Supreme Court Clarifies Vicarious Liability of Directors in Cheque Dishonour Cases

Analysis of the Supreme Court Judgment on Vicarious Liability of Directors in Cheque Dishonour Cases

Reported as:

2024 (3) TMI 789 - Supreme Court

Introduction

The Supreme Court of India, in a recent judgment, has provided clarity on the issue of vicarious liability of directors in cases involving dishonour of cheques u/s 138 of the Negotiable Instruments Act, 1881. The case pertains to a dispute between M/s. Bharti Airtel Limited (the complainant) and M/s. Fibtel Telecom Solutions (India) Private Limited (the accused company), wherein the latter had issued several post-dated cheques to the former, which were subsequently dishonoured. The complainant had filed criminal complaints against the accused company, its director, and the appellant, who was also a director of the accused company.

Arguments Presented

The appellant, an aged lady and a director of the accused company, challenged the criminal complaints filed against her before the High Court, seeking quashing of the same. The primary contention was that she was not involved in the day-to-day affairs of the company and that there were no specific averments in the complaint regarding her role or responsibility in the conduct of the company's business. The appellant relied on several Supreme Court judgments, including NK. WAHI Versus SHEKHAR SINGH & ORS - 2007 (3) TMI 671 - Supreme Court and others, SMS Pharmaceuticals Ltd. Versus Neeta Bhalla - 2005 (9) TMI 304 - Supreme Court and another, and Ashoke Mal Bafna Versus M/s Upper India Steel Mfg. & Engg. Co. Ltd. - 2017 (3) TMI 907 - Supreme Court, to support her arguments.

On the other hand, the complainant argued that the High Court had rightly dismissed the petition for quashing, considering the material on record, and that the grounds raised by the appellant were matters of defense that could be raised during the trial.

Discussions and Findings of the Court

The Supreme Court, after considering the settled legal position, examined the averments made in the complaints against the appellant. The Court observed that the only allegation against the appellant was that she and the other accused had no intention to pay the dues owed to the complainant. It was stated that the appellant and the other accused were directors and promoters of the accused company, and that the other accused was the authorized signatory responsible for the day-to-day affairs of the company.

Significantly, the Court noted that there was no averment to the effect that the appellant was in charge of and responsible for the day-to-day affairs of the company. Furthermore, it was not the case of the complainant that the appellant was either the Managing Director or the Joint Managing Director of the company.

Analysis and Decision by the Court

The Supreme Court, relying on its previous judgments, reiterated the settled legal position that merely reproducing the words of Section 141 of the Negotiable Instruments Act, without a clear statement of facts as to how and in what manner a director was responsible for the conduct of the company's business, would not ipso facto make the director vicariously liable.

The Court observed that the averments made in the complaints were not sufficient to invoke the provisions of Section 141 of the Negotiable Instruments Act against the appellant. Consequently, the Court allowed the appeals, quashed the judgment of the High Court, and set aside the criminal proceedings against the appellant.

Doctrine or Principle Discussed

The judgment primarily discusses the doctrine of vicarious liability of directors in cases involving dishonour of cheques u/s 138 of the Negotiable Instruments Act, 1881. The Court reaffirmed the principle that for a director to be held vicariously liable, there must be specific averments in the complaint showing how and in what manner the director was responsible for the conduct of the company's business.

Summary of the Judgment

The Supreme Court, in this judgment, has reinforced the principle that for a director to be held vicariously liable u/s 141 of the Negotiable Instruments Act, 1881, in cases involving dishonour of cheques, there must be specific averments in the complaint regarding the director's role and responsibility in the conduct of the company's business. The Court has emphasized that merely reproducing the words of the section or stating that the person is a director is not sufficient to attract vicarious liability.

The Court has quashed the criminal proceedings against the appellant, an aged lady and a director of the accused company, on the grounds that there were no specific averments in the complaint regarding her involvement in the day-to-day affairs of the company or her responsibility for the conduct of the company's business.

This judgment provides clarity and guidance on the issue of vicarious liability of directors in cheque dishonour cases, ensuring that directors are not unnecessarily implicated without sufficient evidence of their role and responsibility in the company's operations.

Full Text:

2024 (3) TMI 789 - Supreme Court