2010 (2) TMI 590 - SC - Companies Law

Summoning orders quashed; prosecution under s.138 read with s.141 requires specific averments to fasten vicarious liability only on responsible persons

National Small Industries Corpn. Ltd. Versus Harmeet Singh Paintal

SC upheld the HC's quashing of summoning orders and dismissed the appeals. The Court held that for prosecution under s.138 read with s.141 the complainant ... Dishonour of cheque for insufficiency of funds in the account - Compliance of section 141 - Vicarious liability - Whether the order of the High Court quashing the summoning orders insofar as the respondents are concerned is sustainable and what should be the averments in the complaint u/s 138 read with section 141 of the Act against the Director of a Company before he can be subjected to criminal proceedings? Held that:- The primary responsibility is on the complainant to make specific averments as are required under the law in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no presumption that every Director knows about the transaction. (ii) Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in-charge of and were responsible for the conduct of the business of the company. (iii) Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make accused therein vicariously liable for offence committed by company along with averments in the petition containing that accused were in-charge of and responsible for the business of the company and by virtue of their position they are liable to be proceeded with. (iv) Vicarious liability on the part of a person must be pleaded and proved and not inferred. (v) If accused is Managing Director or Joint Managing Director then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with. (vi) If accused is a Director or an Officer of a company who signed the cheques on behalf of the company then also it is not necessary to make specific averment in complaint. (vii) The person sought to be made liable should be in-charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases. In the appeals of National Small Industries Corporation, respondent No. 1 Harmeet Singh Paintal was no more a Director of the company when the cheques alleged in the complaint were signed and the same is evidenced from the Sixth Annual Report for the year 1996-97 of the accused company. The said report is of dated 30-8-1997 and the same was submitted with the Registrar of Companies on 5-12-1997 and assigned as document No. 42 dated 9-3-1998 by the Department. Those documents have been placed before this Court by respondent No. 1 as an additional document. In view of these particulars and in addition to the interpretation relating to section 141 which we arrived at, no liability could be fastened on respondent No. 1. Further, it was pointed out that though he was an authorized signatory in the earlier transactions, after settlement and in respect of the present cause of action, admittedly fresh cheques were not signed by the first respondent. In the same way, in the appeal of the DCM Financial Services, the respondent therein, namely, Dev Sarin also filed additional documents to show that on the relevant date, namely the date of issuance of cheque he had no connection with the affairs of the company. We are in agreement with the conclusion arrived at by the High Court and in the absence of specific averment as to the role of the respondents and particularly in view of the acceptable materials that at the relevant time they were in no way connected with the affairs of the company, we reject all the contentions raised by learned counsel for the appellants. Consequently, all the appeals fail and are accordingly dismissed. Issues Involved:1. Quashing of summoning orders under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881.2. Necessary averments in complaints under Section 138 read with Section 141 of the Act.3. Vicarious liability of Directors in cases of cheque dishonour.4. Specific roles and responsibilities of Directors in the context of Section 141.Issue-Wise Detailed Analysis:1. Quashing of Summoning Orders:The appeals were filed by the National Small Industries Corporation Limited and DCM Financial Services Ltd. against the High Court's orders quashing the summoning orders passed by the trial Court under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881. The High Court quashed these orders on the grounds that the complaints lacked specific averments against the Directors, showing their responsibility for the conduct of the company's business at the time of the offence.2. Necessary Averments in Complaints:The Supreme Court emphasized that Section 141 of the Act requires specific averments in the complaint to show how and in what manner the Director was responsible for the conduct of the business of the company. It is not sufficient to make a bald statement that the Director is in charge of and responsible for the conduct of the business of the company. The complaint must spell out the role of the Director in the alleged offence, adhering to the strict interpretation of penal statutes.3. Vicarious Liability of Directors:The Court reiterated that vicarious liability under Section 141 can only be fastened on those who were in charge of and responsible for the conduct of the business of the company at the time of the offence. Merely holding a designation or office in a company is not enough to attract criminal liability. The Court cited several precedents, including S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, to underline that specific allegations must be made against the Directors to hold them vicariously liable.4. Specific Roles and Responsibilities of Directors:The Court analyzed the complaints filed by National Small Industries Corporation Ltd. and DCM Financial Services Ltd. and found that the necessary ingredients to attract Section 141 were not satisfied. The complaints contained general statements without specific details about the Directors' roles in the conduct of the company's business. The Court held that without specific averments, the complaints could not be entertained. The Court also noted that the Directors in question were not involved in the company's affairs at the relevant time, further weakening the case against them.Conclusion:The Supreme Court upheld the High Court's decision to quash the summoning orders, emphasizing the need for specific averments in complaints under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881. The Court clarified that vicarious liability cannot be inferred merely based on a person's designation in the company; instead, it must be clearly established through specific allegations and evidence. Consequently, all the appeals were dismissed.