DIRECTORS’ LIABILITY IN CHEQUE DISHONOUR CASES

In a recent landmark ruling, the Supreme Court of India delivered a crucial interpretation of vicarious liability under Section 141 of the Negotiable Instruments Act, 1881, (“NI Act”) in its judgment in Ashok Shewakramani & Ors. Vs. State Of Andhra Pradesh and Shanmuga Spinners[1] by which multiple criminal appeals were decided.

 These appeals arose out of proceedings adopted under Section 138 of the NI Act against companies who had issued cheques which were subsequently dishonored. In terms of Section 141 of the NI Act, these proceedings were also initiated against directors of the company.

The primary issue before the Supreme Court was whether the mandatory requirements of Section 141 of the NI Act were satisfied in relation to certain directors who were prosecuted.

Section 138 and Section 141 of the NI Act

 In terms of Section 138 of the NI Act, a person who has drawn a cheque on an account maintained by him with a banker for payment of any amount of money to another person, from out of that account for the discharge of any debt or other liability, is deemed to have committed an offence if such cheque is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account. The Section then proceeds to set out the period of imprisonment and fine for such offence.

Section 141 then provides that if the person committing the offence under Section 138 is a company, then, along with the company, every person who – (1) was in charge of the conduct of the business at the time the offence was committed; and (2) was responsible to the company for the conduct of its business; will also be deemed to be guilty of the offence.

Are all directors liable under Section 141?

 One of the main grounds raised by the appellants was that there were no averments made in the complaints stating that the appellants were in charge of and responsible for the conduct of the business of the company.

With this background, the Supreme Court was to decide the vicarious liability of directors, who were not managing or whole-time directors.

The Supreme Court observed that the most important averment which is required by Section 141 (1) of the NI Act is that the directors/persons accused were in charge of and were responsible for the conduct of the Company.

In the different appeals lying before it, the Supreme Court observed that the different averments made in the complaints were as follows:-

• 1. All directors were liable for the transactions of the Company;
  2. The appellants were fully aware of the issuance of the cheques without sufficient balance ;
  3. The appellants were fully aware of the business transactions;
  4. The appellants are busy with day-to-day affairs of the Company;
  5. The appellants are managing the Company and are also in charge of the Company;
  6. The appellants were jointly and severally liable for the acts of the Company.

In fact, in one of the complaints, the appellants were not averred to be directors of the Company at all. Also, it was observed that the appellants were neither the signatories to the Cheques nor were whole-time directors of the Company.

The Supreme Court observed that Section 141 of the NI Act is an exception to the normal rule that there cannot be any vicarious liability when it comes to a penal provision. Such vicarious liability is attracted  only when the ingredients of Section 141 (1) of the NI Act are satisfied.

The Hon’ble Supreme Court held that every person who is sought to be roped in by virtue of Section 141 (1) of the NI Act, must be a person, who at the time of the offence committed, was in-charge of and was responsible to the company for the conduct of the business of the company. A person who is merely managing the affairs of the company does not become the person in-charge of the company or the person responsible for the business and conduct of the company.

The Hon’ble Supreme Court further observed that the words “was in charge of” and “was responsible to the company for the conduct of the business of the company” cannot be read disjunctively and the same ought to be read conjunctively in view of the use of the word “and” in between.

The statement by the Counsel on behalf of the original complainants that the averments substantially complied with Section 141 (1) of the NI Act was not accepted by the Hon’ble Supreme Court and the Supreme Court held that Section 141 (1) of the NI Act was not complied with. The appeals were allowed and the original complaints were quashed.

Conclusion

In these matters, the Hon’ble Supreme Court held that an individual could be held vicariously liable for an offense under Section 138 of the NI Act, solely if they fulfilled the dual criteria of being “in charge of” and “responsible to the company for the conduct of its business” at the precise time the alleged offense was committed.

This will come as a relief to persons who are directors not in charge of the conduct of business such as nominee or independent or other such directors, who are sometimes accused of offences under Section 138 of the NI Act, merely on account of their designation.

This judgment also emphasizes the requirement of carefully drafting pleadings and complaints to ensure that all requisite assertions are made. This establishes a clear precedent for the requisite legal criteria in complaints, underscoring the crucial role of accurate assertions in establishing indirect responsibility.

Authors: Manisha Paranjape, Partner and Binkal Mehta, Associate

Footnotes

[1] Judgment dated 03^rd August 2023 in Criminal Appeal No. 879 of 2023

² Judgment dated 20^th March 2017 in Criminal Petition No. 6324 of 2013