2014 (10) TMI 1085 - HC - Indian Laws

Dishonour of Cheque - insufficiency of funds - vicarious liability of Company Secretary and independent non-executive Directors - Section 141 of the NI Act - HELD THAT - On perusal of proviso of Section 141 of the NI Act it is manifestly clear that what is required is that the persons who are sought to be made vicariously liable for a criminal offence under Section 141 of the Act should be at the time when the offence was committed incharge of and responsible for the conduct of the business of the company - Section 141 of the Act is a penal provision creating vicarious liability and which as per settled law must be strictly construed. It is therefore not sufficient to make a bald cursory statement in a complaint and that the Director (arrayed as an accused) was incharge of and responsible for the conduct of the business of the company without anything more as to the role of the Director. The complainant should spell out as to how and in what manner the petitioner was incharge or was responsible to the accused company for the conduct of its business. In a catena of decisions it was held that for making Directors liable for the offences committed by the company under Section 141 of the Act there must be specific averments against the Directors showing as to how and in what manner the Directors were responsible for the conduct of the business of the company. The facts of every case have to be analyzed on the touchstone of the various judgments of the Supreme Court on the law on vicarious liability under Section 141 of the NI Act. In the instant case there is no specific allegation against the petitioners that they were responsible and incharge of day-today affairs of the business of the company and therefore the petitioners are not covered under proviso to Section 141 of the NI Act. Conclusion - For making Directors liable for the offenses committed by the company under Section 141 of the Act there must be specific averments against the Directors showing as to how and in what manner the Directors were responsible for the conduct of the business of the company. The impugned order is set aside - petition disposed off.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

1. Whether the petitioners, who are Company Secretary and independent non-executive Directors of M/s. GEI Industrial Systems Ltd., can be held liable under Sections 138 and 141 of the Negotiable Instruments Act (NI Act) for the dishonor of cheques issued by the company.

2. Whether the complaint against the petitioners should be quashed based on the absence of specific allegations regarding their responsibility for the conduct of the business of the company at the time of the alleged offense.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Liability of Petitioners under Sections 138 and 141 of the NI Act

Relevant legal framework and precedents:

Section 138 of the NI Act deals with the penalty for dishonor of cheques due to insufficient funds. Section 141 extends this liability to every person who, at the time the offense was committed, was in charge of and responsible for the conduct of the business of the company. The section also provides that a person can avoid liability if they prove the offense was committed without their knowledge or that they exercised due diligence to prevent it.

The Court relied on precedents such as 'SMS Pharmaceuticals Ltd. Vs. Neeta Bhalla & Anr.' and 'Sabitha Ramamurthy v R.B.S. Channabasavaradhya' to interpret these sections, emphasizing the need for specific averments in the complaint to establish vicarious liability.

Court's interpretation and reasoning:

The Court emphasized that for vicarious liability under Section 141, it is not sufficient to make a general statement that a director or officer was in charge of the company's business. The complaint must specifically detail how the individual was responsible for the conduct of the business at the time of the offense. The Court noted that the petitioners were not alleged to be in charge of the day-to-day affairs of the company.

Key evidence and findings:

The complaint lacked specific allegations against the petitioners regarding their role in the business operations of the company. The petitioners were described as Company Secretary and non-executive Directors, and there was no evidence they were involved in the issuance of the cheques or the management of the company's financial affairs.

Application of law to facts:

The Court applied the principles from the precedents to the facts, concluding that the complaint did not meet the requirements for establishing vicarious liability under Section 141. The lack of specific allegations against the petitioners meant they could not be held liable under the NI Act.

Treatment of competing arguments:

The respondent argued that the petitioners were responsible for the company's affairs. However, the Court found that these claims were not supported by specific allegations or evidence in the complaint. The Court also considered the Supreme Court's decision to quash the complaint against similarly situated co-accused, reinforcing its decision to quash the complaint against the petitioners.

Issue 2: Quashing of the Complaint

Conclusions:

The Court concluded that the complaint against the petitioners should be quashed due to the absence of specific allegations regarding their responsibility for the company's business at the time of the offense. The Court set aside the trial court's order summoning the petitioners and quashed the complaint against them.

SIGNIFICANT HOLDINGS

The Court held that:

"For making Directors liable for the offenses committed by the company under Section 141 of the Act, there must be specific averments against the Directors showing as to how and in what manner, the Directors were responsible for the conduct of the business of the company."

The Court established that liability under Section 141 requires specific allegations regarding the individual's role in the company's business operations at the time of the offense. Mere designation as a director or officer is insufficient to establish vicarious liability.

The final determination was to quash the complaint against the petitioners due to the lack of specific allegations and the precedent set by the Supreme Court in a related case.