2016 (6) TMI 726 - HC - Indian Laws

Offence under Section 138 of Negotiable Instruments Act - Cheques were dishonoured by the bank on the ground that the drawer s signatures were incomplete or that no image was found or that the signatures did not match. - Vicarious liability - Liability of the authorized signatory or every person who were in charge in case of a Comapny including office bearer and nominated directors. Held that - Vicarious liability in legal parlance means the liability of the master for the acts of the servant or agent done in the course of employment. Section 141 makes a natural person vicariously liable for the contravention committed by a company provided such person has some nexus with the crime either because of his connivance with it or due to by criminal negligence which had resulted in its commission. No doubt the law makes the principal liable for the acts of his agent, but unless there is some absolute duty cast upon the principal, he cannot be held responsible for the acts of his agent. Sheo Prasad 1956 (5) TMI 33 - ALLAHABAD HIGH COURT In K.K. Ahuja 2009 (7) TMI 758 - SUPREME COURT OF INDIA , the Supreme Court has explained the vicarious liability of persons of the company. In view of the aforesaid dictum of law explained by the Supreme Court, the other accused who have been arrayed as accused by virtue of Section 141 of the N.I. Act could not be held liable. In complaints filed for the offence under Section 138 of the N.I. Act, all the Directors of the company and even the Office Bearers are routinely being proceeded against by invoking the provisions under Section 141 of the N.I. Act by glibly repeating the words in the section that certain Director was incharge of and responsible to the company for the conduct of business of the company . It is necessary to emphasis that Section 141 of the N.I. Act where an offence under Section 138 of the N.I. Act has been committed by a company, the complainant is required to give a serious thought and make enquiries and ascertain the fact as to whether a particular Director was incharge of and responsible to the affairs and conduct of the business of the company. Routinely roping in all the Directors by merely repeating the words used in Section 141 of the N.I. Act without ascertaining the facts is a serious matter which has to be deprecated. Some of the applicants before me are indisputably nonexecutive Directors of the company. A nonexecutive Director is no doubt a custodian of the governance of the company, but does not involve in the daytoday affairs of the running of its business and only monitors the executive activity. There is no cogent material on record to fasten any vicarious liability so far as the other accused are concerned who are NonExecutive Directors including the Office Bearers concerned with the Accounts Department of the company. Whenever a blank cheque or postdated cheque is issued, a trust is reposed that the cheque will be filled in or used according to the understanding or agreement between the parties. If there is a prima facie reason to believe that the said trust is not honoured, then the continuation of prosecution under Section 138 of the N.I. Act would be the abuse of the process of law. It is in the interest of justice that the parties in such cases are left to the civil remedy. All the petitions succeed and are allowed. The order of the issuance of the process under Section 138 of the N.I. Act is hereby quashed. Rule is made absolute accordingly. - Decided in favor of petitioners.

Summary

Issues Involved:
1. Applicability of Sections 20 and 87 of the Negotiable Instruments Act (N.I. Act) to cheques.
2. Existence of debt or legal liability at the time of issuing the cheque.
3. Liability of a person who resigned as Managing Director before the cheque was presented.
4. Vicarious liability of Directors and Officers under Section 141 of the N.I. Act.

Issue-Wise Detailed Analysis:

1. Applicability of Sections 20 and 87 of the Negotiable Instruments Act to Cheques:
Section 20 of the N.I. Act deals with inchoate stamped instruments, allowing the holder to complete the document if it is properly stamped and signed. However, the court observed that Section 20 does not apply to cheques as they do not require stamping under the Stamp Act. The court referenced several judgments, including Tarachand Kevalram v. Sikri Brothers and C.T. Joseph v. I.V. Philip, to support this view. The court concluded that a signed blank cheque leaf cannot be termed as a negotiable instrument under Sections 5, 6, and 13 of the N.I. Act, and therefore, filling up such a cheque does not amount to material alteration under Section 87.

2. Existence of Debt or Legal Liability at the Time of Issuing the Cheque:
The court examined whether there was any existing debt or legal liability when the blank signed cheque was handed over. It noted that the cheque was not postdated and was filled up almost seventeen years after being issued as security. The court found that the liability had not been determined at the time the cheque was issued, and the complainant misused the blank signed cheque to shortcut the suit proceedings. The court referenced Indus Airways Pvt Ltd v. Magnum Aviation Private Limited and other judgments to conclude that a cheque issued for a future contingent liability does not attract Section 138 of the N.I. Act.

3. Liability of a Person Who Resigned as Managing Director Before the Cheque Was Presented:
The court considered whether the drawer of the cheque, who had resigned as Managing Director eight years before the cheque was presented, could be held liable under Section 138. The court referenced D.C.M. Financial Services Limited v. J.N. Sareen and another, which held that a person who had resigned with the knowledge of the complainant could not be held liable. The court also cited Alka N. Shah v. State of Gujarat and another and Suhas Bhand v. State of Maharastra to support its conclusion that the drawer, who had no control over the company's affairs at the time of dishonour, could not be held liable.

4. Vicarious Liability of Directors and Officers under Section 141 of the N.I. Act:
The court examined the vicarious liability of other accused who were Non-Executive Directors and Office Bearers. It referenced K.K. Ahuja v. V.K. Vora and National Small Industries Corporation Limited v. Harmeet Singh Paintal, which clarified that only those who were in charge of and responsible for the conduct of the company's business could be held liable. The court found that the complaint did not contain specific allegations against these Directors and Officers, and therefore, they could not be held vicariously liable. The court emphasized the need for specific averments in the complaint to hold individuals liable under Section 141.

Conclusion:
The court quashed the order of the issuance of the process under Section 138 of the N.I. Act against all the accused. It directed that the pending civil suits should proceed further in accordance with law and be decided based on the evidence presented, without being influenced by the observations made in this judgment.