2020 (7) TMI 840 - HC - Indian Laws

Former directors who resigned before cheque dishonour cannot face prosecution under Section 141 NI Act

The HC allowed a criminal petition filed by former directors of a company facing prosecution under Section 138 of the NI Act for cheque dishonour. The ... Dishonour of cheque - vicarious liability of directors before the issuance of the dishonored cheque - Section 141 of the Negotiable Instruments Act - HELD THAT:- Section 141 of the NI Act has envisaged vicarious liability on the part of the Directors or other persons, mentioned therein, of the company who were in charge of and responsible for the conduct of the affairs of the company at the time the commission of the offence. A person would be vicariously liable for commission of the offence under Section 138 of the NI Act by the company only in the event the conditions laid down in Section 141 in the NI Act are satisfied. The decision rendered in Anita Malhotra vs. Apparel Export Promotion Council and another [2011 (11) TMI 532 - SUPREME COURT] is also in similar lines, following Harshendra Kumar D [2011 (2) TMI 1278 - SUPREME COURT]. In Anita Malhotra, the appellant was a non-executive Director on the Board of M/s Lapareil Exports (P) Ltd. resigned from the Directorship w.e.f. 31.08.1998. On 20.11.1998, recording the resignation of the appellant, the company filed statutory Form 32 with the Registrar of Companies. A notice dated 10.12.2004 was issued to the appellant regarding dishonour of alleged cheques under Section 138 of the NI Act and thereafter, a complaint case was filed arraigning the company and the Directors of the company as accused persons with the appellant as one of the accused persons, accused no. 3 to be precise. Section 168 of the Companies Act, 2013 has provided that a Director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same and the company shall intimate the Registrar in such manner, within such time and in such form as may be prescribed. Resignation of a Director takes effect from the date on which the notice is received by the company or the date, if any, specified by the Director in the notice, whichever is later. Earlier, it was statutory Form No. 32 under the Companies Act, 1956 by which the fact of resignation was to be intimated to the Registrar of Companies. Under the Companies Act, 2013, the fact of resignation of a Director is to be submitted in the prescribed Form No. DIR-12. The documents submitted in support of the contentions advanced by the petitioners are found acceptable and free from any doubt, more particularly, in view of failure on the part of the complainant to put the same under any cloud and in the face on non-traversal of the same by the accused no. 1 company and any of its existing Directors who are facing the trial pursuant to the order taking cognizance. From the documents, it is amply demonstrated that the accused no. 3 resigned from the post of Director on 22.09.2017 whereas the accused no. 4 resigned from the post of Director of the accused no. 1 company on 11.06.2018 - These facts amply go to show that on the date the offence under Section 138 of the NI Act was deemed to have been committed due to dishonour of the cheque dated 22.10.2018, the petitioners were not the Directors in the accused no. 1 company and they could not be held responsible for the conduct of its affairs and for that matter, for the issuance and dishonour of the cheque under reference. They were not in the accused no. 1 company as Directors on the date the cause of action to file the complaint arose. In the above view of the matter, if the criminal proceeding of Complaint Case no. C.R. 6697C/2018 is allowed to proceed against the two petitioners, it would amount to abuse of the process of the court resulting in prejudice to the petitioners. This Court is of the considered view that this is a fit case to exercise the power under Section 482 of the Code to stop the petitioners from undergoing the trial. The proceeding against the petitioners was stayed earlier by an interim order - This criminal petition is, accordingly, allowed. Issues Involved:1. Whether the petitioners, who resigned as directors before the issuance of the dishonored cheque, can be held liable under Section 138 of the Negotiable Instruments Act, 1881.2. The applicability of vicarious liability under Section 141 of the Negotiable Instruments Act to the petitioners.3. The validity of the complaint's averments regarding the petitioners' roles in the company at the time of the alleged offence.4. The exercise of inherent powers under Section 482 of the Code of Criminal Procedure to quash the criminal proceedings against the petitioners.Issue-wise Detailed Analysis:1. Liability of Petitioners under Section 138 of the NI Act:The petitioners sought quashing of the criminal proceeding on the grounds that they had resigned as directors of the accused company before the issuance of the cheque that was dishonored. The cheque in question was issued on 22.10.2018, while the petitioners had resigned on 22.09.2017 and 11.06.2018, respectively. The court examined the documents evidencing their resignations, which were duly accepted by the Board of Directors and reported to the Registrar of Companies. It was held that since the petitioners were not directors at the time of the cheque's issuance, they could not be held liable under Section 138 of the NI Act.2. Vicarious Liability under Section 141 of the NI Act:Section 141 of the NI Act imposes vicarious liability on individuals who were in charge of and responsible for the conduct of the company's business at the time the offence was committed. The court noted that the petitioners were not in charge of the company when the cheque was issued and dishonored. The court referred to precedents, including the Supreme Court's decision in *National Small Industries Corporation Limited vs. Harmeet Singh Paintal*, which clarified that liability cannot be imposed on directors who have resigned before the offence was committed.3. Averments in the Complaint:The complaint contained a general averment that the petitioners, as directors, were responsible for the company's affairs. However, the court found that the complaint lacked specific details about the petitioners' roles and responsibilities at the time of the alleged offence. The court emphasized that mere bald statements without specific averments regarding the petitioners' involvement in the company's operations at the relevant time are insufficient to sustain a charge under Section 141.4. Exercise of Inherent Powers under Section 482 CrPC:The court exercised its inherent powers under Section 482 of the Code of Criminal Procedure to quash the proceedings against the petitioners. It was observed that the continuation of the proceedings would result in an abuse of the process of the court, as the petitioners were not directors at the time of the cheque's issuance. The court highlighted that the inherent powers should be used to prevent injustice and protect individuals from unwarranted prosecution.In conclusion, the court quashed the criminal proceedings against the petitioners, acknowledging that they had resigned as directors before the issuance of the cheque and were not responsible for the company's affairs at the time of the alleged offence. The proceedings against the other accused were allowed to continue.