Independent non-executive directors cannot face prosecution under Section 138 without specific allegations of consent or neglect

The Bombay HC quashed prosecution against independent non-executive directors of a company under Section 138 read with Section 141 of the Negotiable Instruments Act. The court held that vicarious liability under Section 141 requires specific averments showing how directors were responsible for company's business conduct. The complaint lacked allegations that the offence was committed with directors' consent, connivance, or due to their neglect. Non-executive directors are not involved in day-to-day company affairs. Prosecuting independent non-executive directors without proper averments would constitute abuse of court process. Petition allowed.

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Issues Involved:

1. Validity of issuance of process against independent directors u/s 138 read with u/s 141 of the Negotiable Instruments Act, 1881.
2. Sufficiency of averments in the complaints to justify prosecution u/s 141(2) of the Act.
3. Role and responsibilities of independent directors in the context of vicarious liability under the Act.

Issue 1: Validity of Issuance of Process against Independent Directors

The Petitioners challenged the orders issued by the learned Magistrate for process against them for an offence punishable u/s 138 read with u/s 141 of the Negotiable Instruments Act, 1881. The Petitioners, being independent directors of Isinox Ltd., argued they were not in charge of and responsible for the day-to-day affairs of the company, and thus could not be prosecuted by invoking vicarious liability u/s 141(1) of the Act. The court held that the liability under u/s 141 of the Act is vicarious and must be strictly construed. It depends on the role played in the management of the company, not merely the designation.

Issue 2: Sufficiency of Averments in the Complaints

The Petitioners asserted that the complaints lacked sufficient averments to justify their prosecution u/s 141(2) of the Act, which requires showing that the offence was committed due to their negligence or connivance. The court noted that the complaints contained only omnibus allegations without specific details attributing the offence to the Petitioners' consent, connivance, or negligence. Therefore, prosecution under u/s 141(2) was impermissible.

Issue 3: Role and Responsibilities of Independent Directors

The court referred to several precedents, including S.M.S. Pharmaceuticals Ltd. V/s. Neeta Bhalla and Sunita Palita and Ors. V/s. Panchami Stone Quarry, emphasizing that independent directors are not involved in the day-to-day affairs of the company. The court concluded that independent non-executive directors could not be held liable under u/s 141(1) of the Act. The Petitioners' roles as members of the audit and corporate social responsibility committee were consistent with their positions as independent directors and did not imply responsibility for the company's daily operations.

Conclusion:

The prosecution of the Petitioners, being independent non-executive directors, for an offence punishable u/s 138 read with u/s 141 of the Act, was deemed an abuse of the process of the court and unjustifiable. The court quashed and set aside the orders of issue of process against the Petitioners and allowed the writ petitions.

Order:

(i) The Writ Petitions stand allowed.

(ii) The orders of issue of process dated 24 December 2020, 4 January 2020, and 4 January 2020 in Complaint Nos. 811/SS/2020, 5696/SS/2019, and 5695/SS/2019, qua Petitioner Nos. 1 and 2, stand quashed and set aside.

(iii) Complaint Nos. 811/SS/2020, 5696/SS/2019, and 5695/SS/2019 to proceed against the rest of the accused in accordance with law.

(iv) Rule made absolute to the aforesaid extent.

(v) No order as to costs.

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