2025 (8) TMI 640 - HC - Indian Laws

Director held liable under Section 138 NI Act for actively managing company affairs despite no automatic vicarious liability

RTDC Ltd. Versus State of NCT of Delhi, Sh. Rohen Trehan.

RTDC Ltd. Versus State of NCT of Delhi, Sh. Rohen Trehan. - 2025:DHC:6674 1. ISSUES PRESENTED and CONSIDERED 1. Whether an accused director of a company can be discharged from proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, on the ground of absence of specific averment that he was 'in charge and responsible' for the management and control of the company's affairs. 2. The applicability and scope of Section 251 Cr.P.C. for seeking discharge in summons trial cases under Section 138 NI Act. 3. The evidentiary threshold and nature of material required to be produced by an accused director to substantiate a claim of non-involvement in the company's affairs for the purpose of discharge. 4. The interpretation of the phrase 'in charge and responsible for the conduct of the business' under Section 141 NI Act and the extent of liability of directors in offences under Section 138 NI Act. 5. The significance of company documents such as Form-32, Memorandum of Association, Articles of Association, and designation of accused persons in determining liability under Section 141 NI Act. 6. Whether the issuance of summons against a director in a complaint under Section 138 NI Act implies prima facie satisfaction of the requirement of 'in charge and responsible' for the purpose of trial. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Discharge of accused director under Section 138/141 NI Act for absence of specific averment of being 'in charge and responsible' - Relevant legal framework and precedents: Section 141 NI Act imputes liability on persons who are 'in charge of and responsible for the conduct of the business' of the company at the time of commission of the offence. The Supreme Court in S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla clarified that mere holding of directorship does not automatically attract liability unless the director is shown to be in charge and responsible. However, ordinary basic averments in the complaint qua the director are sufficient to proceed to trial, as held in Gunmala Sales Pvt. Ltd. - Court's interpretation and reasoning: The Court observed that the complainant had specifically averred that the accused director was in charge and responsible for the company's affairs. Given that the company had only two directors, both necessarily constituted the quorum for board meetings, and neither could disclaim responsibility for the company's management. The Court held that the learned ASJ erred in discharging the accused on the ground that the averments were insufficient. - Key evidence and findings: The company's Form-32 indicated only two directors, including the accused. The complaint and legal notice explicitly named the accused as a director responsible for the company's affairs. No documentary evidence was produced by the accused to rebut this assertion. - Application of law to facts: The Court applied the principle that in a company with only two directors, both are presumptively in charge and responsible, and the complainant's averments suffice to proceed. The accused failed to produce any 'sterling incontrovertible material' to establish non-involvement. - Treatment of competing arguments: The accused contended absence of specific averment and lack of evidence of control. The Court rejected this, relying on established precedents that the initial averment in the complaint is sufficient to proceed to trial, and the accused bears the burden to prove otherwise. - Conclusions: The discharge of the accused director was unwarranted. The accused is liable to be proceeded against under Section 138/141 NI Act. Issue 2: Applicability of Section 251 Cr.P.C. for discharge in summons trial cases under Section 138 NI Act - Relevant legal framework and precedents: Section 251 Cr.P.C. provides for discharge in warrant trial cases only. Summons trial cases, such as those under Section 138 NI Act, do not permit discharge applications; the remedy lies in challenging the summoning order. - Court's interpretation and reasoning: The Court observed that the learned Magistrate erred in entertaining the discharge application under Section 251 Cr.P.C. in a summons trial case. Although the application was dismissed, the error led to subsequent erroneous revision petitions and discharge by the ASJ. - Key evidence and findings: The summons were issued on 26.11.2014, and the accused's discharge application under Section 251 Cr.P.C. was dismissed on 08.07.2016. The ASJ entertained revision petitions against the dismissal and allowed discharge, which was incorrect. - Application of law to facts: The Court emphasized the procedural impropriety and clarified that discharge applications under Section 251 Cr.P.C. are not maintainable in summons trial cases. The proper recourse is to challenge the summoning order itself. - Treatment of competing arguments: The accused's reliance on Section 251 Cr.P.C. was rejected as legally untenable in summons trial context. - Conclusions: The discharge application was improperly entertained and the subsequent discharge order was erroneous. Issue 3: Evidentiary threshold for discharge of director accused under Section 138/141 NI Act - Relevant legal framework and precedents: The Court referred to the principle that once summons are issued, the complainant's case must proceed unless the accused produces 'sterling incontrovertible material' to substantiate non-involvement. The Apex Court in Gunmala Sales Pvt. Ltd. held that basic averments in the complaint suffice to send a director to trial. - Court's interpretation and reasoning: The Court found that the accused failed to produce any documentary evidence or material to show he was not in charge or responsible. Mere denial without proof is insufficient to warrant discharge. - Key evidence and findings: No documentary evidence was placed on record by the accused to negate his role. The company had only two directors, and the accused was one of them. - Application of law to facts: The Court applied the settled principle that the burden is on the accused to produce convincing evidence to justify discharge after summons issuance. - Treatment of competing arguments: The accused's bare assertion of non-involvement was held inadequate. - Conclusions: The accused did not meet the evidentiary threshold for discharge. Issue 4: Interpretation of 'in charge and responsible' under Section 141 NI Act and director's liability - Relevant legal framework and precedents: Section 141 NI Act imputes liability to persons in charge and responsible for the company's conduct. The Apex Court in S.M.S. Pharmaceuticals Ltd. and Aneeta Hada cases clarified that managing directors or joint managing directors are prima facie liable due to their role. The recent HDFC Bank Ltd. judgment emphasized substance over form, holding that precise replication of statutory language is not mandatory if the complaint sufficiently indicates involvement. - Court's interpretation and reasoning: The Court held that being one of only two directors necessarily involves being in charge and responsible, especially in the absence of evidence to the contrary. The designation as Managing Director further strengthens the presumption of liability. - Key evidence and findings: The accused was designated as Managing Director in company records. The complaint and legal notice mentioned his role. The company's limited number of directors made it impossible for one to disclaim responsibility. - Application of law to facts: The Court applied the principle that directors who guide the company's business can be held liable under Section 141. The accused's role as director and managing director sufficed to attract liability. - Treatment of competing arguments: The accused's contention of lack of involvement was rejected, relying on statutory interpretation and judicial precedents. - Conclusions: The accused director is liable under Section 141 NI Act for offences under Section 138 NI Act. Issue 5: Significance of company documents and designation in determining liability under Section 141 NI Act - Relevant legal framework and precedents: Company documents such as Form-32, Memorandum of Association, and Articles of Association establish the structure and designation of directors. The Apex Court in SMS Pharmaceuticals Ltd. held that designation as Managing Director implies being in charge and responsible. - Court's interpretation and reasoning: The Court noted that the accused's designation as Managing Director and status as one of two directors was established through company documents on record. These documents reinforce the presumption of responsibility and liability. - Key evidence and findings: Form-32 filed by the company showed only two directors including the accused. The accused's designation as Managing Director was noted. No contrary evidence was produced. - Application of law to facts: The Court held that such documentary evidence supports the complainant's averments and justifies proceeding against the accused. - Treatment of competing arguments: The accused failed to produce any documentary evidence to counter the company records. - Conclusions: Company documents corroborate the accused's liability under Section 141 NI Act. Issue 6: Effect of issuance of summons against director on prima facie satisfaction of 'in charge and responsible' requirement - Relevant legal framework and precedents: The issuance of summons by the Magistrate indicates prima facie satisfaction of the allegations in the complaint. Gunmala Sales Pvt. Ltd. held that basic averments against a director are sufficient to proceed to trial. - Court's interpretation and reasoning: The Court observed that summons were issued against the accused director, indicating that the Magistrate found sufficient grounds to proceed. This creates a presumption that the accused was in charge and responsible. - Key evidence and findings: Summons dated 26.11.2014 were issued against the accused. No challenge to the summoning order was made. - Application of law to facts: The Court held that the accused cannot be discharged merely on the basis of denial after summons issuance unless strong evidence is produced. - Treatment of competing arguments: The accused's attempt to seek discharge post-summons was rejected as legally impermissible and factually unsupported. - Conclusions: Issuance of summons establishes prima facie case against the accused director under Section 141 NI Act.