2025 (5) TMI 1743 - SC - Indian Laws

Director's vicarious liability under Section 141 established despite insufficient specific role averments in complaint

SC set aside HC judgment that quashed criminal proceedings under Section 138 of Negotiable Instruments Act against director. HC had ruled complaint lacked ... Dishonor of Cheque - Vicarious liability of directors being family members claimed to be non-executive - Validity of the HC judgment, quashing the criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881 - no sufficient averments in the complaint - invoke the vicarious liability against the respondent No. 2 under Section 141 of the NI Act - grant of credit facility in the form of Revolving Loan Facility - HELD THAT:-After the reference in S.M.S. Pharmaceuticals-I (supra) was answered by the three-Judge Bench and before the case of the said parties could be taken up for disposal by the two judge Bench, came the judgment in Sabitha Ramamurthy and Another vs. R.B.S.Channabasavaradhya, (2006) 10 SCC 581. This Court, after noticing S.M.S. Pharmaceuticals-I (supra), held that it was not necessary for the complainant to specifically reproduce the wordings of the section but what was required was a clear statement of fact so as to enable the Court to arrive at a prima facie opinion that the accused are vicariously liable. Such vicarious liability can be inferred only if the requisite statements, which are required to be averred in the complaint petition are made so as to make the accused therein vicariously liable for the offence committed by the company. It was also held that before a person can be made vicariously liable, strict compliance with the statutory requirements should be insisted. On facts, the Court found that the averments did not meet the requirements in the said case. Thereafter, came the judgment in S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Another, (2007) 4 SCC 70 (hereinafter referred to as S.M.S. Pharmaceuticals-II (supra). Referring to para 18 and 19 of the order in the three-Judge Bench reference in S.M.S. Pharmaceuticals-I (supra) and following the judgment in Sabitha Ramamurthy (Supra), the averments in the complaint were tested and it was found that the complaint petition when read in its entirety, the averments therein fell short of the requirements to implicate the respondent-accused in that case. Considering these averments the Court while quashing the proceedings held that merely because somebody is managing the affairs of company, per se they do not become in charge of the conduct of the business of the company or the person responsible for the company for the conduct of the business of the company. It was further held that the averment that the accused were busy with the day-to-day affairs was also insufficient to attract the ingredients of Section 141(1). Proceeding further, the Court held that merely averring that the accused were in-charge of the company was neither here nor there as such averment was insufficient to conclude that the accused were responsible to the company for the conduct of the business. This is vastly different from the averments in the present case wherein it is clearly averred that the respondent no. 2 was responsible for the day-to-day affairs, management and working of the accused no. 1 company. A harmonious reading of the judgments in K.K. Ahuja [2009 (7) TMI 758 - SUPREME COURT], Harmeet Singh Paintal [2010 (2) TMI 590 - SUPREME COURT] and S.P. Mani [2022 (9) TMI 846 - SUPREME COURT] brings out the position that there is no obligation on the complainant to plead in the complaint as to matters within the special knowledge of the company or the directors or firm about the specific role attributed to them in the company. Applying the said legal position to the facts of the present case, it is found that the averments in the complaint set out hereinabove against the respondent No.2 – Mrs. Ranjana Sharma fulfill the requirement of Section 141(1) of the NI Act, and this is not a case where trial against her can be aborted by quashment of proceedings. The High Court was completely unjustified in quashing the proceedings against her. The appeal is, accordingly, allowed and the judgment of the High Court of Judicature at Bombay dated 10.01.2024 in Criminal Writ Petition No. 275 of 2022 is set aside. Consequently, the order dated 16.12.2019 issuing process to respondent No.2 in proceeding in C.C. No. 2486/SS/2019 is restored to the file of the Metropolitan Magistrate, 7th Court, Bhiwandi, Dadar, Mumbai to be proceeded with in accordance with law. The core legal question considered in this appeal is whether the High Court was justified in quashing the criminal proceedings against a director of a company under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (NI Act) on the ground that the complaint lacked sufficient averments to invoke vicarious liability against the director under Section 141.Specifically, the issues presented and considered include:Whether the averments in the complaint satisfy the statutory requirement under Section 141(1) of the NI Act that the accused person was 'in charge of, and was responsible to the company for the conduct of the business of the company' at the time the offence was committed.Whether the complaint must reproduce the exact words of Section 141 verbatim or whether the substance of the averments read as a whole is sufficient to invoke vicarious liability.The scope of vicarious liability of directors under Section 141, particularly whether mere directorship or omnibus averments of managing the company suffice to attract liability.The extent of pleading required in the complaint regarding the specific role or administrative functions of the director alleged to be liable.The applicability of precedents, especially the judgments in S.M.S. Pharmaceuticals Ltd. (I & II), Sabitha Ramamurthy, Ashok Shewakramani, Ashutosh Parasrampuriya, Siby Thomas, and others, in determining the sufficiency of averments.Issue-wise detailed analysis:1. Sufficiency of Averments under Section 141(1) NI ActThe relevant legal framework is Section 141(1) of the NI Act, which imposes vicarious liability on every person who, at the time the offence under Section 138 is committed, was in charge of and responsible to the company for the conduct of its business. The provisos provide defenses if the person proves lack of knowledge or due diligence.Precedents emphasize that this provision creates criminal liability and must be strictly complied with. The phrase 'in charge of, and responsible to the company for the conduct of the business of the company' is a sine qua non for liability.The Court referred to the definition of 'in charge of' as a person in overall control of the day-to-day business of the company. The complaint in this case averred that the accused director was responsible for the day-to-day affairs, management, and working of the company, which by dictionary meaning and substance corresponds to the statutory phrase.The Court rejected the argument that the exact words of Section 141 must be mechanically reproduced. Instead, the substance of the allegations read as a whole must fulfill the statutory requirements. This approach aligns with the principle in Monaben Ketanbhai Shah, which cautions against hypertechnical scrutiny and advocates looking at the complaint in its entirety.The complaint also showed that the accused director participated in negotiations, was authorized by board resolutions to sign key loan documents, execute promissory notes, mortgages, guarantees, and file charges with the Registrar of Companies. These facts demonstrate control and responsibility for the company's business.Thus, the Court found that the averments satisfy the requirement of Section 141(1) and are sufficient to proceed against the accused director.2. Requirement of Specific Role Attribution in ComplaintLearned counsel for the respondent contended that beyond the basic averment of being 'in charge of and responsible,' the complaint must specify the precise role or administrative functions of the director. The Court disagreed, relying on S.P. Mani and K.K. Ahuja, which held that the complainant is only expected to know generally who was in charge of the affairs of the company. Detailed administrative particulars are within the special knowledge of the company and its officers and need not be pleaded by the complainant.The burden to prove non-liability or absence of control lies on the accused at trial. This principle ensures that the complaint stage is not burdened with intricate details beyond the complainant's knowledge.3. Precedents on Pleading Requirements and Vicarious LiabilityThe Court extensively analyzed the three-Judge Bench judgment in S.M.S. Pharmaceuticals Ltd. (I), which clarified that:Section 141 conditions must be strictly complied with as they create criminal liability.Being a director alone does not make one liable; the person must be in charge and responsible for the conduct of business.The complaint must specifically aver that the accused was in charge of and responsible for the company's business at the relevant time.However, the exact words need not be verbatim if the substance of the complaint satisfies the statutory requirement.The Court also noted that S.M.S. Pharmaceuticals (II), Sabitha Ramamurthy, and Ashok Shewakramani emphasize the need for clear, unambiguous averments to attract liability. Omnibus or vague averments lumping directors together without specific facts are insufficient.In the present case, the complaint's averments were clear and specific, distinguishing it from cases like Siby Thomas and Ashok Shewakramani where the averments were vague or omnibus and the courts quashed proceedings.4. Application of Law to FactsThe complaint and annexed documents clearly showed that the accused director was actively involved in the company's business, authorized to negotiate loan terms, sign critical documents, and provide guarantees. This demonstrated that she was in charge of and responsible for the company's business at the relevant time.The High Court's quashing of proceedings on the ground of insufficient averments was therefore found to be erroneous. The Court held that the complaint disclosed a prima facie case against the accused director under Section 141 and the trial should proceed.5. Treatment of Competing ArgumentsThe Court carefully considered the respondent's reliance on Siby Thomas and other authorities requiring strict adherence to the language of Section 141 and specific role attribution. It distinguished those cases on facts, noting that in the present case the complaint contained clear and specific averments satisfying the statutory requirements.The Court also rejected the argument that the complainant must plead administrative details within the company's special knowledge, holding that such matters are for the accused to prove at trial.ConclusionsThe Court concluded that the averments in the complaint fulfill the requirements of Section 141(1) of the NI Act and that the High Court erred in quashing the proceedings against the accused director. The appeal was allowed, the High Court judgment set aside, and the trial court's order issuing process restored.Significant holdings and core principles established include:'Section 141 contains conditions which have to be satisfied before the liability can be extended to officers of a company. Since the provision creates criminal liability, the conditions have to be strictly complied with. The conditions are intended to ensure that a person who is sought to be made vicariously liable for an offence of which the principal accused is the company, had a role to play in relation to the incriminating act and further that such a person should know what is attributed to him to make him liable.''Mere use of a particular designation of an officer without more, may not be enough by way of an averment in a complaint. When the requirement in Section 141, which extends the liability to officers of the company, is that such a person should be in charge of and responsible to the company for conduct of business of the company, how can a person be subjected to liability of criminal prosecution without it being averred in the complaint that satisfies those requirements.''It is necessary to specifically aver in a complaint under Section 141 that at the time the offence was committed, the person accused was in charge of, and responsible for the conduct of business of the company. This averment is an essential requirement of Section 141 and has to be made in a complaint.''The complainant is supposed to know only generally as to who were in charge of the affairs of the company or firm, as the case may be. The other administrative matters would be within the special knowledge of the company or the firm and those who are in charge of it. In such circumstances, the complainant is expected to allege that the persons named in the complaint are in charge of the affairs of the company/firm.''The repetition of the exact words of the Section in the same order, like a mantra or a magic incantation is not the mandate of the law. What is mandated is that the complaint should spell out that the accused sought to be arrayed falls within the parameters of Section 141(1) of the NI Act. Only then could vicarious liability be inferred against the said accused, so as to proceed to trial. Substance will prevail over form.'Final determinations:The complaint's averments that the accused director was responsible for the day-to-day affairs, management, and working of the company satisfy the statutory requirement of being 'in charge of and responsible to the company for the conduct of the business' under Section 141(1).The High Court erred in quashing the complaint on the ground of insufficient averments.The trial court's order issuing process against the accused director is restored, and the proceedings shall continue in accordance with law.