To attract a case under Section 141 of the N.I. Act a specific role must have been played by a Director of the Company for fastening vicarious liability, rules the Supreme Court

The Supreme Court in its judgment in Pooja Ravinder Devidasani Vs. State of Maharashtra & Anr rendered on 17 December 2014, has held that to attract a case under Section 141 of the N.I. Act a specific role must have been played by a Director of the Company for fastening vicarious liability. A company may have a number of Directors and to make any or all the Directors as accused in a complaint merely on the basis of a statement that they are in charge of and responsible for the conduct of the business of the company without anything more is not a sufficient or adequate fulfillment of the requirements under Section 141. The Coourt said that the law laid down  is that for making a Director of a Company liable for the offences committed by the Company under Section 141 of the N.I. Act, there must be specific averments against the Director showing as to how and in what manner the Director was responsible for the conduct of the business of the Company.

Supreme Court of India

The Bench comprising of Sudansu Jyoti Mukhopadhyaya and N.V. Ramana, JJ. was considering appeals by special leave filed by the appellant challenging the judgment and order dated 6th October, 2010 passed by the High Court of Judicature at Bombay in Writ Petition Nos. 614-620 of 2010 whereby the High Court dismissed the writ petitions filed by the appellant seeking quashing of the complaints filed by the Respondent No.2 under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 

Respondent No. 2, a finance Company, filed seven complaints under the N.I. Act against the appellant and others viz., (1) Complaint No. 3370/SS/2008 claiming Rs.1,64,69,801-14 (2) Complaint No. 3641/SS/2008 claiming Rs.1,06,55,289-91 (3) Complaint No. 3368/SS/2008 claiming Rs. 1,41,95,806-40 (4) 3640/SS/2008 claiming Rs. 85,21,294/- (5) 3369/SS/2008 claiming Rs. 1,88,12,292/- (6) 3642/SS/2008 claiming Rs. 1,69,95,353-50 and (7) Complaint No. 4086/SS/2009 for a claim of Rs. 8,08,973-25.

In all the complaints the allegation was that the Respondent No. 2 Company had extended trade finance facility to M/S Elite International Pvt. Ltd. to which the appellant was a Director at the relevant time and several Cheques (119 in number) issued by M/S Elite International Pvt. Ltd. aggregating to Rs.8,64,58,810-16, in discharge of its liability towards part payment, stood dishonoured with the banker’s remarks “insufficient funds”.

According to the complainant, at the material time, the accused (appellant) was in charge and at the helm of affairs of M/S Elite International Pvt. Ltd. and therefore she is vicariously liable for the default of the Company as she is responsible for the conduct of its business. Metropolitan Magistrate, 12th Court, Bandra, Mumbai took cognizance of the complaints and issued process against the accused (appellant) for the offence punishable under Section 138 of the N.I. Act.

The aggrieved appellant filed Criminal Writ Petitions before the High Court under Section 482, Cr.P.C. seeking quashing of the criminal proceedings pending before the Metropolitan Magistrate. The High Court dismissed the writ petitions filed by the appellant, against which the appellant had preferred the appeals before the Apex Court.

The appellant contended that she is merely a housewife who was appointed as a Non-Executive Director of M/s Elite International Private Ltd. and had no active role in the conduct of business of the Company, particularly in the issuance of the cheques in question. As a matter of fact, the appellant had resigned as the Director much before the issuance of the cheques in question, her resignation was also approved by the Board of Directors in the meeting held on 17th December, 2005. The resignation of the appellant as Director of M/S Elite International Pvt. Ltd. has also been informed to the Registrar of Companies by Form No. 20B under Section 159, Schedule V, Part II of the Companies Act, 1956 when the annual return for the year ending on 31st March, 2006 was filed. The trade facility was sanctioned by the Respondent No. 2 on 19th January, 2005 as per the Letter of Guarantee executed by the appellant on the same date. The effective date of resignation of the appellant as Director of the Company was 17th December, 2005. With the result of approval of her resignation by the Board of Directors, the appellant ceased to play any role in the activities of the Company. The Cheques in question were issued by the Company in the year 2008 i.e. about two and half years after resignation of the appellant as Director. This fact itself emphasizes that the appellant was not involved in the affairs of the Company when the Cheques were issued and had no role either in the conduct of the business of the Company or in issuing the Cheques.

The appellant contended that to fasten vicarious liability it is necessary under Section 141 of the N.I. Act that the complainant must aver and prove how and in what manner the appellant was responsible in the conduct of the business of the Company. In other words, the complainant must explain the role specifically attributable to the appellant in the commission of the offence.

Pre contra, the respondent contended as per the Judgment of the Apex Court in Gunmala Sales Private Ltd. Vs. Anu Mehta & Ors. (Criminal Appeal No. 2228 of 2014) decided on October 17, 2014 once in a complaint filed under Section 138 read with Section 141 of the N.I. Act, the basic averment is made 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, the Magistrate can issue process against such Director and the basic averment is sufficient to make out a case against the Director.

The Apex Court held that to fasten vicarious liability under Section 141 of the Act on a person, at the material time that person shall have been at the helm of affairs of the Company, one who actively looks after the day-to-day activities of the Company and particularly responsible for the conduct of its business. Simply because a person is a Director of a Company, does not make him liable under the N.I. Act. Every person connected with the Company will not fall into the ambit of the provision. Time and again, it has been asserted by this Court that only those persons who were in charge of and responsible for the conduct of the business of the Company at the time of commission of an offence will be liable for criminal action. A Director, who was not in charge of and was not responsible for the conduct of the business of the Company at the relevant time, will not be liable for an offence under Section 141 of the N.I. Act.  Referring to the decision in Girdhari Lal Gupta Vs. D.H. Mehta & Anr. (1971) 3 SCC 189, the Court observed that a person ‘in charge of a business’ means that the person should be in overall control of the day to day business of the Company. “A company may have a number of Directors and to make any or all the Directors as accused in a complaint merely on the basis of a statement that they are in charge of and responsible for the conduct of the business of the company without anything more is not a sufficient or adequate fulfillment of the requirements under Section 141”, said the Bench.

The Court added that there must be specific averments against the Director showing as to how and in what manner the Director was responsible for the conduct of the business of the Company. The Bench opined that verbatim reproducing the wording of the Section without a clear statement of fact supported by proper evidence, so as to make the accused vicariously liable, is a ground for quashing proceedings initiated against such person under Section 141 of the N.I. Act

The Apex Court held “the High Court did not deal the issue in a proper perspective and committed error in dismissing the writ petitions by holding that in the Complaints filed by the Respondent No. 2, specific averments were made against the appellant. But on the contrary, taking the complaint as a whole, it can be inferred that in the entire complaint, no specific role is attributed to the appellant in the commission of offence. It is settled law that to attract a case under Section 141 of the N.I. Act a specific role must have been played by a Director of the Company for fastening vicarious liability. But in this case, the appellant was neither a Director of the accused Company nor in charge of or involved in the day to day affairs of the Company at the time of commission of the alleged offence. There is not even a whisper or shred of evidence on record to show that there is any act committed by the appellant from which a reasonable inference can be drawn that the appellant could be vicariously held liable for the offence with which she is charged.”

The Bench said, “we have no hesitation to hold that continuation of the criminal proceedings against the appellant under Section 138 read with Section 141 of the N.I. Act is a pure abuse of process of law and it has to be interdicted at the threshold.”

The Bench before parting with the case, cautioned the Courts not to permit abuse of the process of law. “Putting the criminal law into motion is not a matter of course. To settle the scores between the parties which are more in the nature of a civil dispute, the parties cannot be permitted to put the criminal law into motion and Courts cannot be a mere spectator to it. Before a Magistrate taking cognizance of an offence under Section 138/141 of the N.I. Act, making a person vicariously liable has to ensure strict compliance of the statutory requirements. The Superior Courts should maintain purity in the administration of Justice and should not allow abuse of the process of the Court.”, said the Court.

 Accordingly, the Apex Court allowed the appeals by setting aside the impugned judgment passed by the High Court and quashed the criminal proceedings pending against the appellant before the Trial Court.