2024 (3) TMI 906 - HC - Indian Laws

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

Tilak Raj Bajalia and Anr. Versus Kaybee Foundry Services Pvt. Ltd. & Anr.,

The Bombay HC quashed prosecution against independent non-executive directors of a company under Section 138 read with Section 141 of the Negotiable ... Dishonour of Cheque - vicarious liability of directors - sufficient averments to issue process against the directors, including the Petitioners or not - HELD THAT:- The liability under Section 141 of the Act, 1881 for commission of the offence punishable under Section 138 of the Act, is in the nature of a vicarious liability. It is trite that vicarious liability for an offence is required to be strictly construed. From the text of Section 141 of the Act, it becomes evident that the liability is incurred not on account of the position a person holds, but by reason of the role such person plays in the management of the affairs of the company. Liability does not depend upon the designation or status of the person sought to be roped in. Conversely, it could be shown that though a person does not hold a particular designation, yet he was in-charge of and responsible to the affairs of the company, and, therefore, liable to be prosecuted by invoking the constructive criminality under Section 141 of the Act. In the case of POOJA RAVINDER DEVIDASANI VERSUS STATE OF MAHARASHTRA & ANOTHER [2014 (12) TMI 1070 - SUPREME COURT], the Supreme Court enunciated that the law laid down by the Supreme Court is that for making a director of a company liable for the offence committed by the company under Section 141 of the Act, there must be specific averments against the director showing as to how and in what manner, such director was responsible for the conduct of the business of the company. The facts in the case of SUNITA PALITA & OTHERS VERSUS M/S PANCHAMI STONE QUARRY [2022 (8) TMI 55 - SUPREME COURT], appear to be on all four with the case at hand, as the Appellants therein were also shown to be independent and non-executive directors of the company. Non-executive directors are not involved in the day to day affairs of the company or in running of its business. The endeavour of Mr. Kumar to bank upon the information disclosed in the annual statement of account does not advance the cause of the Respondent No. 1 – complainant. The very fact that the Petitioners were made members of the audit and corporate social responsibility committee appears to be in consonance with the role of the Petitioners as independent non-executive directors of Isinox Ltd. The complaints singularly lack any averment that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, the Petitioners. In the absence of such averments, the prosecution of the Petitioners by invoking the provisions contained in Section 141(2) of the Act also, would be legally impermissible. The conspectus of aforesaid discussion is that the prosecution of the Petitioners who are the independent non-executive directors of Isinox Ltd. for an offence punishable under Section 138 read with Section 141 of the Act, 1881 would amount to abuse of the process of the court and wholly unjustifiable - Petition allowed. 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 DirectorsThe 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 ComplaintsThe 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 DirectorsThe 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.