person : The Supreme Court reaffirmed that under Sections 3 and Section  13 of the Indian Trusts Act, 1882, a Trust is only an obligation attached to the ownership of property and does not have a separate legal identity. It cannot sue or be sued in its own name. The trustees, who hold and manage the Trust property, alone have the authority to initiate or defend legal proceedings. Legal rights and liabilities therefore rest with the trustees, not with the Trust itself.

2. Complaint Maintainable Against Trustees Without Making the Trust an Accused: The Court held that when a cheque issued on behalf of a Trust is dishonoured, a complaint under Section 138 of the NI Act is maintainable against the trustee or chairman who signed the cheque, even if the Trust itself is not made an accused. Since a Trust has no independent existence in law, all acts done in its name are, in effect, acts of the trustees, who are responsible for the financial obligations arising from them.

3. Trustees’ Personal Liability under the NI Act Strengthened: The judgement underscored that the person who signs a dishonoured cheque carries primary criminal liability under Section 138. Referring to earlier rulings in SMS Pharmaceuticals Ltd. vs. Neeta Bhalla (2005) and K.K. Ahuja vs. V.K. Vora (2009), the Court reiterated that signatories and managing heads are responsible for the conduct of an organisation’s business. Accordingly, a trustee or chairman cannot avoid liability by claiming that the Trust should have been made a party.

4. Trusts Cannot Be Equated with Companies or Associations of Individuals: The Court made a clear distinction between a Trust and a company. While a company incorporated under the Companies Act is a juristic person with a distinct legal identity, a Trust is merely a fiduciary relationship without such status. The Court rejected the argument that a Trust could be treated as an “association of individuals” under Section 141 of the NI Act, thereby limiting vicarious liability only to trustees.

5. Reaffirmation of Trustees’ Duty to Defend Legal Proceedings: Relying on Section 13 of the Indian Trusts Act, the Court noted that trustees are under a statutory duty to maintain and defend all suits concerning Trust property. This provision reinforces that trustees, and not the Trust, are accountable in all legal and financial matters, acting as the legal representatives of the Trust.

6. Limited Scope of the Judgement: Finally, the Court clarified that its findings are confined to the context of the NI Act. While the ruling does not extend to other areas of law where Trusts may be treated differently, it sets a clear precedent for determining responsibility and liability in financial transactions involving Trusts.

The Court held that the complaint was legally maintainable and that the trustee must face trial for the alleged offence.

Implications and Key Takeaways for Non-Profit and Charitable Organisations

1. Trustees’ Personal Liability Reinforced: The ruling firmly establishes that trustees who sign cheques on behalf of a Trust are personally liable under Section 138 of the NI Act if the cheque is dishonoured. The Trust, lacking independent legal status, cannot shield them from prosecution. Trustees must verify fund availability and authorisation before issuing cheques to avoid personal criminal liability.

2. No Juristic Immunity for Trust-based Entities: The Court clarified that a Trust is not a juristic person and cannot sue or be sued in its own name. Hence, non-profit Trusts do not enjoy the limited liability protections available to companies or societies.Trustees’ personal accountability extends to all financial and contractual acts carried out in the Trust’s name.

3. Strengthened Need for Governance and Documentation: As trustees bear personal responsibility, maintaining proper records of authorisations, financial resolutions, and board decisions becomes critical. Non-profits should adopt transparent governance frameworks and documented approval processes for all monetary transactions.

4. Uniform Legal Position Across Jurisdictions: The Supreme Court overruled conflicting High Court judgements that had earlier recognised Trusts as juristic persons. This provides clarity and uniformity across India. Non-profits must now align their compliance frameworks with this settled interpretation that liability lies with trustees, not the Trust.

5. Heightened Compliance and Risk Management Obligations:  Trusts must adopt proactive measures such as regular audits, compliance training, and risk assessments to protect both the organisation and trustees.

6. Implication on Public Charitable Trusts:Though public charitable Trusts are not governed by the Indian Trusts Act, 1882, the Supreme Court’s reasoning applies equally to them. Since such Trusts lack separate legal personality, all financial and legal responsibility rests with their trustees. Accordingly, trustees must exercise due care and accountability in managing transactions undertaken in the Trust’s name.