2025 (12) TMI 214 - HC - Indian Laws

No novation under S.62; security cheques enforceable, S.138 complaints survive; non-executive director spared vicarious liability under S.141

MANDAVA ASHAPRIYA, RAMAKOTESWARA RAO KOMMALAPATI, MANDAVA RAO PRABHAKAR, NSL ENERGY VENTURES PRIVATE LIMITED Versus STATE, Through Senior Standing Counsel (Criminal) Delhi High Court New Delhi, PTC INDIA FINANCIAL SERVICES LTD., New Delhi

HC held that no novation under S.62 Contract Act occurred, as discussions on converting the bridge loan into a term loan never ripened into a concluded ... Dishonour of cheque - novation of the contract within the scope of Section 62 Indian Contract Act - extinguishment of a legally enforceable debt or other liability - fastening of vicarious liability upon the individual Directors (the Petitioners) under Section 141 of the N.I. Act - Seeking quashing of the criminal proceedings and the impugned Summoning orders - misinterpretation of preliminary negotiations, while ignoring the binding terms of the executed Contracts. Novation of the Contract - Legally Enforceable Debt - whether a legally enforceable debt existed at the time of presentation of the cheques in question, for encashment or was it extinguished by a subsequent understanding between the parties, leading to novation of the contract? - HELD THAT:- There was only a proposal for conversion of the Bridge Loan into a Term Loan and there was no final concluded Agreement. NNPIL cleared the past dues as part of its ongoing obligations, but PFS did not commit to any conversion of the Bridge loan into a Term Loan, beyond mere consideration - the contention of the Petitioners that there was novation of the contract is clearly not made out from the communication exchanged through various letters and from the circumstances as narrated herein. The Respondent’s central argument is that the discussion around conversion was merely a “proposal” or, at best, an “agreement to agree,” which never culminated in a formally executed Term Loan agreement. They contend that in the absence of a new signed contract, the original amended Bridge Loan Agreement remained in full force, and the cheques remained valid - This argument is well-founded, as it correctly interprets the nature of novation. A novation does not occur without a clear offer; it cannot be inferred from vague or conditional communications that lack the certainty of an enforceable promise. Once no novation took place, the original amended Bridge Loan Agreement, and its corresponding repayment schedule, remained in effect. The security cheques, which were provided specifically to secure the instalments under that schedule, remained valid for an existing liability which accrued after October 2015. They were valid and enforceable - This Court thus, finds that no novation of the contract occurred. The original Agreement remained in force and the security cheques represented a legally enforceable debt. The cheques issued as security for the original Bridge Loan Agreement remained valid instruments for that debt. The subsequent presentation for encashment was towards a liability which was legally enforceable at the time of presentation of Cheques - Complaints under S.138 NI Act are maintainable. Vicarious Liability of the Directors under Section 141 N.I. Act - HELD THAT:- For a prosecution to be sustained under Section 141(1), the Complaint must contain specific averments that the accused Director was, in fact, responsible for the company's day-to-day affairs. A mere statement that a person is a Director is insufficient. The Complainant must plead how and in what manner the director was responsible for the conduct of the business - Accused No. 2/Mandava Rao Prabhalkara, however, as per FORM DIR-12 is categorised as a “Professional Director” which is the class of “Non-Executive Directors”. He is neither a signatory to the Cheque nor is there any averment from where his involvement and control over the affairs of the Company can be established. In the judgment of Apex Court in Pooja Ravinder Devidasani vs. State of Maharashtra [2014 (12) TMI 1070 - SUPREME COURT] it was observed that “while taking into consideration that a non-executive director plays a governance role and are not involved in the daily operations or financial management of the Company, held that to attract liability under section 141 of the NI Act, the accused must have been actively in-charge of the company’s business at the relevant time. Mere directorship does not create automatic liability under the Act. The law has consistently held that only those who are responsible for the day-to-day conduct of business can be held accountable.” Therefore, in the absence of any averments defining his role in the Complaint, it cannot be said that he was in-charge or responsible for the day-to-day working of the Accused Company and is entitled to be discharged. Petition dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the bridge loan agreement stood novated under Section 62 of the Indian Contract Act, 1872, resulting in extinguishment of a 'legally enforceable debt or other liability' underlying the cheques in question. 1.2 Whether the averments in the complaints under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, are sufficient to fasten vicarious liability on the individual directors who were arrayed as accused and summoned. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Novation of Contract and Existence of Legally Enforceable Debt 2.1.1 Legal framework discussed 2.1.1.1 The Court considered Section 62 of the Indian Contract Act, 1872, governing novation, rescission and alteration of contract, and noted that novation requires agreement between the parties to substitute a new contract, or to rescind or alter the existing one, whereupon the original contract need not be performed. 2.1.2 Interpretation and reasoning 2.1.2.1 It was undisputed that the parties were governed by the Bridge Loan Agreement dated 10.03.2014, as amended on 28.12.2015, under which post-dated cheques were issued by the guarantor company to secure quarterly principal and interest obligations. 2.1.2.2 The borrower's letters dated 25.08.2016 and 26.08.2016 requesting conversion of the bridge loan into a term loan were characterised as a proposal/request, not as an offer in the contractual sense. 2.1.2.3 The Court held that the lender's reply dated 30.08.2016, stating that it 'could consider' the request for conversion subject to payment of outstanding dues and approval of the competent authority, was merely an expression of willingness to evaluate the proposal and not a clear or binding offer or counter-offer; the use of the term 'consider' was treated as non-committal. 2.1.2.4 Payment of Rs. 11,53,93,648/- by the borrower on 23.09.2016 was treated as fulfilment of existing overdue obligations under the amended bridge loan, and as a pre-condition for the lender to consider conversion, not as consideration for a concluded new contract or as acceptance of any standing offer to novate. 2.1.2.5 The Court relied on subsequent correspondence, including letters dated 28.10.2016, 06.12.2016 and 13.02.2017, where the lender withdrew the loan recall notice and Section 138 proceedings only for cheques dishonoured up to 31.08.2016, and explicitly clarified that such withdrawal could not be construed as assurance or acceptance of conversion, nor as extinguishing future obligations. 2.1.2.6 The Court found that there was no concluded agreement on essential terms of any proposed term loan (such as interest, tenure, moratorium, security modifications) and that the negotiation remained at the level of an 'agreement to agree', which is legally unenforceable and cannot amount to novation. 2.1.2.7 It was held that novation cannot be inferred merely from conduct where there is no clear offer and acceptance; the borrower's payment of arrears and the lender's willingness to consider conversion did not demonstrate a mutual intention to substitute the existing contract with a new one within the meaning of Section 62. 2.1.2.8 The Court rejected the contention that the lender's use of the word 'redundant' regarding earlier notices in the letter dated 13.02.2017 admitted extinguishment of the entire bridge loan; it was confined to defaults and notices up to 31.08.2016 and did not waive or discharge liabilities for subsequent instalments. 2.1.2.9 The argument that the security cheques became redundant upon alleged novation was rejected on the premise that, since the original amended bridge loan remained in force and instalments continued to fall due, the cheques retained their character as instruments securing a subsisting liability. 2.1.2.10 The Court accepted the respondent's position that issuance of cheques as 'security' does not by itself negate liability under Section 138 N.I. Act; the liability to honour such cheques crystallises on the date they are presented if the underlying debt, for which they were given as security, remains unpaid. 2.1.3 Conclusions 2.1.3.1 No novation of the bridge loan agreement, within the scope of Section 62 of the Indian Contract Act, was established; the amended bridge loan agreement dated 28.12.2015 continued to govern the parties. 2.1.3.2 The payment made on 23.09.2016 discharged only past arrears up to 31.08.2016 and did not extinguish future liabilities or substitute the existing contract with a term loan arrangement. 2.1.3.3 The cheques in question, though originally issued as security, continued to secure instalments lawfully due under the subsisting bridge loan repayment schedule, and represented a 'legally enforceable debt or other liability' on the dates of their presentation. 2.1.3.4 Presentation and dishonour of the cheques thus attracted Section 138 of the N.I. Act, and the complaints were held to be maintainable; quashing was refused on the ground of alleged absence of enforceable debt. 2.2 Vicarious Liability of Directors under Section 141 of the N.I. Act 2.2.1 Legal framework discussed 2.2.1.1 The Court examined Section 141(1) and 141(2) of the N.I. Act, noting that they create constructive/vicarious liability on persons who, at the time of commission of the offence, were in charge of and responsible to the company for the conduct of its business, or where the offence was committed with their consent, connivance or due to their neglect. 2.2.1.2 The Court referred to the principles laid down by the Supreme Court in National Small Industries Corporation Ltd. v. Harmeet Singh Paintal, particularly that if an accused director or officer has signed the cheque on behalf of the company, specific averments about day-to-day control are not necessary. 2.2.1.3 The Court applied the decisions in Pooja Ravinder Devidasani v. State of Maharashtra and Chitalapati Srinivasa Raju v. SEBI, which emphasise that non-executive directors, who are not involved in the day-to-day affairs or financial management, are not automatically liable under Section 141; mere designation as director is insufficient without specific averments of being in charge of and responsible for the conduct of business. These principles were noted as recently endorsed in Kamalkishor Shrigopal Taparia v. India Ener-gen Private Limited. 2.2.2 Interpretation and reasoning 2.2.2.1 The relevant averment in the complaints stated that accused Nos. 2 to 9 were directors of the borrower company and responsible for its day-to-day affairs and that accused Nos. 2, 3 and 7 were also directors of the guarantor company and responsible for its day-to-day affairs. The Court held that such averments, read with the role of each director, had to be assessed for sufficiency. 2.2.2.2 As to accused No. 3 and accused No. 7, the Court noted, on the basis of FORM DIR-12, that accused No. 3 was a 'Whole-time Director' (executive director) and accused No. 7 was a 'Professional Director' (non-executive director), and that both were signatories to the cheques in question. 2.2.2.3 The Court held that being signatories to the cheques, coupled with their status as directors, sufficiently indicated involvement in the conduct of the company's business for the purpose of summoning under Section 141, even in the case of a non-executive director, in light of the principle that no further specific averment is required for a director who has signed the impugned cheques. 2.2.2.4 As to accused No. 2, categorised in FORM DIR-12 as a 'Professional Director' within the class of non-executive directors, the Court found that he was not a signatory to the cheques and that, apart from the general omnibus statement that all directors were responsible for day-to-day affairs, there were no specific averments or material indicating his actual involvement in or control over the conduct of the company's business at the relevant time. 2.2.2.5 Applying the Supreme Court's guidance, the Court held that non-executive directors cannot be fastened with vicarious liability on the basis of mere directorship and bald allegations; specific facts showing that such director was in charge of and responsible for day-to-day affairs are necessary. 2.2.2.6 The Court rejected the contention that the complaints were liable to be quashed as against all directors on the ground of 'bald' averments, distinguishing between signatory directors (accused Nos. 3 and 7) and a non-signatory, non-executive director (accused No. 2) with no specific role pleaded. 2.2.3 Conclusions 2.2.3.1 The averments in the complaints, read with the fact that accused Nos. 3 and 7 were directors and signatories to the impugned cheques, were held sufficient to satisfy the threshold under Section 141 N.I. Act at the summoning stage; proceedings against them and the company were not liable to be quashed. 2.2.3.2 As regards accused No. 2, a non-executive 'Professional Director' who did not sign the cheques and against whom no specific role or control over daily affairs was pleaded, the complaints were held insufficient to attract vicarious liability under Section 141, and he was held entitled to discharge. 2.2.3.3 The petitions seeking quashing filed by the company and by the two signatory directors were dismissed as without merit, while the petitions filed by the non-executive, non-signatory director (accused No. 2) were allowed and he was discharged from the criminal complaints.