2024 (11) TMI 604 - HC - Indian Laws

Director who resigned before cheque dishonour cannot be held liable under Section 141 of Negotiable Instruments Act

Delhi HC quashed proceedings against a director under Section 138 read with Section 141 of the Negotiable Instruments Act. The petitioner had resigned as ... Dishonour of Cheque - role of the petitioner (director of the accused company) in the transaction made - resignation from the accused company prior to the cheque dishonour - vicarious liability - Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 - HELD THAT:- In accordance with Section 141 of the NI Act, in instances where the principal offender under Section 138 of the NI Act is a company, every person who at such time when the cheque was dishonoured, and no subsequent payment was made, was in charge of the business of the company, and was responsible for the conduct of business, is deemed to be guilty of the offence under Section 138 of the NI Act. It is trite law that a person cannot be arrayed as an accused person merely due to association with the accused company in capacity of a Director. In SMS PHARMACEUTICALS LTD. VERSUS NEETA BHALLA [2005 (9) TMI 304 - SUPREME COURT], the Hon’ble Apex Court analysed Section 141 of the NI Act and observed 'Liability depends on the role one plays in the affairs of a company and not on designation or status. If being a Director or manager or secretary was enough to cast criminal liability, the section would have said so. Instead of “every person” the section would have said ‘every Director, manager or secretary in a company is liable’…, etc. The legislature is aware that it is a case of criminal liability which means serious consequences so far as the person sought to be made liable is concerned. Therefore, only persons who can be said to be connected with the commission of a crime at the relevant time have been subjected to action.' It must be borne in mind that Section 141 of the NI Act is a penal provision that aims to create vicarious liability on the accused. For this reason, the provisions ought to be strictly construed. In the case of NATIONAL SMALL INDUSTRIES CORPN. LTD. VERSUS HARMEET SINGH PAINTAL [2010 (2) TMI 590 - SUPREME COURT], the Hon’ble Apex Court had emphasised the necessity to detail the role of the director accused on account of the penal nature of Section 141 of the NI Act and held 'Section 141 is a penal provision creating vicarious liability, and which, as per settled law, must be strictly construed. It is therefore, not sufficient to make a bald cursory statement in a complaint that the Director (arrayed as an accused) is in charge of and responsible to the company for the conduct of the business of the company without anything more as to the role of the Director. But the complaint should spell out as to how and in what manner Respondent 1 was in charge of or was responsible to the accused Company for the conduct of its business. This is in consonance with strict interpretation of penal statutes, especially, where such statutes create vicarious liability.' From a perusal of the record, it is apparent that during each series of omission necessary to constitute an offence under Section 138 read with Section 141 of the NI Act, the petitioner had ceased to be a director of M/s Fresco Foods Pvt. Ltd. It is evident that at the date of issuance of the cheque on 26.09.2016, the date of the dishonour of the subject cheque on 04.10.2016 or at the date of the demand notice on 28.10.2016, the petitioner was not in charge of and responsible for the conduct of the accused company. Merely stating that the cheque was handed over way back in the year 2009 or that the petitioner signed as a witness to the agreement dated 12.03.2009 is not sufficient to attract liability when the petitioner was not a director of the accused company at any of the relevant stages necessary for the commission of the offence under Section 138 read with Section 141 of the NI Act. The proceedings emanating from Complaint Case for the offence under Section 138 read with Section 141 of the NI Act qua the petitioner is quashed - petition allowed. Issues Involved:1. Whether the petitioner can be held liable under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, given his resignation from the accused company prior to the cheque dishonour.2. Interpretation and application of Section 141 of the NI Act concerning vicarious liability of directors and other officers of a company.Detailed Analysis:Issue 1: Liability of the Petitioner under Section 138 read with Section 141 of the NI ActThe petitioner challenges the proceedings under Section 138 of the NI Act, asserting that he resigned from the accused company, M/s Fresco Foods Pvt. Ltd., on 05.12.2009, well before the cheque in question was dishonoured on 04.10.2016. The petitioner relied on Form-32 filed with the Registrar of Companies to substantiate his claim of resignation. The petitioner contends that since he was not a director at the time of the cheque's dishonour, he cannot be held liable under the provisions of the NI Act. The respondent, however, argues that the petitioner was a director at the time the agreement was executed and was responsible for the company's business, making him liable under Section 138 read with Section 141 of the NI Act.Issue 2: Interpretation of Section 141 of the NI ActSection 141 of the NI Act creates vicarious liability for offences committed by a company under Section 138. The section stipulates that every person who, at the time the offence was committed, was in charge of and responsible for the conduct of the company's business, shall be deemed guilty. The judgment references several precedents, including S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and K.K. Ahuja v. V. K. Vora, emphasizing that mere association with the company as a director does not suffice to attract liability. It must be demonstrated that the accused was actively in charge of and responsible for the company's business at the relevant time.The court reiterated that liability under Section 141 arises from one's role in the company's affairs, not merely from holding a position. The judgment also cited the case of Ashok Shewakramani and Others v. State of Andhra Pradesh, underscoring that the terms 'in charge of' and 'responsible to the company for the conduct of the business' must be read conjunctively, requiring evidence of active involvement in the company's business.Conclusion:The court concluded that the petitioner, having resigned in 2009, was not in charge of or responsible for the company's conduct at the time of the cheque's issuance, dishonour, or subsequent failure to pay. The petitioner's role as a witness to the agreement in 2009 does not establish liability under Section 138 read with Section 141 of the NI Act. Consequently, the proceedings against the petitioner in Complaint Case No. 476576/2016 were quashed, as the petitioner was not involved in the company's affairs at any relevant stage of the alleged offence.