2010 (7) TMI 286 - SC - Companies Law

Dishonour of cheques for insufficiency of funds in account - Held that - SLP dismissed. In this case, save and except for the statement that the Respondents, Mr. Rajiv Jain and Sarla Jain and some of the other accused, were Directors of the accused Companies and were responsible and liable for the acts of the said Companies, no specific allegation has been made against any of them. The question of proving a fact which had not been mentioned in the complaint did not, therefore, arise in the facts of this case. This has prompted the High Court to observe that the Bank had relied on the mistaken presumption that as Directors, Rajiv Jain, Sarla Jain and the other Directors were vicariously liable for the acts of the Company. Admittedly, except for the aforesaid statement, no other material has been disclosed in the complaint to make out a case against the respondents that they had been in charge of the affairs of the Company and were responsible for its action. The High Court, therefore, rightly held that in the absence of any specific charge against the Respondents, the complaint was liable to be quashed and the respondents were liable to be discharged. As to the submission made on behalf of the Bank that they were holders in due course of the four cheques issued by the Respondent No. 3 Company and that by presenting them to the Petitioner Bank for encashment, the Respondent No. 1 Company had become liable for dishonour thereof, has been adequately dealt with and negated by the High Court and does not require any further elaboration.

Summary

Issues:
1. Interpretation of provisions of section 141 of the Negotiable Instruments Act, 1881.
2. Vicarious liability of directors in a company for criminal offenses committed by the company.
3. Determination of liability in cases of dishonored cheques and the concept of "holder in due course."

Analysis:

Issue 1: Interpretation of provisions of section 141 of the Negotiable Instruments Act, 1881
The case involved a dispute where the Respondents challenged a complaint filed by the Petitioner Bank under sections 138 and 139 of the Negotiable Instruments Act, 1881. The Trial Court had rejected the Respondents' application for discharge, citing the presumption of a "holder in due course" under section 118(E) of the Act. The Respondents then moved the Delhi High Court under section 482 of the Criminal Procedure Code, which quashed the complaint and discharged the accused. The Supreme Court upheld the High Court's decision, emphasizing the need for specific allegations in a complaint to establish liability under section 141 of the Act. The Court referred to previous judgments, including SMS Pharmaceuticals Ltd. v. Neeta Bhalla, to clarify that mere directorship does not automatically imply liability without clear and unambiguous allegations of involvement in the company's affairs.

Issue 2: Vicarious liability of directors in a company for criminal offenses committed by the company
The Court reiterated that to prosecute directors under section 138 read with section 141 of the Act, the complaint must specifically allege their role in the transaction. The Court emphasized the importance of clear and unambiguous allegations to prevent frivolous litigation and abuse of the legal process. In this case, apart from general statements regarding directorship, the complaint lacked specific charges against the accused directors, leading the High Court to quash the complaint. The Court upheld this decision, emphasizing the necessity of detailed allegations to establish vicarious liability of directors in criminal proceedings.

Issue 3: Determination of liability in cases of dishonored cheques and the concept of "holder in due course"
The Petitioner Bank argued that as holders in due course of the cheques issued by the Respondent No. 3 Company, they were entitled to proceed against the Respondent No. 1 Company for dishonor. However, the High Court rejected this argument, stating that the Respondent No. 1's role was limited to presenting the cheques for collection, and they were not directly involved in the dishonor. The Court concurred with the High Court's decision, indicating that the Petitioner Bank's argument did not hold merit in this context.

In conclusion, the Supreme Court dismissed the Special Leave Petitions filed by the Petitioner Bank, upholding the High Court's decision to quash the complaint and discharge the accused due to the lack of specific allegations establishing vicarious liability under the Negotiable Instruments Act, 1881.