2022 (12) TMI 963 - HC - Indian Laws

Summons quashed for non-executive director not vicariously liable under NI Act - Specific allegations required

The court quashed the summoning order dated 28.11.2018 to the extent of issuing summons to the petitioner, an Independent/Non-Executive Director. The ... Dishonor of Cheque - vicarious liability of the Director - section 141 of NI Act - HELD THAT:- In SMS PHARMACEUTICALS LTD. VERSUS NEETA BHALLA [2005 (9) TMI 304 - SUPREME COURT] the Hon’ble Supreme Court of India discussed the meaning and purpose of Section 141 as well as the averments required to be made in the complaint under Section 138 r/w 141 of Negotiable Instruments Act, 1881 to fasten the vicarious liability on the persons associated with a company. The prime objective of this Court is to remind all the Metropolitan Magistrates in Delhi to carefully scrutinize all the complaint cases being filed under Section 138 r/w 141 of the Negotiable Instruments Act, 1881 against the accused companies at the pre-summoning stage and make sure that notice be directed only to those directors or employees of the company who satisfy the principles laid down in the aforesaid judgments. Summons must be issued only after giving due consideration to the allegations and the materials placed on record by the complainant. Undeniably, as per the aforesaid legal pronouncements, Managing Director and the Joint Managing Director are deemed to be vicariously liable for the offence committed by the company because of the position they hold in the company. Problem arises in cases where all the persons holding office in the company are sought to be prosecuted by the complainant, irrespective of whether they played any specific role in the incriminating act - One can also not lose sight of the fact that once such innocent persons are summoned, they have no choice but to seek bail and face the ordeal of trial. Many of such persons also approach the High Court under Section 482 Cr.P.C. to seek quashing of the summoning order and the complaint filed against them and this further increases the burden on the already overburdened Courts. Coming to the facts of the present case, a perusal of Form No. DIR-11, dated 19.09.2019, of the accused company K.S. Oils Limited shows that the petitioner was an independent director at the time of commission of the offence. In view of Section 141 of Negotiable Instruments Act, 1881 and Section 149 of Companies Act, 2013 petitioner could have been held vicariously liable only if it was shown that he was incharge of and was responsible for the conduct of the business of the company at the time of commission of offence, and not otherwise - In absence of any specific averments or allegations carving out a specific role attributable to petitioner in relation to conduct of business of accused company, merely making bald statements that all the accused persons/directors were incharge and responsible for the day to day affairs of the company, does not suffice to make the petitioner herein vicariously liable for dishonouring of the cheques not signed by him and there being material on record to show that he was an independent director in the company. Petition allowed. Issues Involved:1. Quashing of the summoning order dated 28.11.2018.2. Determining the vicarious liability of an Independent/Non-Executive Director under Section 138/141 of the Negotiable Instruments Act, 1881.Detailed Analysis:Quashing of the Summoning Order:The petitioner sought quashing of the summoning order dated 28.11.2018 passed by the Metropolitan Magistrate-04, Patiala House Courts, Delhi, and the consequent proceedings in Criminal Complaint no. 16201/2017. The complaint was filed under Section 138/141 of the Negotiable Instruments Act, 1881, against the accused company and its directors for dishonor of cheques issued in favor of the complainant company.Vicarious Liability of an Independent/Non-Executive Director:1. Petitioner's Argument: - The petitioner was an Independent/Non-Executive Director and had no role in the transactions or day-to-day affairs of the company. - The petitioner was neither a signatory to the cheques nor had knowledge of their issuance. - The complaint lacked specific allegations against the petitioner, making only general and vague statements. - Reliance was placed on several judgments, including Har Sarup Bhasin v. M/s Origo Commodities India Pvt Ltd, Anoop Jhalani v. The State & Anr., MCD v. Ram Kishan Rohatgi, Gunmala Sales Private Limited v. Anu Mehta & Ors, National Small Industries Corporation Limited v. Harmeet Singh Painwal, Sunita Palita v. Panchami Stone Quarry, and Sudeep Jain v. ECE Industries.2. Respondent's Argument: - The petitioner was a director at the time the cheques were dishonored and resigned only in September 2017. - The petitioner's arguments should be dealt with during the trial. - The amount in question was substantial (more than Rs. 106 crores), and the trial was pending.3. Legal Provisions and Precedents: - Section 141 of the Negotiable Instruments Act, 1881: It states that every person who was in charge of and responsible for the conduct of the business of the company at the time the offence was committed shall be deemed guilty. - Section 149 of the Companies Act, 2013: It specifies that an independent director or a non-executive director not being a promoter or key managerial personnel shall be held liable only for acts of omission or commission by the company which occurred with their knowledge or due to their negligence. - Supreme Court Judgments: - S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla: Specific averments are required to show that the accused was in charge of and responsible for the conduct of the business at the relevant time. - National Small Industries Corp. Ltd. v. Harmeet Singh Paintal: Emphasized the need for specific allegations and clear descriptions of the role of directors. - Anita Malhotra v. Apparel Export Promotion Council: Reiterated the need for specific roles to be mentioned in the complaint. - Pooja Ravinder Devidasani v. State of Maharashtra and Anr.: Highlighted that non-executive directors are not involved in day-to-day affairs and cannot be held liable without specific allegations. - Sunita Palita & ors. v. Panchami Stone Quarry: Confirmed that liability depends on the role played in the company's affairs, not merely on designation.4. Court's Observations: - The complaint contained general allegations against all directors without specifying the petitioner's role. - Mere designation as a director is insufficient to establish liability; specific roles and responsibilities must be detailed. - The summoning order was passed mechanically without due application of mind, as required by law.5. Conclusion: - The court quashed the summoning order dated 28.11.2018 to the extent of issuing summons to the petitioner. - The petition was allowed, recognizing that the petitioner, being an independent director, was not shown to be in charge of or responsible for the conduct of the business at the relevant time.This judgment underscores the necessity for specific and detailed allegations in complaints under Section 138/141 of the Negotiable Instruments Act, 1881, particularly when implicating directors who are not involved in the day-to-day management of the company.