2017 (3) TMI 907 - SC - Indian Laws

Complaint under Negotiable Instruments Act - whether the role of the appellant in the capacity of erstwhile Director of the defaulter Company makes him vicariously liable for the activities of the defaulter Company as defined under Section 141 of the Act? - Held that - Admittedly the cheques dated 28-12-2004 were issued while the appellant was Director of the Company with validity for a period of six months but during that period they were not presented for realization at the bank. The appellant has resigned as Director w.e.f. 2-1-2006 and the fact of his resignation has been furnished by Form 32 to the Registrar of Companies on 24-03-2006 in conformity with the rules. Thereafter, the appellant had played no role in the activities of the default Company. This fact remains substantiated with the Statement filed by the default Company on 20-02-2006 with the Registrar of Companies that in an advertisement of the Company seeking deposits (Annexure P3), only the names of three Directors of the Company were shown as involved in the working of the Company and the name of appellant was not therein. Indisputably, therefore, the cheques bounced on 24-08-2006 due to insufficient funds were neither issued by the appellant nor the appellant was involved in the day to day affairs of the Company. Before summoning an accused under Section 138 of the Act, the Magistrate is expected to examine the nature of allegations made in the complaint and the evidence both oral and documentary in support thereof and then to proceed further with proper application of mind to the legal principles on the issue. Impliedly, it is necessary for Courts to ensure strict compliance of the statutory requirements as well as settled principles of law before making a person vicariously liable. We are of the view that this is a fit case for quashing the complaint. The High Court ought to have allowed the criminal miscellaneous application of the appellant because of the absence of clear particulars about role of the appellant at the relevant time in the day to day affairs of the Company.

Summary

Issues:
Appeal against judgment dismissing petition to quash complaint under Section 138 of Negotiable Instruments Act and Section 420 of Indian Penal Code.

Analysis:
The appellant appealed against the High Court's judgment dismissing the petition to quash a complaint under Section 138 of the Negotiable Instruments Act, 1881, and Section 420 of the Indian Penal Code. The complaint alleged that the appellant, a former director of a defaulter company, issued cheques that were dishonored due to insufficient funds. The appellant argued that he had resigned from his directorial position before the issuance of the bounced cheques and should not be held liable. The respondent contended that the appellant's actions as a director made him responsible for the bounced cheques. The key issue was whether the appellant's past role as a director made him vicariously liable under Section 141 of the Act and whether the High Court correctly dismissed the petition to quash the criminal proceedings.

The Supreme Court considered legal principles established in previous cases. It was noted that to establish vicarious liability under Section 141, specific averments against the director showing their responsibility for the company's conduct were required. The court emphasized that mere directorship does not automatically make a person liable under the Act. The court highlighted the importance of demonstrating how the accused was responsible for the business's conduct at the time of the offense. In this case, the appellant had resigned as a director before the bounced cheques were issued, and evidence confirmed his disassociation from the defaulter company's activities.

The court stressed that before summoning an accused under Section 138 of the Act, the magistrate must carefully examine the allegations and evidence to ensure strict compliance with statutory requirements and legal principles. In this instance, the court found that the complaint lacked clear particulars about the appellant's role in the company's affairs at the relevant time. Consequently, the court allowed the appeal, quashing the criminal proceedings against the appellant. The decision aimed to maintain the integrity of justice administration and prevent the abuse of court processes.