2023 (7) TMI 38 - HC - Indian Laws

Dishonour of Cheque - insufficiency of funds - vicarious liability of director - section 141 of the NI Act - HELD THAT - For summons to be sustained and for trial to continue, it is absolutely essential that the basic or foundational averments must be contained in a criminal complaint against a director in relation to his alleged role in the offence. This court is constrained to observe that it appears to have become commonplace for complainants to arraign all and sundry directors of a company as accused in a criminal complaint in relation to dishonour of cheques, with the evident intention of pressurising and arm-twisting a company into paying-up a claimed debt. It is necessary to articulate that a criminal complaint under section 138 of the NI Act is not, in and of itself, a money recovery proceedings, even though fine and compensation may be imposed upon conviction. The wanton arraignment of directors without reference to their role in relation to a transaction, or to the issuance or dishonour of a cheque by the company, requires to be deprecated and discouraged, since it amounts to abuse of the salutary process of criminal law. This court is clear that for one, there are no allegations in the criminal complaints in relation to the petitioners, much-less any specific allegations as to their role in the alleged offence. In these circumstances, it cannot be said that the petitioners would incur any vicarious liability along with the accused company merely because they were directors of the company. Two, absent any allegations against the petitioners in the criminal complaints, the issuance of the summoning orders was evidently not informed by any application of mind, but was the outcome of a purely mechanical process. The summoning orders cannot be sustained in law - Petition disposed off.

Summary

Issues Involved:
1. Quashing of summoning orders under Section 138 of the Negotiable Instruments Act, 1881.
2. Vicarious liability of directors under Section 141 of the NI Act.
3. Application of mind by the Magistrate in issuing summons.

Summary:

Issue 1: Quashing of Summoning Orders under Section 138 of the NI Act
The petitioners sought quashing of summoning orders dated 08.03.2017 issued by the learned Metropolitan Magistrate, District Courts, Saket, Delhi, in relation to dishonoured cheques issued by respondent No. 2 company. The cheques were dishonoured for reasons including "insufficient funds" and "other reasons." The court noted that the petitioners were directors of the accused company but were neither signatories to the cheques nor specifically alleged to have been in charge of or responsible for the conduct of the business of the company at the relevant time.

Issue 2: Vicarious Liability of Directors under Section 141 of the NI Act
The court emphasized that under Section 141 of the NI Act, liability arises only if a person was in charge of and responsible for the conduct of the business of the company at the time the offence was committed. The court cited multiple Supreme Court judgments, including *S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla* and *Sabitha Ramamurthy vs. R.B.S. Channabasavaradhya*, to underscore that merely holding a designation such as a director does not automatically make one liable. The complaint must contain specific averments detailing the role of the directors in the alleged offence.

Issue 3: Application of Mind by the Magistrate in Issuing Summons
The court found that the summoning orders lacked application of mind and were issued mechanically. The court referred to the Supreme Court's decision in *Pepsi Foods Ltd. vs. Special Judicial Magistrate*, which mandates that the Magistrate must apply their mind to the facts and the law before issuing summons. The summoning orders in this case did not contain any reference or discussion about the allegations against the petitioners, indicating a lack of application of mind.

Conclusions:
1. The court concluded that there were no specific allegations against the petitioners in the criminal complaints regarding their role in the issuance or dishonour of the cheques.
2. The petitioners could not incur vicarious liability merely because they were directors of the accused company.
3. The issuance of the summoning orders was not based on any application of mind but was a mechanical process.

Order:
The summoning orders dated 08.03.2017 and all proceedings arising from them, insofar as they relate to the petitioners, were quashed. The petitions were disposed of accordingly.