2022 (9) TMI 792 - HC - Indian Laws

Dishonor of Cheque - funds insufficient - legally enforceable debt or not - vicarious liability of the directors - petitioners have resigned to the posts of Directors of company - section 138 of NI Act - HELD THAT - This Court, on perusal of catena of decisions, is of the view that the petitioners who were the Directors of Company, but have resigned much prior to the issuance of the cheque, the question of facing criminal trial after lapse of 1 years would be travesty of justice. It is essential that once cheque was issued for discharge of legally enforceable debt, the company as well as the persons incharge of day to day affairs of the company can be prosecuted for the dishonour of such cheque. But the same cannot be alleged as against quondam Directors, who before the issuance of cheque have resigned to the posts of Directors. The petitioners are not signatories to the cheque. Hence, directing the petitioners herein to face trial would be nothing but abuse of process of Court and same would be a futile exercise. The Criminal Petition is allowed.

Summary

Issues:
Quashing of criminal proceedings under Section 138 of the Negotiable Instruments Act based on the resignation of directors before the issuance of the cheque.

Analysis:
The case involved a petition to quash criminal proceedings in C.C.No.329 of 2017 under Section 138 of the Negotiable Instruments Act. The accused were directors of a company that issued a dishonored cheque. The defense argued that the accused had resigned before the issuance of the cheque, relying on Forms-32 as evidence of resignation dates. The prosecution contended that these facts were questions of fact to be decided during trial and that resignation was a defense to be raised later. The court examined Forms-32, confirming the resignation dates of the accused directors.

In its analysis, the court referred to various judgments, including Harshendra Kumar D vs Rebatilata Koley and D.B. Negandhi Vs Registrar of Companies, emphasizing that resignation from directorship before the offense absolves the individual from liability. The court highlighted the principle that if a director resigns and the Registrar of Companies is duly informed, the individual ceases to be a director. The court also cited Smt.A.L.Uday Shankar Harshitha vs The State Of A.P., underscoring that the defense of resignation should be considered at the prima facie stage to prevent injustice.

The court concluded that the accused directors had resigned before the issuance of the cheque, making them non-signatories to the dishonored cheque. Therefore, directing them to face trial would be an abuse of process and a futile exercise. The court allowed the Criminal Petition, quashing the proceedings against the petitioners in C.C.No.329 of 2017. The judgment highlighted the importance of considering resignation as a defense at the initial stage to prevent injustice and abuse of the legal process.