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2025 (4) TMI 356 - HC - Indian LawsDishonour of Cheque - vicarious liability of Independent Director u/s 141 of the Negotiable Instruments Act 1881 - main ground on which quashing of the summoning Order and further proceedings emanating therefrom in relation to the Petitioner is sought is that he was an Independent Director and had no role in the day to day affairs of the Company - HELD THAT - It is a penal provision creating vicarious liability which must be strictly construed. Mere bald cursory statement in a Complaint that the Director (arrayed as an accused) is in charge of and responsible to the company for the conduct of the business of the Company without anything more as to the role of the Director is not sufficient. The Complaint should spell out as to how and in what manner Respondent was in charge of or was responsible to the accused Company for the conduct of its business. Apex Court explained in the case of N.K. Wahi v. Shekhar Singh 2007 (3) TMI 671 - SUPREME COURT that to launch a prosecution against the alleged Directors there must be a specific allegation in the Complaint as to the part played by them in the transaction. There should be clear and unambiguous allegation as to how the Directors are in-charge and responsible for the conduct of the business of the Company. While the exact words of the Section may not be reproduced but the role of the Director must be discernible from the averments made in the Complaint. In the absence of any averment or specific evidence the Complaint would not be entertain-able. In S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Another 2005 (9) TMI 304 - SUPREME COURT the Apex Court held that mere designation as a Director is not sufficient; specific role and responsibility must be established in the Complaint. It is well established that in order to fasten the vicarious liability in terms of Section 141 the role of the Directors concerned should be specifically described in clear and unambiguous as to how the Directors concerned were alleged to be in charge and responsible for the conduct and affairs of the Company - the averments made against the Petitioner in the Complaint may be considered. It is evident that the Appellant was neither a signatory to the dishonoured cheques nor was he actively involved in the financial decision-making of the Company. Moreover he resigned from the post of independent Non-Executive Director on 03.05.2017 duly notified through Form DIR-11 and DIR-12 to the Registrar of Companies. A contention is raised that the DIR Form 12 did not reflect the name of the Petitioner as an Independent Director but as explained DIR form merely gives the names of Directors and does not specify if they are independent Directors which is generally reflected in Memorandum/ Articles of Association. Conclusion - The Petitioner could not be held vicariously liable under Section 141 of the NI Act due to the lack of specific averments and evidence of his involvement in the alleged offence. Petition allowed.
ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment include:
ISSUE-WISE DETAILED ANALYSIS Relevant legal framework and precedents: The legal framework primarily revolves around Section 138 and Section 141 of the Negotiable Instruments Act, 1881. Section 138 pertains to the offence of cheque dishonor, while Section 141 deals with offences by companies, specifying that individuals in charge of and responsible for the conduct of the business of the company can be held liable. Several precedents were examined, including:
Court's interpretation and reasoning: The Court interpreted Section 141 as a penal provision creating vicarious liability, which must be strictly construed. It emphasized that mere designation as a director is insufficient to establish liability. The complaint must specifically detail how the director was in charge of and responsible for the conduct of the business of the company. Key evidence and findings: The Court found that the complaint did not contain specific averments detailing how the Petitioner was responsible for the dishonored cheques. The Petitioner was not a signatory to the cheques, nor was he involved in the financial decision-making of the company. Furthermore, the Petitioner was an independent non-executive director with no financial responsibilities or involvement in day-to-day operations. Application of law to facts: The Court applied the principles established in the aforementioned precedents, concluding that the Petitioner, as an independent non-executive director, was not in charge of or responsible for the conduct of the business of the company. Therefore, he could not be held vicariously liable under Section 141 of the NI Act. Treatment of competing arguments: The Respondent argued that the Petitioner was not merely an independent director and that specific averments were made in the complaint regarding his involvement. However, the Court found these arguments unsubstantiated by evidence or specific allegations in the complaint. Conclusions: The Court concluded that the Petitioner could not be held vicariously liable under Section 141 of the NI Act due to the lack of specific averments and evidence of his involvement in the alleged offence. SIGNIFICANT HOLDINGS The Court held that:
The Court set aside the summoning orders dated 15.01.2016 in the complaints against the Petitioner, Rahul Sood, and allowed the petitions.
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