2025 (2) TMI 1049 - HC - Indian Laws

Company directors cannot be held vicariously liable for cheque dishonor under NI Act Section 138 without specific role evidence

Adarsh Saran & Anr. And Alok Khanna Versus Central Bank Of India & Ors.

Adarsh Saran & Anr. And Alok Khanna Versus Central Bank Of India & Ors. - 2025:DHC:1169 1. ISSUES PRESENTED and CONSIDEREDThe primary issue considered was whether the petitioners, who were directors of the accused company, could 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. This involved determining if the petitioners were in charge of and responsible for the conduct of the business of the company at the time the offence was committed.2. ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsSection 138 of the NI Act pertains to the offence of dishonor of a cheque for insufficiency of 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 Court referred to several precedents, including S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, K.K. Ahuja v. V. K. Vora, and National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, which emphasize the necessity of specific averments regarding the role of directors in the conduct of the company's business.Court's Interpretation and ReasoningThe Court reiterated that vicarious liability under Section 141 of the NI Act must be strictly construed, and a person cannot be held liable merely due to their designation as a director. The Court emphasized that it must be shown that the director was in charge of and responsible for the conduct of the business of the company at the time the offence was committed. The Court also noted that the legal presumption under the NI Act requires a high threshold of evidence to disprove the allegations at a pre-trial stage.Key Evidence and FindingsThe petitioners presented several documents, including the company's Annual Return and internal communications, to demonstrate that they were not involved in the day-to-day affairs of the company. The petitioner in CRL.M.C. 2520/2020 also provided Form No. 32, indicating his status as a Non-Executive Director. These documents were considered unimpeachable evidence that the petitioners were not in charge of the company's business at the relevant time.Application of Law to FactsThe Court applied the legal principles established in the relevant precedents to the facts presented by the petitioners. The absence of specific allegations in the complaint regarding the petitioners' involvement in the company's business, coupled with the evidence provided, led the Court to conclude that the petitioners could not be held liable under the NI Act.Treatment of Competing ArgumentsThe complainant argued that the petitioners were responsible for the day-to-day affairs of the company and that the grounds raised by the petitioners were triable in nature. However, the Court found that the evidence presented by the petitioners was sufficient to disprove the allegations without the need for a trial, as the complaint lacked specific averments about the petitioners' roles.ConclusionsThe Court concluded that the petitioners were not in charge of and responsible for the conduct of the business of the company at the time the offence was committed. Therefore, they could not be held vicariously liable under Section 138 read with Section 141 of the NI Act.3. SIGNIFICANT HOLDINGSCore Principles EstablishedThe Court reaffirmed the principle that vicarious liability under Section 141 of the NI Act requires specific averments about the accused's role in the conduct of the company's business. Merely holding a directorial position is insufficient to establish liability.Final Determinations on Each IssueThe Court quashed the proceedings against the petitioners, finding that the evidence presented was sufficient to demonstrate that they were not responsible for the conduct of the business of the company at the time of the offence. Consequently, the petitions were allowed, and the proceedings emanating from CC No. 36097/2016 were quashed.