The Hon'ble Supreme Court in a recent judgment in Ashutosh Ashok Parasrampuriya and Anr. v. M/s Gharkul Industries Pvt. Ltd. & Ors.1 held that the directors of a company can only be made liable for offences committed by the company under Section 141 of the Negotiable Instruments Act, 1881 (NI Act) when there are specific averments made that such directors were at the time of offence, responsible for conduct of company's business. In this article, we navigate through the facts and findings of the aforementioned judgment.
The appellants include Ameya Paper Mills Pvt. Ltd. (Company) and its directors. The first respondent (Complainant) that it is a company dealing in business of production and sale of spices. The appellants, being well acquainted with the Complainant, approached the Complainant for some financial assistance for their business. Considering the relations and need of the appellants, the Complainant provided financial assistance and a Memorandum of Understanding (MoU) was signed with consent of all parties.
The Complainant had disbursed amounts through various cheques as and when required by the appellants. A total amount of INR 15,019,831 (Rupees fifteen million nineteen thousand eight hundred and thirty-one) was received by the appellants from November 2007 to March 2009. In August 2010, a letter was issued by Complainant to the appellants demanding the balance-sheet of the Company. The balance sheet received from appellants confirmed the amounts received by appellants until June 2012. The Complainant contended that the directors of a company were responsible for conduct of the business and affairs of the Company. In 2012, one of the cheques issued by the appellant towards making part payment of the outstanding dues was dishonored on account of insufficient funds. The Complainant issued a notice of dishonor of cheque which was refused to be accepted by the appellants and returned with the remark "not claimed".
In this background, the Complainant filed a complaint against the appellants under Section 138 NI Act with a specific averment that all the appellants had consented to the terms of the MoU and failed to abide by it. The Ld. trial Court taking cognizance of the complaint issued summons to the appellants directing them to appear before the Court on 23 November 2012. The order passed by the Ld. trial Court summoning the appellants came to be challenged through two separate criminal petitions filed under Section 482 of Code of Criminal Procedure, 1973 (CrPC) seeking quashing of the summons and the criminal complaints registered against them. Both petitions were tagged together and came to be dismissed by the High Court of Bombay. Hence, the matter reached the Hon'ble Supreme Court.
Contentions of the appellants
The appellants submitted that no specific averment was made that the directors of the Company had committed any offence and were responsible for conduct of business of the Company. Merely because the appellants were directors of the Company, they could not be held vicariously liable and be made accused in the proceedings. It was further the case of appellants that no notice relating to dishonor of cheque dated 2 June 2012 had been received by them.
Further, the appellants also submitted that they were non-executive directors of the Company and were not responsible for conduct of business which was a mandatory requirement for initiation of proceedings under Section 138 of the NI Act. Therefore, the appellants submitted that the order passed by the trial Court in summoning the appellants was nothing but an abuse of process of law. To buttress their arguments, the appellants relied upon the decision in SMS Pharmaceuticals Ltd. v. Neeta Bhalla and Anr.2 and Pooja Ravinder Devidasani v. State of Maharashtra and Anr.3
Contentions of the respondents
The respondents including the Complainant argued that the records of the Registrar of Companies clearly indicated that all appellants were directors of the Company as on 1 April 2007 and were responsible to the Company for conduct of business. There was nothing on record to indicate that the appellants were appointed as non-executive directors. The respondents relied on the decisions in A.K. Singhania v. Gujrat State Fertilizer Company Ltd. and Anr.4 and Gunmala Sales Pvt. Ltd. v. Anu Mehta and Ors.5
The Hon'ble Supreme Court, at the outset, referred to its decision in S.M.S Pharmaceuticals Ltd. (supra) wherein it was held that, "a complaint must contain material to enable the Magistrate to make up his mind for issuing process". Then the Apex Court in referred to its findings in S.M.S Pharmaceuticals Ltd. (supra) that it was necessary to specifically aver in a complaint under Section 141 of NI Act that at the time of commission of the offence, the person accused was in charge of the conduct of company's business. The Hon'ble Supreme Court also referred to a catena of other decisions6 which reiterated the aforementioned principle.
The Apex Court observed that, on reading the complaint as a whole, the allegations in the complaint were that at the time when the cheques were dishonored, the appellants were directors of the Company and were responsible for its business. In the given factual circumstances, and in line of the ratio laid in S.M.S Pharmaceuticals Ltd. (supra), the Hon'ble Supreme Court overruled arguments of the appellants. The Apex Court held that no error was committed by the High Court in dismissing the petitions filed under Section 482 of the CrPC under the impugned judgment. Therefore, the appeals were dismissed.
The instant judgment is the second judgment passed recently which has held that directors cannot be automatically held vicariously liable for a company's criminal offences in absence of specific averments. It appears that the object of the Apex Court in these judgments is to establish a clear distinction between cases where directors can be proceeded against offences committed by the company and cases where directors would not be held vicariously liable for the company's criminal offences. The decision comes as a sigh of relief for many directors and key managerial personnel across corporates in India facing proceedings under the NI Act.
1. Ashutosh Ashok Parasrampuriya and Anr. v. M/s Gharkul Industries Pvt. Ltd. & Ors., Criminal Appeal Nos. 1206 of 2021.
2. SMS Pharmaceuticals Ltd. v. Neeta Bhalla and Anr., 2005 8 SCC 89.
3. Pooja Ravinder Devidasani v. State of Maharashtra and Anr., 2014 16 SCC 1.
4. A.K. Singhania v. Gujrat State Fertilizer Company Ltd. and Anr., 2013 16 SCC 630.
5. Gunmala Sales Pvt. Ltd. v. Anu Mehta and Ors., 2015 1 SCC 103.
6. S.K. Alagh v. State of Uttar Pradesh and Ors., 2008 5 SCC 662; Maharashtra State Electricity Distribution Co. Ltd. & Anr. v. Datar Switchgear Ltd. and Ors., 2010 10 SCC 479; and GHCL Employees Stock Option Trust v. India Infoline Ltd., 2013 4 SCC 505.
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