MERE DIRECTORSHIP DOES NOT CREATE AUTOMATIC LIABILITY UNDER THE NEGOTIABLE INSTRUMENTS ACT, 1881MERE DIRECTORSHIP DOES NOT CREATE AUTOMATIC LIABILITY UNDER THE NEGOTIABLE INSTRUMENTS ACT, 1881

[DR.MARIAPPAN GOVINDARAJAN]

Dishonour of cheque

Section 138 of the Negotiable Instruments Act, 1881 (‘Act’ for short) provides for the punishment and fine for the dishonour of the cheque to a party for the settlement of its dues.  Section 138 provides that where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to 2 years, or with fine which may extend to twice the amount of the cheque, or with both.

The above said section shall not be applicable unless-

• the cheque has been presented to the bank within a period of 6 months from the date on which it is drawn or within the period of its validity, whichever is earlier;
•  the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice; in writing, to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
• the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within 15 days of the receipt of the said notice.

Offences by a company

Section 141 of the Act provides that if the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.  If the person who is charged for dishonour of cheque proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence, then he may not be punished under this section.

Section 141 of the Act is a penal provision creating vicarious liability, and which, as per settled law, must be strictly construed.

Issue

Now-a-days the appointment of independent directors is on the increase due to it is to be done mandatorily.  Such independent directors are always non-executive director and not in charge the affairs of the company.  The issue to be discussed is as to whether such independent directors are made liable under the Act for the dishonouring of cheques issued by the company with reference to decided case laws.

Case laws

In NATIONAL SMALL INDUSTRIES CORPN. LTD. VERSUS HARMEET SINGH PAINTAL - 2010 (2) TMI 590 - SUPREME COURT has distinguished the case of persons who are in charge of and responsible for the conduct of the business of the company at the time of the offence and the persons who are merely holding the post in a company and are not in charge of and responsible for the conduct of the business of the company.  in order to fasten the vicarious liability in accordance with Section 141, the averment as to the role of the Directors concerned should be specific. The description should be clear and there should be some unambiguous allegations as to how the Directors concerned were alleged to be in charge of and were responsible for the conduct and affairs of the company.

The Supreme Court framed the following principles-

• The primary responsibility is on the complainant to make specific averments as are required under the law in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no presumption that every Director knows about the transaction.
• Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company.
• Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make the accused therein vicariously liable for offence committed by the company along with averments in the petition containing that the accused were in charge of and responsible for the business of the company and by virtue of their position they are liable to be proceeded  with.
• Vicarious liability on the part of a person must be pleaded and proved and not inferred.
• If the accused is a Managing Director or a Joint Managing Director then it is not necessary to make specific averment in the complaint and by virtue of their position, they are liable to be proceeded with.
• If the accused is a director or an officer of a company who signed the cheques on behalf of the company then also it is not necessary to make specific averment in the complaint.
• The person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a director in such cases.

In POOJA RAVINDER DEVIDASANI VERSUS STATE OF MAHARASHTRA & ANOTHER - 2014 (12) TMI 1070 - SUPREME COURT the Supreme Court held that a non-executive director plays a governance role, and are not involved in the daily operations or financial management of the company, held that to attract liability under section 141 of the Act.  The accused must have been actively in-charge of the company’s business at the relevant time. 

In KAMALKISHOR SHRIGOPAL TAPARIA VERSUS INDIA ENER-GEN PRIVATE LIMITED & ANR. - 2025 (2) TMI 674 - SUPREME COURT, the appellant in the present appeal was an independent director in ‘D.S. Kulkarni Developers Limited’.   He was appointed as additional independent director non-executive director on 27.09.2008.  On 30.09.2014 he was reappointed as independent non-executive director.  He has no role in the operations of the company as well as financial aspects of the company.

Kulkarni Developers Limited obtained two loans from the respondent company two loans during 2016 – 17 of Rs. 56 lakhs and Rs.70 lakhs.  The company issued various cheques to the respondent company towards the repayment of loan.  Nearly 4 cheques were dishonoured to the tune of Rs.34 lakhs.  The respondent company filed 4 complaints against the Kulkarni Developers Limited.  In the first round of notice the name of the appellant was not there.  But in the second round of notice the name of the appellant was also included.  The complaints were filed on 23.02.2017, 07.04.2017, 22.05.2017 and 31.07.2017.  The appellant resigned from his directorship on 03.05.2017.

The complaints were filed before the Metropolitan Magistrate, Esplanade, Mumbai.  The appellant filed a writ petition before High Court with the prayer to quash the above said criminal proceedings.  The High Court dismissed the petition of the appellant on 06.08.2019.  Against the order of the High Court the appellant filed the present appeal before the Supreme Court.

The appellant submitted the following before the Supreme Court-

• The appellant was non-executive independent director not involving in the day-to-day affairs of the company.
• The complaints did not provide any specific allegations against the appellant.
• The Appellant had resigned from the company well before the offence occurred and that making him liable for an act committed post-resignation was a misuse of the legal process.
• Section 141 of the Act establishes vicarious liability only upon directors who were in-charge of and responsible for the conduct of the business of the company at the relevant time.

The respondent submitted the following before the Supreme Court-

• The High Court rightly observed that the role of the appellant was a matter to be examined during the trial.
• The vicarious liability under Section 141 of the Act could extend to directors, regardless of their executive or non-executive status.
• The appellant, by virtue of his directorship, was part of the decision-making apparatus of the company, therefore, could not escape liability at the pre-trial stage.     

The Supreme Court considered the submissions of the parties to this appeal.  The Supreme Court indicated that it has consistently held that a mere designation as a director does not conclusively establish liability under section 138 read with section 141 of the Act. Liability is contingent upon specific allegations demonstrating the director’s active involvement in the company’s affairs at the relevant time.

The Supreme Court observed that the appellant was neither a signatory to the dishonoured cheques nor was he actively involved in the financial decision-making of the company.  Further the appellant resigned from his directorship on 03.05.2017.  The complaints do not contain any specific averments detailing how the Appellant was responsible for the dishonoured cheques.

The Supreme Court held that the appellant cannot be held vicariously liable under section 141 of the Act. The complaints do  not meet the mandatory legal requirements to implicate him.  The Supreme Court allowed the appeal and quashed the 4 criminal proceedings against the appellant.

Conclusion

To launch a prosecution, therefore, 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. The description should be clear. It is true that precise words from the provisions of the Act need not be reproduced and the court can always come to a conclusion in facts of each case. In the absence of any averment or specific evidence the net result would be that complaint would not be entertainable.