2024 (4) TMI 953 - HC - Indian Laws

Company directors cannot be held liable under Section 141 for dishonoured cheques without proof of control or negligence

Sachin Kumar Parolia Versus Rahul Rajan & Ors.

Delhi HC dismissed petition challenging discharge of respondents in dishonour of cheque case. Court held Section 141 NI Act creates vicarious liability ... Dishonour of cheque - insufficient funds - vicarious liability - liability of group companies - liability common Directors of the group, namely, Right Choice Group of Companies - Lifting of the corporate veil - HELD THAT:- Section 141 of the NI Act is neither intended nor extends the vicarious liability on the group companies. It is intended to create vicarious liability only on the persons and officers who are either in-charge of the company, which is the main accused, or have connived or are negligent, resulting in the accused company committing the offence under Section 138 of the NI Act. Section 141 of the NI Act, therefore, cannot extend to the group companies - Section 138 of the NI Act, in fact, creates liability only on the ‘drawer of the cheque’. As it creates a criminal liability, there is no scope of lifting of the corporate veil. It is only because of the application of Section 141 of the NI Act, that the liability, in case the offence under Section 138 of the NI Act is committed by a company, has been extended by a deeming fiction on the person in-charge of or holding an office, making them equally liable for the offence. The said provision, however, cannot extend to other corporate entities or group of companies. This Court in Yashovardhan Birla v. CECIL Webber Engineering Ltd., [2023 (4) TMI 706 - DELHI HIGH COURT], has reiterated that large business conglomerates may have a number of companies under them, which may be ultimately managed by a particular family or group of investors, but to run the day-to-day affairs, officers and professionals are appointed in such companies. In such cases, the head of the Company cannot be made liable and taken into the purview of Section 141 of the NI Act, doing so would unfairly and unnecessarily expand the provisions of vicarious liability under the NI Act. Thus, the respondent no. 3 could not have been proceeded against only on the allegation that it is a group company of the accused no. 1, which is the drawer of the cheque in question. Liability of common Directors of the group, namely, Right Choice Group of Companies - HELD THAT:- The petitioner has placed no document on record to show that the respondent nos. 1 and 2 were the Directors of the accused no. 1, which is the drawer of the cheque. There is no averment in the complaint that the respondent nos. 1 and 2 were persons in-charge of or responsible to the accused no. 1 for the conduct of its business. Apart from stating that the respondent nos. 1 and 2 have acted in connivance with accused nos. 1 and 3 or that the accused no. 3 has acted on their express instructions, there is no material placed on record by the petitioner for the said averment - The only reliance of the petitioner even in the present petition is on the alleged LinkedIn profile of respondent no. 1, which inter alia claims respondent no. 1 to be the Director of the Right Choice Group. However, accused no. 1 is not the Right Choice Group but Right Choice Marketing Solutions JLT. There are no merit in the challenge made by the petitioner in the present petition - petition dismissed. Issues Involved:1. Whether respondent no. 3 can be held liable under Section 138 of the NI Act as a group company of the drawer of the cheque.2. Whether respondent nos. 1 and 2, as Directors of the group company, can be held vicariously liable under Section 138 read with Section 141 of the NI Act.Issue 1: Liability of Respondent No. 3 as a Group CompanyThe petitioner contended that Right Choice Marketing Solutions JLT (accused no. 1) and Right Choice Builders Private Limited (respondent no. 3) are part of a single economic entity and should be treated as such for liability under Section 138 of the NI Act. The learned counsel for the petitioner argued for lifting the corporate veil, citing various judgments. However, the court found that the petitioner failed to provide substantial evidence to prove that respondent no. 3 and accused no. 1 are the same entity. The court emphasized that Section 141 of the NI Act does not extend vicarious liability to group companies and that Section 138 creates liability only on the 'drawer of the cheque.' Therefore, respondent no. 3 could not be proceeded against on the mere allegation of being a group company of accused no. 1.Issue 2: Vicarious Liability of Respondent Nos. 1 and 2The petitioner alleged that respondent nos. 1 and 2, as Directors of the Right Choice Group, were responsible for the day-to-day affairs of accused no. 1 and had instructed the issuance of the dishonored cheques. The court examined the complaint and found that there were no specific averments or documents to show that respondent nos. 1 and 2 were Directors of accused no. 1 or were in charge of its business. The court noted that the complaint lacked the necessary averments under Section 141 of the NI Act to hold respondent nos. 1 and 2 vicariously liable. The court also found that the reliance on the alleged LinkedIn profile of respondent no. 1 was insufficient to establish liability. Consequently, respondent nos. 1 and 2 could not be held liable under Section 138 of the NI Act.ConclusionIn light of the above findings, the court dismissed the petition, holding that neither respondent no. 3 nor respondent nos. 1 and 2 could be held liable under Section 138 of the NI Act based on the provided evidence and allegations. The court reiterated that the statutory liability for dishonor of the cheque is limited to the drawer of the cheque and, in the case of companies, to those in charge of or responsible for the conduct of the company's business.