2025 (6) TMI 1800 - HC - Indian Laws

Dishonour of Cheque - discharge of legal debts and liabilities - vicarious liability of Director - presumption in favor of accused - HELD THAT - On perusal of evidence of PW-1 and PW-2 it does not appear that the complainant/appellant has substantiated the said claim that at the time of commission of the offence the appellant herein was anyway responsible for the day to day business of the company or he was anyway responsible for the issuance of the impugned cheque. On the contrary PW-1 clearly admitted in his cross examination that he knows that accused no. 1/ company had gone into liquidation vide Hon ble High Court s order dated 29.07.2013 in connection with the CP No. 63 of 2013. PW-2 also admitted that it is a fact that vide order dated 29.07.2013 passed by the Hon ble High Court the accused no.1/company went into liquidation though it was not within his knowledge that the official liquidator appointed by the Hon ble High Court took control or charge of all assets of the accused no.1/company. In view of aforesaid factual position as admitted by both PW1 and PW2 that the accused/company had gone into liquidation since 29.07.2013 and when it is the specific case of the accused persons including the respondent herein that he ceased to be a director of the company from 29.07.2013 and when PW-2 has not denied that from 29.07.2013 the official liquidator appointed by the Hon ble High Court took control or charge of all assets of the accused no.1 the burden was heavily upon the complainant to plead and prove as to what role specifically played by the respondent herein in executing the impugned cheque dated 28.10.2013. In the present case when the accused company had admittedly gone into liquidation on 29.07.2013 and it is the specific case of the respondent that he seized to be a director on and from that date he cannot be made accountable and fastened with liability for issuance of any cheque issued after liquidation unless his specific role has been pleaded and proved. Neither in the complaint nor in the evidence the role of the respondent herein in issuance of the impugned cheque has been canvassed or proved - Merely because the respondent herein was a director prior to 29.07.2013 he would not become in charge of the conduct of the business of the accused company or the person responsible to the company for the conduct of the business of the company which had admittedly gone into liquidation on 29.07.2013 and when the impugned cheque was issued on 28.10.2013. Only such person who at the time the offence was committed was in charge of and was responsible to the company for the conduct of the business of the company as well as the company alone shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished. It is trite law in view of judgement of Mallappa others Vs. State of Karnataka 2024 (2) TMI 1391 - SUPREME COURT that there always remains a presumption in favour of the accused unless proved guilty and this presumption continues at all stages of the trial and finally culminates into a fact when the case ends in acquittal and the presumption of innocence gets concretized when the case ends in acquittal and therefore when the accused is not found guilty by the trial court the presumption gets strengthened and a higher threshold is expected to rebut the same in appeal which the appellant/complainant has miserably failed to do in the present context. Conclusion - The court below is justified in holding that the ingredients to constitute offence under section 138 read with section 141 of N.I Act. against present respondent remains not proved and therefore the respondent/accused was rightly acquitted. There is no force in this appeal and the same is liable to be dismissed. Appeal dismissed.

The core legal questions considered in this judgment are:

1. Whether the accused director can be held liable under section 138 read with section 141 of the Negotiable Instruments Act (N.I. Act) for dishonour of a cheque issued by a company that had already gone into liquidation prior to the cheque's issuance.

2. Whether the accused was in charge of and responsible for the conduct of the company's business at the time the alleged offence was committed.

3. Whether the complainant complied with the mandatory requirement of sending a demand notice under section 138(b) of the N.I. Act to the accused prior to initiating prosecution.

4. The applicability of judicial precedents regarding director liability in cases involving companies undergoing liquidation or bankruptcy.

Issue-wise Detailed Analysis

1. Liability of Director Post-Liquidation under Section 138/141 of N.I. Act

The legal framework governing this issue includes section 138 and section 141 of the N.I. Act, which impose criminal liability on the drawer of a cheque and on persons in charge of the company at the time the offence is committed. The Apex Court precedents cited include Aneeta Hada v. M/S Godfather Travels and Tour Pvt. Ltd. and Tourism Finance Corporation India Ltd. v. Rainbow Papers Ltd., which hold that directors involved in the day-to-day functioning of a company can be held liable even in insolvency or bankruptcy proceedings.

The Court noted that the company went into liquidation by an order dated 29.07.2013, prior to the issuance of the impugned cheque dated 28.10.2013. The respondent director testified unchallenged that he ceased to be a director from the date of the liquidation order and had no knowledge of the cheque issuance. The complainant failed to prove that the respondent was in charge of or responsible for the company's business affairs at the time the offence was committed.

The Court emphasized that the phrase "every person who at the time the offence was committed" in section 141 is critical, meaning liability attaches only to those in charge at the relevant time. Since the official liquidator took control post-liquidation, the erstwhile directors, including the respondent, could not be held liable for acts after that date.

The Court also observed that vicarious liability under section 141 requires proof of specific responsibility for the company's business at the offence time, which was absent here. The complainant neither pleaded nor proved the respondent's role in issuing the cheque post-liquidation.

2. Requirement of Demand Notice under Section 138(b) of N.I. Act

Section 138(b) mandates that the payee or holder in due course must send a written demand notice to the drawer within 30 days of receiving information of cheque dishonour. The complainant alleged sending a demand notice on 16.01.2014 but failed to produce evidence of its service to the accused. The trial court noted the absence of any demand notice proof except a letter under section 434 of the Companies Act dated 13.08.2015, which is unrelated.

The respondent denied receiving any demand notice. The Court reiterated that service of demand notice is an essential ingredient of the offence under section 138. Failure to prove such service entitles the accused to benefit of doubt, especially in criminal trials where presumption of innocence prevails.

3. Effect of Liquidation on Director's Liability

The Court analyzed the legal effect of the company's liquidation on the liability of its directors. Upon winding up, all employees and officers, including directors, are discharged, and control passes to the official liquidator who manages the company's assets and liabilities under the Companies Act.

The trial court correctly held that after liquidation, the erstwhile directors cease to be in charge and responsible for the company's affairs, and liability for dishonoured cheques issued thereafter cannot be fastened on them. Creditors' claims are to be addressed through liquidation proceedings, not criminal prosecution of ex-directors.

This position aligns with the principle that criminal liability under section 138/141 requires the accused to be in charge at the time of offence. The Court distinguished this from cases where directors remain in control and issue cheques during insolvency but prior to formal liquidation.

4. Treatment of Competing Arguments

The appellant argued that the accused suppressed the liquidation status, issued the cheque with intent to deceive, and that directors remain liable despite insolvency. The appellant relied on precedents holding directors liable even post-bankruptcy.

The Court rejected this argument on facts, noting that the complainant was aware of the liquidation order well before filing the complaint and failed to prove the respondent's involvement in issuing the cheque. The Court also emphasized the absence of demand notice proof and the respondent's unchallenged testimony about cessation of directorship.

The Court further noted that the appellant failed to rebut the presumption of innocence or prove the essential ingredients of the offence beyond reasonable doubt, as required in criminal proceedings.

5. Evidentiary Findings

The cheque in question was signed by accused no. 2 (deceased), not the respondent. The respondent's testimony that he ceased to be director on 29.07.2013 was uncontroverted. The complainant's witnesses admitted knowledge of liquidation and did not deny the official liquidator's control post-liquidation. No evidence was led to show the respondent's involvement in the cheque issuance or management of company affairs post-liquidation.

The complainant failed to produce the demand notice or prove its service, a fatal lapse for prosecution under section 138.

Conclusions

The Court concluded that the prosecution failed to prove that the respondent was in charge or responsible for the company's business at the time the offence was committed. The company's liquidation prior to the cheque issuance relieved the respondent of liability. The absence of proof of demand notice service further negated the prosecution's case. Therefore, the ingredients of offence under section 138 read with section 141 of the N.I. Act were not established against the respondent.

Significant Holdings

"The words 'every person who at the time of the offence was committed' occurring in section 141 of the N.I. Act is significant which indicates that criminal liability of a director must be determined on the date, the offence is alleged to have been committed."

"Merely because the respondent herein was a director prior to 29.07.2013, he would not become in charge of the conduct of the business of the accused company or the person responsible to the company for the conduct of the business of the company, which had admittedly gone into liquidation on 29.07.2013 and when the impugned cheque was issued on 28.10.2013."

"Service of demand notice is an essential ingredient to constitute offence under section 138 of the N.I Act... benefit of every reasonable doubt is to be given to the accused and complainant is to prove all the ingredients of the offence laid down in section 138(b) beyond doubt."

"When the accused/company had admittedly gone into liquidation on 29.07.2013 and it is the specific case of the respondent that he ceased to be a director on and from that date, he cannot be made accountable and fastened with liability for issuance of any cheque, issued after liquidation unless his specific role has been pleaded and proved."

"There always remains a presumption in favour of the accused unless proved guilty and this presumption continues at all stages of the trial and finally culminates into a fact, when the case ends in acquittal and the presumption of innocence gets concretized when the case ends in acquittal and therefore, when the accused is not found guilty by the trial court, the presumption gets strengthened and a higher threshold is expected to rebut the same in appeal."

The final determination was that the respondent accused was rightly acquitted as the prosecution failed to prove the essential ingredients of the offence under sections 138 and 141 of the N.I. Act, including the crucial elements of director's charge and responsibility at the time of offence and service of demand notice. The appeal was dismissed accordingly.

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