2024 (2) TMI 1294 - HC - Companies Law

Non-executive director cannot be prosecuted for cheque dishonour without proving business responsibility

M.A. Alagappan Versus PVR Limited.

Delhi HC held that complaint under dishonour of cheque case against non-executive director was not maintainable. Court ruled that when director is not ... Maintainability of complaint against the petitioner - Dishonour of Cheque - vicarious liability of Non-Executive Director - issuance of a legal demand notice to the accused company and its directors - HELD THAT:- It is trite that the Non-Executive Director is not involved in the day to day affairs of the company or in the running of its business. Further, when a complaint is filed against the Director of the company, who is not a signatory of the dishonoured cheque, specific averments have to be made in the pleadings to substantiate the contentions in the complaint that such Director was incharge of and responsible for conduct of the business of the company unless such Director is designated Managing Director or Joint Managing Director. A bare reading of para 3 of the complaint shows that in the complaint it has not been substantiated that in what manner the petitioner/accused no. 4 was incharge of and responsible for conduct of the business of the accused company, which elaboration was mandatory since the petitioner is neither a signatory to the cheque nor was he the Managing Director or Joint Managing Director of the accused company. This being the position, the complaint is not maintainable against the petitioner. In view of the undisputed status of the petitioner as a Non-Executive Director and further regard being had to the fact that the petitioner is neither signatory to the cheque nor Managing Director or Joint Managing Director of the accused company, making him stand the trial would be an abuse of process of Court. Appeal disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a non-executive director can be held liable and summoned to stand trial under the negotiable instrument/criminal provisions when he is not a signatory to the dishonoured cheques and no specific averments are made that he was in charge of and responsible for the conduct of the company's business at the relevant time. 2. Whether a complaint against a director who is neither Managing Director nor Joint Managing Director, and who is averred to be a non-executive director, is maintainable in the absence of specific pleading showing control of day-to-day affairs. 3. Whether the High Court should exercise powers under Section 482 CrPC to quash criminal proceedings against such a director where the complaint contains only bald or general averments. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Liability of a non-executive director when not a signatory to the cheque Legal framework: Liability under the relevant statutory provision attaches to the person who 'at the time the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company.' A director who is not a signatory to the cheque is not per se liable unless specific averments establish control over corporate affairs. Precedent Treatment: The Court applied the settled principle from higher-court precedents that liability depends on role and responsibility in company affairs rather than designation alone; non-executive directors generally are not responsible for day-to-day running. Interpretation and reasoning: The petitioner's undisputed status as an Additional/Non-Executive Director (as per company records) and absence of any allegation that he signed the cheques or was Managing/Joint Managing Director mean the complaint must contain specific factual averments showing he was in charge of company business. The complaint contained only a general averment that certain directors 'are all responsible for the day-to-day affairs and management' without particulars as to the petitioner. Ratio vs. Obiter: Ratio - where a director is non-executive and not a signatory, mere generic averments that directors collectively ran the business are insufficient to sustain criminal proceedings; specific pleading of control is required. Obiter - general commentary on the nature of non-executive directorship and resignation timing. Conclusion: The complaint is not maintainable against a non-executive director in the absence of specific averments that he was in charge of and responsible for the company's conduct at the relevant time. Issue 2 - Effect of resignation timing and official records on status at the relevant time Legal framework: A director's status is determined by company filings and the effective date of resignation as per statutory forms and records; liability is assessed with reference to whether the person was a director at the time the alleged offence was committed. Precedent Treatment: The Court relied on the principle that documentary records (company forms) showing appointment/resignation are material to determine directorship status. Interpretation and reasoning: The resignation tendered by the petitioner had an effective date later than the issuance dates of the cheques. The Form showing appointment as an Additional Director was undisputed and no reply contested non-executive status. Given the undisputed documentary position, the petitioner was a director during the period cheques were issued, but being non-executive and not a signatory does not automatically render him liable. Ratio vs. Obiter: Ratio - documentary proof of appointment/resignation is relevant but does not substitute for pleading of control; holding directorship during the cheque issuance does not itself establish culpability absent additional averments. Conclusion: The petitioner remained a director for the period in question per record, but that status alone does not establish responsibility for the offending cheques. Issue 3 - Scope and exercise of High Court's power under Section 482 CrPC to quash proceedings against a director Legal framework: The High Court may quash criminal proceedings where trial would be an abuse of process, including where complaints rest on bald averments without supporting material showing responsibility of the accused. Precedent Treatment: The Court considered precedents permitting quashal where unimpeachable evidence or acceptable circumstances demonstrate the director could not have been in charge of company affairs; conversely, authorities require strong incontrovertible material to displace a prima facie complaint when contested. Interpretation and reasoning: The present facts feature undisputed documentary proof of the petitioner's non-executive status and lack of any specific pleading or material alleging his control over company business. The respondent did not file a reply contesting the non-executive status. In these circumstances, compelling the petitioner to stand trial would amount to an abuse of process because no offence is made out against him on the material before the Court. Ratio vs. Obiter: Ratio - where complaint lacks specific averments and documentary record establishes non-executive role without rebuttal, High Court should quash proceedings under inherent powers to prevent abuse of process. Obiter - remarks on when stronger material would be necessary to sustain a challenge to process. Conclusion: The High Court ought to and did quash the complaint insofar as it implicated the petitioner, exercising its power to prevent an abuse of process in the absence of specific averments or unimpeachable material showing responsibility for the company's business.