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2023 (11) TMI 1357 - HC - Indian LawsDishonour of cheque - funds insufficient - vicarious liability of petitioner as an Independent Non-Executive Director - Section 141 of the NI Act - HELD THAT - Section 138 of NI Act casts criminal liability on a person who issues a cheque towards discharge of a debt or liability as a whole or in part and the cheque is dishonoured by the bank on presentation. Section 138of NI Act creates criminal liability in case of dishonour of a cheque. Section 141 of NI Act extends criminal liability in case of a company to every person who at the time of the offence was in charge of and was responsible for the conduct of the business of the company. A company is a juristic person and every person who at the time of commission of offence is in charge and responsible for the conduct of the business of the company is liable for the offence stated to be committed by the company. The criminal liability arises when the offence was committed and not on the basis of merely holding a designation or office in a company. Section 141 of the NI Act mandates that a person is criminally liable when at the time of commission of offence was in charge and responsible for the conduct of the business of the company and person connected with the company may not fall within the ambit of section 141 of the NI Act. The Supreme Court in SMS Pharmaceuticals Ltd. V Neeta Bhalla another 2005 (9) TMI 304 - SUPREME COURT held that the liability arises on account of conduct act or omission on the part of a person and not merely on account of holding an office or a position in a company. Therefore in order to bring a case within Section 141 of the Act the complaint must disclose the necessary facts which make a person liable. The Supreme Court in Siby Thomas V M/s Somany Ceramics Ltd. 2023 (10) TMI 487 - SUPREME COURT referred decision in S.P. Mani and Mohan Dairy V Dr. Snehalatha Elangovan 2022 (9) TMI 846 - SUPREME COURT and observed that it is the primary responsibility of the complainant to make specific averments in the complaint so as to make the accused vicariously liable. It is accepted legal proposition in view of law laid down by the Supreme Court in above referred decision that it is the primary responsibility of the complainant to make specific averments in the complaint so as to make the accused vicariously liable. If the basic averment is made in the complaint under section 138 of NI Act that the Director was in charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed then Magistrate can issue process against such Director. The complaint should specifically spell out how and in what manner the Director was in charge of or was responsible to the accused company for conduct of its business and mere bald statement that he or she was in charge of and was responsible to the company for conduct of its business is not sufficient. Section 141 of the NI Act provides for a constructive liability which is created by a legal fiction. The section 141 of the NI Act being a penal should receive strict construction and compliance. It the accused played insignificant role in affairs of the company may not be sufficient to attract the constructive liability under Section 141 of the NI Act - Had the petitioner not responsible for affairs of the accused no 1 it can only be established and proved in accordance with law during the trial of the complaint under section 138 of NI Act. The petitioner cannot be absolved from his liability qua the cheque in question by pleading that he was independent non-executive director of the accused no 1. The nomenclature of the petitioner in certain documents submitted by the petitioner and required to be proved in accordance with law does not mean that the petitioner was a non-functional director of the accused no1. It is also relevant to mention that the petitioner never challenged his summoning for offence punishable under section 138 of the NI Act and only challenged impugned order whereby the trial court judicially opined about existence of prima facie case against him. Conclusion - The complaint contained sufficient averments to proceed against the petitioner under Section 138 read with Section 141 of the NI Act. The petitioner s designation as an Independent Non-Executive Director did not absolve him of liability given the allegations in the complaint. There is no legal and factual infirmity in the order passed by the trial court and impugned order passed by the revisional court - Petition dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment are:
2. ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents Section 138 of the NI Act imposes criminal liability on the drawer of a cheque that is dishonored due to insufficient funds. Section 141 extends this liability to every person who, at the time the offence was committed, was in charge of and responsible for the conduct of the business of the company. The Supreme Court in SMS Pharmaceuticals Ltd. v. Neeta Bhalla and others established that specific averments are necessary to make a director vicariously liable under Section 141. Court's Interpretation and Reasoning The Court emphasized that vicarious liability under Section 141 requires specific averments in the complaint that the accused was in charge of and responsible for the conduct of the business of the company at the time the offence was committed. The Court referred to several Supreme Court judgments, including SMS Pharmaceuticals Ltd., to underline that mere holding a position in a company does not automatically make one liable. Key Evidence and Findings The complaint alleged that the petitioner, along with other directors, was responsible for the conduct of the business of the company and that the cheque in question was issued with their consent. The petitioner was shown as a director in Form 32 and attended board meetings, indicating involvement in company affairs. Application of Law to Facts The Court found that the complaint contained sufficient averments regarding the petitioner's role in the company, thus justifying the issuance of process against him. The Court noted that the petitioner was a director at the time of the offence and that the complaint adequately alleged his involvement in the company's business. Treatment of Competing Arguments The petitioner argued that he was an Independent Non-Executive Director and not involved in the day-to-day affairs of the company. The Court dismissed this argument, stating that the designation in certain documents does not absolve him of liability, as the complaint sufficiently alleged his involvement in the company's affairs. Conclusions The Court concluded that the complaint contained sufficient averments to hold the petitioner vicariously liable under Section 141 of the NI Act. The petitioner's arguments regarding his role and designation were not sufficient to dismiss the complaint at this stage. 3. SIGNIFICANT HOLDINGS Preserve Verbatim Quotes of Crucial Legal Reasoning "The liability arises on account of conduct, act or omission on the part of a person and not merely on account of holding an office or a position in a company." Core Principles Established The judgment reinforces the principle that for vicarious liability under Section 141 of the NI Act, specific averments regarding the accused's role in the company's business are essential. It also emphasizes that mere designation as a director does not automatically entail liability. Final Determinations on Each Issue The Court dismissed the petition, affirming the trial court's and revisional court's orders. It held that the complaint contained sufficient averments to proceed against the petitioner under Section 138 read with Section 141 of the NI Act. The petitioner's designation as an Independent Non-Executive Director did not absolve him of liability, given the allegations in the complaint.
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