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2025 (5) TMI 1743 - SC - Indian LawsDishonor of Cheque - Vicarious liability of directors being family members claimed to be non-executive - Validity of the HC judgment quashing the criminal proceedings under Section 138 of the Negotiable Instruments Act 1881 - no sufficient averments in the complaint - invoke the vicarious liability against the respondent No. 2 under Section 141 of the NI Act - grant of credit facility in the form of Revolving Loan Facility - HELD THAT -After the reference in S.M.S. Pharmaceuticals-I (supra) was answered by the three-Judge Bench and before the case of the said parties could be taken up for disposal by the two judge Bench came the judgment in Sabitha Ramamurthy and Another vs. R.B.S.Channabasavaradhya (2006) 10 SCC 581. This Court after noticing S.M.S. Pharmaceuticals-I (supra) held that it was not necessary for the complainant to specifically reproduce the wordings of the section but what was required was a clear statement of fact so as to enable the Court to arrive at a prima facie opinion that the accused are vicariously liable. Such vicarious liability can be inferred only if the requisite statements which are required to be averred in the complaint petition are made so as to make the accused therein vicariously liable for the offence committed by the company. It was also held that before a person can be made vicariously liable strict compliance with the statutory requirements should be insisted. On facts the Court found that the averments did not meet the requirements in the said case. Thereafter came the judgment in S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Another (2007) 4 SCC 70 (hereinafter referred to as S.M.S. Pharmaceuticals-II (supra). Referring to para 18 and 19 of the order in the three-Judge Bench reference in S.M.S. Pharmaceuticals-I (supra) and following the judgment in Sabitha Ramamurthy (Supra) the averments in the complaint were tested and it was found that the complaint petition when read in its entirety the averments therein fell short of the requirements to implicate the respondent-accused in that case. Considering these averments the Court while quashing the proceedings held that merely because somebody is managing the affairs of company per se they do not become in charge of the conduct of the business of the company or the person responsible for the company for the conduct of the business of the company. It was further held that the averment that the accused were busy with the day-to-day affairs was also insufficient to attract the ingredients of Section 141(1). Proceeding further the Court held that merely averring that the accused were in-charge of the company was neither here nor there as such averment was insufficient to conclude that the accused were responsible to the company for the conduct of the business. This is vastly different from the averments in the present case wherein it is clearly averred that the respondent no. 2 was responsible for the day-to-day affairs management and working of the accused no. 1 company. A harmonious reading of the judgments in K.K. Ahuja 2009 (7) TMI 758 - SUPREME COURT Harmeet Singh Paintal 2010 (2) TMI 590 - SUPREME COURT and S.P. Mani 2022 (9) TMI 846 - SUPREME COURT brings out the position that there is no obligation on the complainant to plead in the complaint as to matters within the special knowledge of the company or the directors or firm about the specific role attributed to them in the company. Applying the said legal position to the facts of the present case it is found that the averments in the complaint set out hereinabove against the respondent No.2 Mrs. Ranjana Sharma fulfill the requirement of Section 141(1) of the NI Act and this is not a case where trial against her can be aborted by quashment of proceedings. The High Court was completely unjustified in quashing the proceedings against her. The appeal is accordingly allowed and the judgment of the High Court of Judicature at Bombay dated 10.01.2024 in Criminal Writ Petition No. 275 of 2022 is set aside. Consequently the order dated 16.12.2019 issuing process to respondent No.2 in proceeding in C.C. No. 2486/SS/2019 is restored to the file of the Metropolitan Magistrate 7th Court Bhiwandi Dadar Mumbai to be proceeded with in accordance with law.
The core legal question considered in this appeal is whether the High Court was justified in quashing the criminal proceedings against a director of a company under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (NI Act) on the ground that the complaint lacked sufficient averments to invoke vicarious liability against the director under Section 141.
Specifically, the issues presented and considered include:
Issue-wise detailed analysis: 1. Sufficiency of Averments under Section 141(1) NI Act The relevant legal framework is Section 141(1) of the NI Act, which imposes vicarious liability on every person who, at the time the offence under Section 138 is committed, was in charge of and responsible to the company for the conduct of its business. The provisos provide defenses if the person proves lack of knowledge or due diligence. Precedents emphasize that this provision creates criminal liability and must be strictly complied with. The phrase "in charge of, and responsible to the company for the conduct of the business of the company" is a sine qua non for liability. The Court referred to the definition of "in charge of" as a person in overall control of the day-to-day business of the company. The complaint in this case averred that the accused director was responsible for the day-to-day affairs, management, and working of the company, which by dictionary meaning and substance corresponds to the statutory phrase. The Court rejected the argument that the exact words of Section 141 must be mechanically reproduced. Instead, the substance of the allegations read as a whole must fulfill the statutory requirements. This approach aligns with the principle in Monaben Ketanbhai Shah, which cautions against hypertechnical scrutiny and advocates looking at the complaint in its entirety. The complaint also showed that the accused director participated in negotiations, was authorized by board resolutions to sign key loan documents, execute promissory notes, mortgages, guarantees, and file charges with the Registrar of Companies. These facts demonstrate control and responsibility for the company's business. Thus, the Court found that the averments satisfy the requirement of Section 141(1) and are sufficient to proceed against the accused director. 2. Requirement of Specific Role Attribution in Complaint Learned counsel for the respondent contended that beyond the basic averment of being "in charge of and responsible," the complaint must specify the precise role or administrative functions of the director. The Court disagreed, relying on S.P. Mani and K.K. Ahuja, which held that the complainant is only expected to know generally who was in charge of the affairs of the company. Detailed administrative particulars are within the special knowledge of the company and its officers and need not be pleaded by the complainant. The burden to prove non-liability or absence of control lies on the accused at trial. This principle ensures that the complaint stage is not burdened with intricate details beyond the complainant's knowledge. 3. Precedents on Pleading Requirements and Vicarious Liability The Court extensively analyzed the three-Judge Bench judgment in S.M.S. Pharmaceuticals Ltd. (I), which clarified that:
The Court also noted that S.M.S. Pharmaceuticals (II), Sabitha Ramamurthy, and Ashok Shewakramani emphasize the need for clear, unambiguous averments to attract liability. Omnibus or vague averments lumping directors together without specific facts are insufficient. In the present case, the complaint's averments were clear and specific, distinguishing it from cases like Siby Thomas and Ashok Shewakramani where the averments were vague or omnibus and the courts quashed proceedings. 4. Application of Law to Facts The complaint and annexed documents clearly showed that the accused director was actively involved in the company's business, authorized to negotiate loan terms, sign critical documents, and provide guarantees. This demonstrated that she was in charge of and responsible for the company's business at the relevant time. The High Court's quashing of proceedings on the ground of insufficient averments was therefore found to be erroneous. The Court held that the complaint disclosed a prima facie case against the accused director under Section 141 and the trial should proceed. 5. Treatment of Competing Arguments The Court carefully considered the respondent's reliance on Siby Thomas and other authorities requiring strict adherence to the language of Section 141 and specific role attribution. It distinguished those cases on facts, noting that in the present case the complaint contained clear and specific averments satisfying the statutory requirements. The Court also rejected the argument that the complainant must plead administrative details within the company's special knowledge, holding that such matters are for the accused to prove at trial. Conclusions The Court concluded that the averments in the complaint fulfill the requirements of Section 141(1) of the NI Act and that the High Court erred in quashing the proceedings against the accused director. The appeal was allowed, the High Court judgment set aside, and the trial court's order issuing process restored. Significant holdings and core principles established include:
Final determinations:
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