1999 (6) TMI 444 - HC - Companies Law

Directors' vicarious liability upheld in cheque dishonour case under section 138.

The court dismissed the petition in a case involving the dishonour of a cheque under section 138 of the Negotiable Instruments Act, 1881. The directors' ... Directors - Power of Issues Involved:1. Dishonour of cheque and subsequent legal proceedings under section 138 of the Negotiable Instruments Act, 1881.2. Issuance of process against the accused directors.3. Vicarious liability of directors under section 141 of the Negotiable Instruments Act, 1881.4. Recall of process issued by the magistrate.5. Legal requirements and sufficiency of the complaint and verification statement.6. Liability of nominee directors and non-working directors.7. Legal precedents and application of judicial discretion.Issue-wise Detailed Analysis:1. Dishonour of Cheque and Subsequent Legal Proceedings:The petitioner-company issued a cheque for Rs. 12,56,212, which was dishonoured. The respondent issued a notice demanding payment within 15 days, failing which a complaint was filed under section 138 of the Negotiable Instruments Act, 1881. The Judicial Magistrate issued a process against the accused, which led to non-bailable warrants against certain directors.2. Issuance of Process Against the Accused Directors:The Chief Judicial Magistrate issued the process under section 138 based on the complaint and verification. The accused directors challenged this issuance, claiming they were not involved in the day-to-day operations of the company.3. Vicarious Liability of Directors:The petitioners argued that the complaint did not specify how the directors were in charge of or responsible for the company's conduct. They cited legal precedents, including Municipal Corporation of Delhi v. Ram Kishan Rohtagi and State of Haryana v. Brij Lal Mittal, to argue that mere directorship does not imply liability under section 141 unless specific involvement is shown.4. Recall of Process Issued by the Magistrate:The application to recall the process was rejected by the magistrate. The petitioners contended that the magistrate erred in issuing the process without sufficient evidence of the directors' involvement. They argued that the complaint lacked necessary averments and that the verification statement did not establish a prima facie case.5. Legal Requirements and Sufficiency of the Complaint and Verification Statement:The court examined whether the complaint and verification met the legal requirements under sections 138 and 141. The complaint mentioned that the directors were responsible for the company's conduct, but the petitioners argued this was insufficient. The court noted that the complaint and verification did include necessary allegations, and the directors did not respond to the notice, missing the opportunity to clarify their roles.6. Liability of Nominee Directors and Non-working Directors:The petitioners included a nominee director and non-working directors, arguing they should not be liable. The court noted that the nominee director did not file for recall of the process, and the complaint did implicate the directors in the company's financial decisions. The court referred to section 292 of the Companies Act, which requires board resolutions for borrowing, implying the directors' involvement.7. Legal Precedents and Application of Judicial Discretion:The court referred to various precedents, including U.P. Pollution Control Board v. Modi Distillery, to emphasize that directors can be held liable if they are in charge of and responsible for the company's conduct. The court found that the magistrate's decision to issue the process was justified based on the complaint and verification.Conclusion:The court dismissed the petition, holding that the complaint and verification met the legal requirements, and the directors' involvement was sufficiently alleged. The issuance of the process was upheld, and the petitioners' arguments were found to lack merit. The criminal writ petition was dismissed with no order as to costs.