2023 (11) TMI 1357 - HC - Indian Laws

Independent Non-Executive Director cannot escape Section 141 NI Act liability based on designation alone

MR. K.S. MEHTA Versus M/s MORGAN SECURITIES & CREDITS PVT. LTD.

MR. K.S. MEHTA Versus M/s MORGAN SECURITIES & CREDITS PVT. LTD. - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:Whether the petitioner, as an Independent Non-Executive Director, can be held vicariously liable under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (NI Act) for the dishonor of a cheque issued by the company.Whether the complaint contains sufficient averments to establish the petitioner's liability under Section 141 of the NI Act.Whether the petitioner, not being a signatory to the cheque or a party to the Inter Corporate Deposit Agreement, Memorandum of Settlement, and Consent Award, can still be held liable.Whether the revisional court erred in dismissing the petitioner's revision petition challenging the trial court's order.2. ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsSection 138 of the NI Act imposes criminal liability on the drawer of a cheque that is dishonored due to insufficient funds. Section 141 extends this liability to every person who, at the time the offence was committed, was in charge of and responsible for the conduct of the business of the company. The Supreme Court in SMS Pharmaceuticals Ltd. v. Neeta Bhalla and others established that specific averments are necessary to make a director vicariously liable under Section 141.Court's Interpretation and ReasoningThe Court emphasized that vicarious liability under Section 141 requires specific averments in the complaint that the accused was in charge of and responsible for the conduct of the business of the company at the time the offence was committed. The Court referred to several Supreme Court judgments, including SMS Pharmaceuticals Ltd., to underline that mere holding a position in a company does not automatically make one liable.Key Evidence and FindingsThe complaint alleged that the petitioner, along with other directors, was responsible for the conduct of the business of the company and that the cheque in question was issued with their consent. The petitioner was shown as a director in Form 32 and attended board meetings, indicating involvement in company affairs.Application of Law to FactsThe Court found that the complaint contained sufficient averments regarding the petitioner's role in the company, thus justifying the issuance of process against him. The Court noted that the petitioner was a director at the time of the offence and that the complaint adequately alleged his involvement in the company's business.Treatment of Competing ArgumentsThe petitioner argued that he was an Independent Non-Executive Director and not involved in the day-to-day affairs of the company. The Court dismissed this argument, stating that the designation in certain documents does not absolve him of liability, as the complaint sufficiently alleged his involvement in the company's affairs.ConclusionsThe Court concluded that the complaint contained sufficient averments to hold the petitioner vicariously liable under Section 141 of the NI Act. The petitioner's arguments regarding his role and designation were not sufficient to dismiss the complaint at this stage.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning'The liability arises on account of conduct, act or omission on the part of a person and not merely on account of holding an office or a position in a company.'Core Principles EstablishedThe judgment reinforces the principle that for vicarious liability under Section 141 of the NI Act, specific averments regarding the accused's role in the company's business are essential. It also emphasizes that mere designation as a director does not automatically entail liability.Final Determinations on Each IssueThe Court dismissed the petition, affirming the trial court's and revisional court's orders. It held that the complaint contained sufficient averments to proceed against the petitioner under Section 138 read with Section 141 of the NI Act. The petitioner's designation as an Independent Non-Executive Director did not absolve him of liability, given the allegations in the complaint.