2025 (6) TMI 1573 - HC - Indian Laws

Dishonour of Cheque - vicarious/criminal liability of Managing Director and Authorised Signatory of the accused Cooperative Society for the dishonour of a cheque issued by the Society - petitioners would contend that they are not liable to be prosecuted for the dishonour of the cheque issued by the first accused Society since the dishonour happened due to the financial collapse of that Society which was beyond their control - HELD THAT - Section 141 of the NI Act deals with the commission of offence under Section 138 of the said Act by a company. As per Sub-section (1) of Section 141 of the NI Act the requirement for fastening a person with criminal liability for the offence committed by a company under Section 138 of the NI Act is that at the time when the offence was committed such person should be in charge of and responsible to the company for the conduct of the business of the company. The first proviso to Section 141(1) of the NI Act exonerates the officer or employee of the company from the said offence if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence. As far as the present case is concerned there is absolutely nothing stated in Annexure-A1 complaint filed by the first respondent that the petitioners herein were in charge of and were responsible to the first accused Society for its conduct of business at the time of commission of the offence. Therefore the primary requirement to fasten the petitioners with criminal liability under Section 138 of the NI Act for the dishonour of the cheque issued by the first accused Society has not been established by the complainant (first respondent). It is clear from the decisions of the Hon ble Apex Court in in Ravi Dhingra v. State of NCT of Delhi 2024 (12) TMI 1090 - SUPREME COURT that the requirement to plead in the complaint that the persons being prosecuted were in charge of and were responsible to the company for the conduct of business of the company at the time of commission of the offence cannot be watered down by other general and superficial statements to the effect that those persons were managing the affairs of the company. As far as the present case is concerned there is absolutely no allegation in Annexure-A1 complaint that the petitioners were in charge of and responsible for the conduct of business of the first accused Society. That being so the prosecution launched against the petitioners is prima facie unsustainable. Conclusion - The petitioners are not liable to be prosecuted under Section 138 read with Section 141 of the NI Act due to absence of essential allegations regarding their charge and responsibility over the Society s business at the time of the offence. The proceedings against the petitioners are accordingly quashed. Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the petitioners, as Managing Director and Authorised Signatory of the accused Cooperative Society, can be held criminally liable under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) for the dishonour of a cheque issued by the Society.

- Whether the petitioners were "in charge of, and responsible to the company for the conduct of the business of the company" at the time of commission of the offence, as required under Section 141(1) of the NI Act to fasten individual criminal liability.

- Whether the absence of specific averments in the complaint regarding the petitioners' charge and responsibility over the company's business justifies quashing the prosecution against them.

- The applicability and interpretation of Section 141 of the NI Act, including the provisos exempting government-nominated directors and officers exercising due diligence.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Liability of Petitioners under Section 138 NI Act for Dishonour of Cheque Issued by the Cooperative Society

The legal framework centers on Section 138 of the NI Act, which penalizes the drawer of a cheque that is dishonoured for insufficiency of funds or other reasons. When the drawer is a company or cooperative society, Section 141 of the NI Act governs the imposition of criminal liability on individuals associated with the company.

The Court examined whether the petitioners, as officers of the Cooperative Society, could be prosecuted under Section 138 for the dishonour of the cheque issued by the Society. The petitioners contended that the financial collapse of the Society, beyond their control, caused the dishonour, and that they were not responsible at the material time-one's tenure having ended and the other being on leave without allowance.

The complaint lacked any specific allegation that the petitioners were in charge of and responsible for the conduct of the Society's business at the time the offence was committed. The petitioners' defense also highlighted ongoing efforts to liquidate the Society's assets to satisfy liabilities, including the amount covered by the cheque, indicating no personal liability.

Issue: Interpretation and Application of Section 141(1) of the NI Act

Section 141(1) imposes criminal liability on every person who, at the time the offence under Section 138 was committed, was in charge of and responsible to the company for the conduct of its business. The two provisos exempt persons who prove lack of knowledge or due diligence, and government-nominated directors or officers.

The Court relied heavily on recent authoritative precedents interpreting Section 141(1). In Ashok Shewakramani v. State of Andhra Pradesh, the Supreme Court clarified that the phrases "was in charge of" and "was responsible to the company for the conduct of the business" must be read conjunctively, not disjunctively. Mere management or involvement in day-to-day affairs does not satisfy the statutory requirement. The person must have been specifically in charge of and responsible for the company's business conduct at the time of the offence.

The Court noted that the complaint's general averments that the petitioners were managing the company or involved in daily affairs were insufficient. The complaint failed to allege that the petitioners were in charge of and responsible for the business conduct at the relevant time, which is mandatory to fasten criminal liability under Section 141(1).

Further, the second proviso exempts persons nominated as directors by virtue of holding government office, which was relevant here since the first petitioner was deputed from the Co-operative Department as Managing Director and his tenure ended prior to the offence.

Issue: Sufficiency of Complaint and Grounds for Quashing Proceedings

The Court examined whether the absence of the mandatory averments in the complaint warranted quashing the prosecution against the petitioners. The Supreme Court in Ravi Dhingra v. State of NCT of Delhi reiterated that complaints lacking the essential averments under Section 141(1) cannot be maintained and must be quashed to prevent abuse of process.

The Court found that the complaint in the present case conspicuously lacked the statutory averments that the petitioners were in charge of and responsible to the Society for its business conduct at the time of the cheque dishonour. The prosecution against the petitioners was thus prima facie unsustainable.

The Magistrate's refusal to entertain discharge petitions on the ground that summons trials do not permit discharge was also noted. However, the High Court emphasized that the proper remedy in such cases is quashing the proceedings, as done here.

3. SIGNIFICANT HOLDINGS

"There is absolutely nothing stated in Annexure-A1 complaint ... that the petitioners herein were in charge of, and were responsible to the first accused Society for its conduct of business at the time of commission of the offence. Therefore, the primary requirement to fasten the petitioners with criminal liability under Section 138 of the NI Act ... has not been established by the complainant."

"The words 'was in charge of' and 'was responsible to the company for the conduct of the business of the company' cannot be read disjunctively and the same ought be read conjunctively in view of use of the word 'and' in between."

"Merely because somebody is managing the affairs of the company, per se, he does not become in charge of the conduct of the business of the company or the person responsible to the company for the conduct of the business of the company."

"When the complaint lacks the mandatorily required averment to maintain a complaint for the commission of offence under Section 138 of the NI Act, the only option left with the High Court is quashment of those proceedings."

The Court concluded that the petitioners were not liable to be prosecuted under Section 138 read with Section 141 of the NI Act due to absence of essential allegations regarding their charge and responsibility over the Society's business at the time of the offence. The proceedings against the petitioners were accordingly quashed.