2014 (12) TMI 1070 - SC - Companies Law

Vicarious liability upon Director of the Company in case of dishonor of cheques - Whether the appellant is liable for prosecution u/s 138 r.w. Section 141 of the N.I. Act for the offence of dishonor of cheques committed by the default Company Held that - The appellant was wife of the Managing Director, and appointed as a Director of the Company M/S Elite International Pvt. Ltd. on 1st July, 2004 and had also executed a Letter of Guarantee on 19th January, 2005 - The cheques were issued during April, 2008 to September, 2008 - So far as the dishonor of Cheques is concerned, admittedly the cheques were not signed by the appellant - the appellant was not the Managing Director but only a non-executive Director of the Company - Non-executive Director is no doubt a custodian of the governance of the Company but does not involve in the day-to-day affairs of the running of its business and only monitors the executive activity - To fasten vicarious liability under Section 141 of the Act on a person, at the material time that person shall have been at the helm of affairs of the Company, one who actively looks after the day-to-day activities of the Company and particularly responsible for the conduct of its business - Simply because a person is a Director of a Company, does not make him liable under the N.I. Act - Every person connected with the Company will not fall into the ambit of the provision - only those persons who were in charge of and responsible for the conduct of the business of the Company at the time of commission of an offence will be liable for criminal action - a Director, who was not in charge of and was not responsible for the conduct of the business of the Company at the relevant time, will not be liable for an offence under Section 141 of the N.I. Act the same has been held in National Small Industries Corpn. Ltd. Versus Harmeet Singh Paintal 2010 (2) TMI 590 - SUPREME COURT OF INDIA Continuation of the criminal proceedings against the appellant under Section 138 read with Section 141 of the N.I. Act is a pure abuse of process of law and it has to be interdicted at the threshold. Validity of dismissal of Writ petition by HC - Held that - The High Court did not deal the issue in a proper perspective and committed error in dismissing the writ petitions by holding that in the Complaints filed by the Respondent No. 2, specific averments were made against the appellant - But on the contrary, taking the complaint as a whole, it can be inferred that in the entire complaint, no specific role is attributed to the appellant in the commission of offence - to attract a case under Section 141 of the N.I. Act a specific role must have been played by a Director of the Company for fastening vicarious liability the appellant was neither a Director of the accused Company nor in charge of or involved in the day to day affairs of the Company at the time of commission of the alleged offence - There is not even a whisper or shred of evidence on record to show that there is any act committed by the appellant from which a reasonable inference can be drawn that the appellant could be vicariously held liable for the offence with which she is charged thus, the criminal complaint is set aside. So far as the Letter of Guarantee is concerned, it gives way for a civil liability which the respondent No. 2 complainant can always pursue the remedy before the appropriate Court - So, the contention that the cheques in question were issued by virtue of such Letter of Guarantee and hence the appellant is liable under Section 138 read with Section 141 of the N.I. Act, cannot also be accepted in these proceedings - Decided in favour of appellant.

Issues Involved:
1. Liability under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881.
2. Validity of the High Court's dismissal of writ petitions seeking quashing of criminal proceedings.
3. Role and responsibility of the appellant as a Non-Executive Director.
4. Applicability of vicarious liability under the N.I. Act.
5. Disputed resignation of the appellant as a Director.
6. Examination of the complaint's averments and evidence.

Detailed Analysis:

1. Liability under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881:
The appellant was charged under Section 138 read with Section 141 of the N.I. Act for dishonor of cheques issued by M/S Elite International Pvt. Ltd. The appellant contended that she was a Non-Executive Director and had resigned before the issuance of the cheques. The Court emphasized that to fasten vicarious liability under Section 141, the complainant must specifically show how and in what manner the accused was responsible for the conduct of the business of the company. The Court found that the appellant was neither in charge of nor responsible for the conduct of the company's business at the relevant time.

2. Validity of the High Court's dismissal of writ petitions seeking quashing of criminal proceedings:
The High Court dismissed the appellant's writ petitions seeking to quash the criminal proceedings. The Supreme Court found that the High Court erred in its judgment by not properly considering the appellant's resignation and her lack of involvement in the company's affairs at the time of the alleged offence. The Supreme Court held that the continuation of the criminal proceedings against the appellant was an abuse of the process of law.

3. Role and responsibility of the appellant as a Non-Executive Director:
The appellant argued that she was merely a housewife appointed as a Non-Executive Director and had no active role in the company's business. The Court noted that a Non-Executive Director is a custodian of governance but does not involve in day-to-day affairs. The appellant had resigned before the issuance of the cheques, and there was no evidence to show her involvement in the company's activities during the relevant period.

4. Applicability of vicarious liability under the N.I. Act:
The Court reiterated that vicarious liability under Section 141 of the N.I. Act requires specific averments showing the accused's responsibility for the conduct of the company's business. The Court cited its previous judgments, including National Small Industries Corporation Vs. Harmeet Singh Paintal, emphasizing the need for specific allegations against the Director. The Court found that the complaint lacked specific details attributing any role to the appellant in the commission of the offence.

5. Disputed resignation of the appellant as a Director:
The appellant provided evidence of her resignation, including Form 32 and the Annual Return, which showed her resignation date as 17th December 2005. The respondent argued that the resignation was disputed and not proven. The Court found that the respondent did not emphatically dispute the resignation in the proceedings before the High Court and accepted the evidence provided by the appellant.

6. Examination of the complaint's averments and evidence:
The Court examined the complaint and found that it did not attribute any specific role to the appellant in the commission of the offence. The complaint merely stated that the appellant was responsible for the conduct of the company's business without providing details. The Court emphasized that criminal law cannot be set into motion as a matter of course and that the Magistrate must carefully scrutinize the evidence before summoning the accused.

Conclusion:
The Supreme Court quashed the criminal proceedings against the appellant, holding that the continuation of the proceedings was an abuse of the process of law. The Court allowed the appeals, set aside the High Court's judgment, and emphasized the need for specific allegations and evidence to fasten vicarious liability under the N.I. Act.

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