2023 (11) TMI 1383 - HC - Indian Laws

Managing Director's Section 138 conviction overturned as company acquittal bars vicarious liability under Section 141

AFSAL HUSSAIN Versus K.S. MUHAMMED ISMAIL, STATE OF KERALA

Kerala HC set aside conviction of Managing Director under Section 138 of Negotiable Instruments Act, ruling that vicarious liability under Section 141 ... Dishonour of Cheque - conviction of accused - vicarious liability - liability of Managing Director for and on behalf of the company - HELD THAT:- In Siby Thomas v. Somany Ceramics Ltd [2023 (10) TMI 487 - SUPREME COURT] the Apex Court held that, vicarious liability would be attracted only when the ingredients of Section 141(1) of the N.I Act are established. In Pramod v. Velayudhan [2005 (7) TMI 716 - KERALA HIGH COURT] this Court held that, to hold a person guilty of offence under Section 138 of the N.I Act by virtue of Section 141 of the N.I Act, the first and foremost requirement to be established is commission of the offence by another person i.e. a company, firm or association of individuals. Unless and until, it is established that such juristic person commits offence under Section 138 of the N.I Act, no person referred to in Section 141 of the N.I Act can be proceeded against, summoned, prosecuted or convicted for offence under Section 138 of the N.I Act. In the case on hand, the 1st accused-company owed amount to the complainant/1st respondent. Admittedly the revision petitioner was the Managing Director of that company and he issued that cheque in his capacity as its Managing Director. When the company is found not guilty of the offence alleged, the Managing Director cannot be held vicariously liable for the offence committed by the company. No appeal or revision has seen preferred by the complainant/1st respondent against the acquittal of the 1st accused-company. So, that verdict has become final. So much so, the revision petitioner Managing Director cannot be held liable as the company was acquitted, finding that no offence was committed by the company. The revision petitioner in his personal capacity did not owe any amount to the complainant/ 1st respondent and Ext.P2 cheque was issued not towards discharge of any personal liability of the revision petitioner - Since the company is acquitted, its Managing Director, cannot have any liability, dehors the liability of the company. The liability of persons referred to in Section 141 of the N.I Act is co-extensive with that of the company, firm or association of individuals, in a prosecution under Section 138 of the N.I Act. When it is found that the company has not committed the offence, and it is acquitted, its directors are not liable to be convicted, for the offence for which the company has been acquitted. The finding of the appellate court that, the revision petitioner/2nd accused has committed an offence punishable under Section 138 of the N.I Act in spite of acquittal of the 1st accused-company, is liable to be set aside. The impugned judgment is set aside and the revision petitioner is found not guilty of the offence punishable under Section 138 of the N.I Act and he is acquitted - revision petition is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in this revision petition are:(a) Whether the Managing Director of a company can be held vicariously liable under Section 138 of the Negotiable Instruments Act (N.I. Act) when the company itself has been acquitted of the offence;(b) The scope and applicability of Section 141 of the N.I. Act regarding offences by companies and the vicarious liability of persons in charge of the company;(c) Whether the conviction of the Managing Director under Section 138 of the N.I. Act can be sustained when the company, which issued the cheque, has been acquitted;(d) The legal effect of acquittal of the company on the liability of its directors or managing director under the N.I. Act;(e) The correctness and legality of the appellate court's judgment which upheld the conviction of the Managing Director while acquitting the company and other directors.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Vicarious liability of Managing Director under Section 138 read with Section 141 of the N.I. ActThe relevant legal framework is Section 138 of the N.I. Act which penalizes dishonour of cheque for insufficiency of funds, and Section 141 of the N.I. Act which deals with offences by companies. Section 141(1) states that when an offence under Section 138 is committed by a company, every person who was in charge of and responsible for the conduct of the business of the company at the time of the offence shall also be deemed guilty, unless he proves the offence was committed without his knowledge or that he exercised due diligence to prevent it.The Court referred to key precedents interpreting Section 141:Aneeta Hada v. Godfather Travels and Tours Pvt. Ltd. (2012): The Supreme Court held that vicarious liability under Section 141 arises only if the company itself is found guilty of the offence. The Court emphasized the 'express condition precedent' that the company must be prosecuted and convicted before its officers can be held liable. The Court noted the importance of protecting the corporate entity's separate legal personality and reputation.Siby Thomas v. Somany Ceramics Ltd. (2023): The Apex Court reiterated that vicarious liability is attracted only when the ingredients of Section 141(1) are established. It clarified that the phrase 'was in charge of and was responsible to the company' must be read conjunctively, meaning the person must be both in charge and responsible for the conduct of the company's business at the time of the offence.Pramod v. Velayudhan (2005): This Court held that the commission of offence by the company is a legal pre-requisite to prosecute and convict any person under Section 141. Without establishing the company's guilt, no person can be held liable for the offence committed by the company.The Court analyzed the facts in light of these precedents and the statutory provisions. The cheque in question was issued by the Managing Director in his capacity as such, on behalf of the company. The company was acquitted by the appellate court, and no appeal was filed against that acquittal by the complainant. Therefore, the acquittal of the company has attained finality.The Court reasoned that since the company was acquitted, the Managing Director cannot be held vicariously liable under Section 141. The liability of the directors or managing director is co-extensive with that of the company. If the company did not commit the offence, its officers cannot be convicted for it. The Managing Director did not owe any personal liability to the complainant, and the cheque was not issued to discharge any personal debt.Issue (c) and (d): Sustaining conviction of Managing Director despite acquittal of companyThe appellate court had upheld the conviction of the Managing Director under Section 138 but acquitted the company and other directors. The revision petitioner challenged this on the ground that such conviction is legally untenable.The Court examined the appellate court's reasoning and found it contrary to the binding precedents and statutory mandate. The Court emphasized that the liability under Section 141 is vicarious and contingent upon the company's commission of offence. The acquittal of the company negates the foundation for holding the Managing Director liable.The Court also noted the absence of any appeal or revision by the complainant against the company's acquittal, which makes the acquittal final and binding.Issue (e): Legality and propriety of the appellate court's judgmentThe Court found that the appellate court erred in law by convicting the Managing Director while acquitting the company. The appellate court's decision was inconsistent with the statutory scheme and judicial precedents. The Court set aside the appellate court's judgment insofar as it upheld the conviction of the Managing Director.3. SIGNIFICANT HOLDINGSThe Court held:'When the company is found not guilty of the offence alleged, the Managing Director cannot be held vicariously liable for the offence committed by the company.''The liability of persons referred to in Section 141 of the N.I Act is co-extensive with that of the company, firm or association of individuals, in a prosecution under Section 138 of the N.I Act. When it is found that the company has not committed the offence, and it is acquitted, its directors are not liable to be convicted, for the offence for which the company has been acquitted.''Commission of offence by a juristic person is an inevitable legal pre-requisite or the condition precedent to proceed against a person referred to under Section 141 of the N.I Act and to hold him guilty of the said offence.'Accordingly, the Court set aside the conviction of the Managing Director under Section 138 of the N.I. Act and acquitted him, cancelling his bail bond and setting him at liberty forthwith.