Summary
After a company's cheque was dishonoured, the payee filed a complaint under Sections 138 and 141 of the Negotiable Instruments Act against the company, its Managing Director (who signed the cheque) and three other directors. The complaint said only, in general terms, that all of them were responsible for the day-to-day business. The Calcutta High Court refused to quash it against the three directors. The Supreme Court held that Section 141 creates vicarious liability and must be strictly construed. Unless an accused is the Managing or Joint Managing Director or signed the cheque, the complaint must specifically say how that person was in charge of the business. The appellants were shown by unimpeachable records to be independent non-executive directors. The proceedings were quashed against them.
Issues
- Whether a bald averment that all directors were responsible for the company's day-to-day affairs is enough to proceed under Section 141 of the NI Act against independent non-executive directors who neither signed the cheque nor were Managing Directors.
- Whether the High Court should have exercised its Section 482 CrPC jurisdiction to quash the complaint against them.
Provisions considered
- Sections 138 and 141, Negotiable Instruments Act, 1881Following S.M.S. Pharmaceuticals, K.K. Ahuja, National Small Industries Corporation and Pooja Ravinder Devidasani, only those in charge of and responsible for the business when the offence was committed are liable. Directors other than the Managing Director or the signatory require specific averments. (¶¶ 23, 28, 29, 30, 36, 41, 42, 43, 44, 46)
- Sections 2(47), 149(6) and 150, Companies Act, 2013These sections define independent directors and the manner of their selection. Forms DIR-12 and 32 showed the appellants as non-executive independent directors from 01.04.2014. (¶¶ 25, 26, 27, 43)
- Section 482, Code of Criminal Procedure, 1973Inherent power must be used sparingly but must be exercised when the tests are met. The High Court erred in refusing relief on formulaic pleadings. (¶¶ 34, 35, 45, 48)
- Sections 205 and 305, Code of Criminal Procedure, 1973Because the company had appeared through an authorised representative, there was no justification for refusing to dispense with the appellants' personal appearance. (¶¶ 14, 21, 47)
Held
- Section 141 is a penal provision creating vicarious liability and must be strictly construed. Being a director is not enough; liability arises from being in charge of and responsible for the conduct of the business when the offence is committed. Dragging directors into such proceedings only because of their designation would be a travesty of justice. (¶¶ 41, 42, 43)
- A Managing Director or Joint Managing Director, and a director or officer who signed the cheque, are covered without further averment. Other directors can be proceeded against only on specific averments showing how and in what manner they were responsible for the conduct of the business. A bald statement that all directors are in charge does not meet Section 141. (¶¶ 30, 37, 43, 46)
- A non-executive director is a custodian of governance but is not involved in the day-to-day running of the business. The appellants were shown by unimpeachable documents to be independent non-executive directors who neither were Managing Directors nor signed the cheque. (¶¶ 29, 38, 43)
- Although it warned against a hyper-technical approach, the High Court itself adopted one in rejecting the Section 482 petition on a cursory reading of pleadings that merely repeated the words of Section 141. It ignored the material on record about the appellants' status. (¶¶ 39, 40, 45, 48)
- In any event, once the company had appeared through an authorised officer, there was no justification for refusing to dispense with the appellants' personal appearance. A summoning order must show application of mind (Pepsi Foods). (¶ 47)
Result
Appeal allowed. The High Court order was set aside and Case No. AC/121/2017 under Sections 138/141 of the NI Act was quashed against the appellants. It may continue against the other accused, including the company, its Managing Director and the signatory of the cheque.