Summary
Two non-executive directors of a listed company were prosecuted under Section 138 read with Section 141 of the Negotiable Instruments Act for dishonour of cheques issued by the company towards an inter-corporate deposit; the High Court refused to quash the complaints under Section 482 CrPC. The Supreme Court held that non-executive directors who neither signed the cheques nor were shown by specific averments to be in charge of and responsible for the company's business at the relevant time cannot be made vicariously liable, and quashed the proceedings.
Issues
- Whether non-executive directors who did not sign the dishonoured cheques can be prosecuted under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 in the absence of specific averments that they were in charge of and responsible for the conduct of the company's business at the relevant time.
- Whether the question of a director's non-executive status must be left to trial or can be decided at the quashing stage under Section 482 CrPC on the basis of the complaint and undisputed public records.
Provisions considered
- Section 141, Negotiable Instruments Act, 1881Section 141 is a penal provision creating vicarious liability and must be strictly construed. Both ingredients of sub-section (1), that the person was in charge of, and was responsible to, the company for the conduct of its business when the offence was committed, must be specifically averred in the complaint; there is no presumption that every director knows of the transaction, and mere directorship or attendance at board meetings does not attract liability. (¶¶ 16, 16.1, 16.2, 16.3, 16.4, 16.5, 16.6, 18, 19)
- Section 138, Negotiable Instruments Act, 1881Two post-dated cheques issued by the company towards repayment of an inter-corporate deposit were dishonoured for insufficient funds and complaints under Section 138 were filed against all directors. Only the signatory of a cheque is liable under Section 138 unless the case is brought within Section 141. (¶¶ 2, 5, 8, 16.6, 17)
- Section 482, Code of Criminal Procedure, 1973The appellants' petitions under Section 482 to quash the complaints had been dismissed by the High Court; the Supreme Court set aside that order and quashed the proceedings because the complaints lacked the averments necessary to fasten vicarious liability. (¶¶ 2, 9, 20)
Held
- Non-executive and independent directors cannot be held liable under Section 138 read with Section 141 of the NI Act unless specific allegations demonstrate their direct involvement in the affairs of the company at the relevant time. The complaint must spell out how and in what manner the director was in charge of and responsible for the conduct of the company's business; a bald, cursory statement is insufficient, and vicarious liability must be pleaded and proved, not inferred. (¶¶ 16, 16.1, 16.2, 16.3)
- A non-executive director performs a governance role and is not involved in daily operations or financial management; mere designation as a director creates no automatic liability, and only those responsible for the day-to-day conduct of business at the relevant time can be held accountable. Where the cheques were signed by the managing director and not by the accused director, and the complaint does not assert that he was in charge of the company's business, he cannot be prosecuted with the aid of Section 141(1). (¶¶ 16.4, 16.5, 16.6)
- On the record, the appellants neither issued nor signed the dishonoured cheques, were not present at the board meeting that approved the inter-corporate deposit, were not party to the agreement or the later settlement, and their non-executive status was confirmed by Registrar of Companies records and corporate governance reports filed with the stock exchange. The complaints contained no specific averments linking them to the transactions, and attendance at board meetings does not by itself translate into control over financial operations. (¶¶ 4, 6, 7, 17, 18)
- In the absence of specific allegations the appellants could not be held vicariously liable under Section 141 of the NI Act, and the criminal proceedings against them were quashed; the High Court's refusal to quash under Section 482 CrPC was set aside. (¶¶ 19, 20)
Result
Appeals allowed; High Court order dated 28.11.2023 set aside; criminal proceedings against the appellants in Complaint Nos. 15857 and 15858 of 2017 before the Additional Chief Metropolitan Magistrate, New Delhi quashed; no order as to costs.