2017 (4) TMI 1017 - HC - Indian Laws

Complaint filed under Section 138 of the Negotiable Instruments Act - liability of non-executive and independent Directors of the company by virtue of Section 141 of the Negotiable Instruments Ac - Held that - Section 141 of the Act makes the Directors incharge and responsible to Company for the conduct of the business of the Company within the mischief of Section 138 of the Act and not particular business for which the cheque was issued. If there are basic averments in the complaint supported by some other evidence on record, then the burden would shift upon the accused to show that he had nothing to do with the daytoday affairs and working of the company at the time of the commission of the offence. As observed the accused will have to furnish some sterling uncontrovertible material or acceptable circumstances to substantiate such contention. The accused cannot get the complaint quashed merely on the ground that apart from the basic averments, no particulars are given in the complaint about his role, because ordinarily the basic averment would be sufficient to send him to trial and it could be argued that his further role could be brought out in the trial. I do not propose to close the doors of the applicants at this stage. It will be still open for the applicants to adduce sufficient and necessary materials in the course of the trial to establish that they, being nonexecutive and independent Directors, had no role to play in the daytoday affairs and management of the company. The Trial Court shall consider such evidence that may be led by the parties in the course of the trial and then take an appropriate decision before fastening vicarious liability under Section 141 of the Negotiable Instruments Act. While deciding or fixing the vicarious liability of the applicants herein, the Trial Court shall not be influenced by any of the observations made by this Court in this judgment, except the position of law.

Issues Involved:
1. Whether the applicants, as non-executive and independent directors, can be held vicariously liable under Section 141 of the Negotiable Instruments Act.
2. Adequacy of the averments in the complaint to fasten vicarious liability.
3. The role and responsibilities of the applicants within the company.
4. The evidentiary requirements to substantiate the applicants' involvement in the day-to-day affairs of the company.

Detailed Analysis:

1. Vicarious Liability of Non-Executive and Independent Directors:
The applicants sought to quash the proceedings under Section 138 of the Negotiable Instruments Act, arguing that they were non-executive and independent directors with no involvement in the day-to-day affairs of the company. The court considered the scope of Section 141, which imposes vicarious liability on persons in charge of and responsible for the conduct of the business of the company at the time the offence was committed. It was emphasized that merely holding a designation or office in a company is insufficient to establish liability; there must be a clear connection to the conduct of the business.

2. Adequacy of Averments in the Complaint:
The court examined whether the complaint contained adequate averments to establish that the applicants were in charge of and responsible for the conduct of the business. The complaint alleged that the applicants were members of the audit committee and were responsible for overseeing financial, audit, and other matters directly related to the conduct of the business. The court found these averments sufficient to proceed against the applicants.

3. Role and Responsibilities of the Applicants:
The court noted that the applicants were members of the audit committee, which had significant responsibilities, including oversight of the company’s financial reporting process, recommending the appointment of auditors, and reviewing financial statements. Additionally, the applicants were remunerated by the company, indicating their involvement in its affairs. This evidence suggested that the applicants were not entirely detached from the company's operations.

4. Evidentiary Requirements:
The court held that while the basic averments in the complaint were sufficient to proceed against the applicants, they could still present evidence during the trial to demonstrate their lack of involvement in the day-to-day affairs of the company. The court emphasized that the burden would shift to the applicants to provide "sterling uncontrovertible material or acceptable circumstances" to substantiate their claim of non-involvement.

Conclusion:
The court rejected the applications to quash the proceedings, stating that the complaint contained sufficient averments to establish a prima facie case against the applicants. The applicants were given the opportunity to present evidence during the trial to prove their non-involvement in the day-to-day affairs of the company. The court clarified that its observations should not influence the trial court’s decision, which should be based on the evidence presented during the trial.

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