2008 (5) TMI 420 - SC - Companies Law

Supreme Court: Directors not liable solely for company's offenses under Negotiable Instruments Act

The Supreme Court clarified that the Magistrate had jurisdiction to proceed with the case involving allegations under section 138 of the Negotiable ... Whether for purposes of section 141 of the Negotiable Instruments Act, 1881, it is sufficient if the substance of the allegation read as a whole fulfil the requirements of the said section and it is not necessary to specifically state in the complaint that the person accused was in charge of, or responsible for, the conduct of the business of the company? Whether a director of a company would be deemed to be in charge of, and responsible to, the company for conduct of the business of the company and, therefore, deemed to be guilty of the offence unless he proves to the contrary? Even if it is held that specific averments are necessary, whether in the absence of such averments the signatory of the cheque and/or the managing directors or joint managing director who admittedly would be in charge of the company and responsible to the company for conduct of its business could be proceeded against? Held that:- Appeal dismissed. Accused No. 2 is Paresh Rajda, the Chairman of the Company, and as per the impugned judgment of the High Court, the question of his responsibility for the business of the Company has not been seriously challenged. We, nonetheless, find clear allegations against both the accused/appellants to the effect that they were officers and responsible for the affairs of the company. We are of the opinion that at a stage where the trial has not yet started, it would be inappropriate to quash the proceedings against them in the light of the observations of this Court quoted above. Issues:1. Jurisdiction of the Magistrate in deciding the application under section 395 of the Code of Criminal Procedure.2. Allegations against the accused under section 138 of the Negotiable Instruments Act.3. Interpretation of section 141 of the Act regarding liability of Directors in a company.Jurisdiction of the Magistrate:The case involved a complaint under section 138 of the Negotiable Instruments Act, where Tata Finance Limited accused individuals of dishonoring cheques. The accused challenged the summoning alleging lack of jurisdiction by the Magistrate. The High Court directed the application to be decided first, which the Magistrate rejected citing lack of jurisdiction. The accused then approached the High Court again, which upheld the allegations against the accused. The Supreme Court found that the Magistrate's jurisdiction was not an issue, and the matter should proceed to trial.Allegations under Section 138:The accused, including the Chairman and Directors of the company, were accused of dishonoring cheques. The defense argued that the accused were merely directors and not directly involved in the offense. The complainant alleged that the accused were responsible officers of the company and liable for the dishonored cheques. Citing previous judgments, the defense and prosecution presented arguments on the liability of directors under section 141 of the Act. The Supreme Court analyzed the complaint's contents and found clear allegations against the accused, stating that quashing the proceedings at this stage would be premature.Interpretation of Section 141:The Supreme Court referred to previous judgments to interpret section 141 of the Act regarding the liability of directors in a company. The Court noted that specific averments in the complaint are essential to establish liability under section 141. The Court highlighted that being a director alone is not sufficient to establish liability and that the person must be in charge of and responsible for the company's conduct at the relevant time. The Court found clear allegations in the complaint against the accused, indicating their responsibility for the company's affairs. The Court upheld the allegations and dismissed the appeals, emphasizing that quashing the proceedings before trial would be inappropriate based on the available information.