India: Dishonoured Cheques - Not All Directors?

Background

The long-standing issue of undisposed pending cases of cheque dishonour in terms of Section 138 of the Negotiable Instruments Act, 1881 ("said Act") continues unabated and a common grey area amongst such cases has been the issue of correctly identifying the persons who can be held liable for the same.

Recently, the Hon'ble Supreme Court in Ashutosh Ashok Parasrampuriya and Anr. v. M/s Gharkul Industries Pvt. Ltd. & Ors¹ inter alia held that the directors of a company can only be held liable for offences committed by the company when there are specific averments made that such directors were at the time of offence, responsible for conduct of the said company's business.

A common misconception is that when a cheque issued by a company bounces, all the directors of the company are liable to be proceeded against in terms of Section 141 of the said Act. In this article, we discuss the parameters to be kept in mind for attributing the Section 138 offence to different categories of directors and other managerial personnel of a company as well as the importance of the underlying complaints and the contents thereof. 

Section 138 of the said Act casts criminal liability punishable with imprisonment or fine or with both on any person who issues a cheque towards discharge of a debt or liability as a whole or in part and the cheque is dishonoured by a bank on presentation. Section 141 of the said Act (which arises out of the known principle of vicarious liability) extends such criminal liability in case of a company to every person who at the time of the offence, was in charge of and was responsible for the conduct of the business of the company.

It is a known principle of law that penal provisions are to be strictly interpreted. The normal rule in cases involving criminal liability is against vicarious liability, i.e., no one should be held criminally liable for an act of another. This rule is however, subject to exception on account of specific provisions being made in statutes extending liability to others viz. Section 141 of the said Act. 

Directors v/s Managing Directors

At the outset, it should be made clear that no person can be made liable / proceeded against for a cheque dishonour case under Section 141 unless the company itself has been made an accused in the case. In other words, commission of offence by the company is an express condition precedent to attract the vicarious liability of other categories of persons and for maintaining prosecution under Section 141 of the said Act, arraigning of the company as an accused is a mandatory precondition.

Section 141 contains two categories of persons liable for cheque dishonour cases: (i) every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company; and (ii) directors/managers/secretaries or other officers, who will be liable if the offence has been committed with their consent or connivance or if the offence was a result of any negligence on their part.

In S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla & Anr², the Hon'ble Supreme Court observed that a company being a juristic person, all its deeds and functions are a result of acts of others. Therefore, officers of a company who are responsible for acts done in the name of the company are sought to be made personally liable for acts which result in criminal action being taken against the company. It was held that merely being a director of a company is not sufficient to make the person liable under Section 141 of the Act. A director in a company cannot simply be deemed to be in charge of and responsible to the company for conduct of its business. The requirement is that the person sought to be made liable should in fact be in charge of and responsible for the conduct of the business of the company at the relevant time.

In State of Haryana v. Brij Lal Mittal and Ors³, it was held that for a person for being prosecuted for an offence committed by a company, vicarious liability arises if at the material time he/she was in charge of and was also responsible to the company for the conduct of its business. Simply because a person is a director of a company, it does not necessarily mean that he/she fulfils both the aforesaid requirements so as to make him/her liable. Conversely, without being a director of a company, a person can still be in charge of and responsible for the conduct of the business of the company.

It should be kept in mind that when it comes to the status of a director vis-a-vis a managing director / joint managing director in a defaulting company, the position of the law may be slightly different. These persons, as the designation of their office suggests, are in charge of the company and are responsible for the day to day conduct of the business of the company. By the virtue and level of control yielded by managing directors, they are responsible for all acts and omissions of the company at all times. 

Section 141 uses the words "was in charge of and was responsible to the company for the conduct of the business of the company". It is evident that a person who can be made vicariously liable under sub-section (1) of Section 141 is a person who is responsible to the company for the conduct of the business of the company and in addition is also in charge of the business of the company. There may be many directors and secretaries who are not in charge of the business of the company at all. The meaning of the words "person in charge of the business of the company" has been considered by the Supreme Court in Girdhari Lal Gupta v. D.N. Mehta⁴  and State of Karnataka v. Pratap Chand⁵  where it was inter alia held that the words refer to a person who is in overall control of the day to day business of the company.

It is to be noted that in K.K. Ahuja v. V.K. Vora and Anr.⁶, the Supreme Court held that if the accused is the managing director or a joint managing director, it is not necessary to make an averment in the complaint that he/she is in charge of, and is responsible to the company, for the conduct of the business of the company. It is sufficient if an averment is made that the accused was the managing director or joint managing director at the relevant time. This is because the prefix `Managing' to the word `Director' makes it clear that they were in charge of and are responsible to the company, for the conduct of the business of the company. Additionally, so far as signatory of a cheque which is dishonoured is concerned, he/she is clearly responsible for the incriminating act and will be covered under sub-section (2) of Section 141 of the said Act.

Importance of the Complaint

The starting point and one of the most important basis of Section 138 cases is the underlying complaint. Therefore, it is critical for the complainant to ensure that the complaint is iron clad and without any lacunae. As is evident from hereinabove, the courts have not always adopted the principle of deemed liability

and as mentioned earlier, vicarious liability cannot be simply assumed in criminal/penal provisions. 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 in the absence of which, the statutory requirements of Section 141 cannot be said to be satisfied.

In Sabitha Ramamurthy & Ors. v R.B.S. Channabasavardhya⁷, the Hon'ble Supreme Court observed that while it is not necessary for the complainant to specifically reproduce the wordings of the section but what is required is a clear statement of fact so as to enable the court to arrive at a prima facie opinion that the accused are vicariously liable. Section 141 raises a legal fiction where although a person is not personally liable for commission of such an offence, such person would be 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.

Conclusion

In view of the aforementioned, we have summarised certain major points which the complainants must bear in mind in all Section 138 and Section 141 cases:

1. Section 141 does not make all the directors liable for the offence. The criminal liability can be fastened and attributed to only those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company;
2. The primary responsibility is on the complainant to make specific averments as are required under the law in the complaint so as to make the accused vicariously liable. For fastening criminal liability, there exists no presumption that every director knew and was involved in the transaction;
3. Vicarious liability of a person must be pleaded and supported by the requisite statements along with specific averments in the complaint/petition so as to ensure due satisfaction of the statutory requirements of Section 141;
4. If the accused is a managing director or joint managing director or any other person who actually signed the cheque on behalf of the company, then it is not necessary to make specific averment in the complaint and by virtue of their position such persons are liable under the law.
5. Only when the company is arraigned as an accused and being prosecuted, the persons mentioned in the other categories can be made vicariously liable (subject to the averments in the petition/complaint and proof thereof).

The approach adopted by the courts time and again have now made the position of law considerably clearer. While on one hand, the complainants must be careful regarding averments at the stage of drafting of complaint, on the other hand, the difference in the treatment meted out to directors in general vs managing directors / signatories is definitely a relief for such directors / personnel who may have been unjustly embroiled in S.138 proceedings.

Footnotes

1 (2005) 8 SCC 89

2 Criminal Appeal No(S). 1206 Of 2021

3 1998 CriL J3287

4 1971(3)SCC 189

5 1981(2)SCC 335

6 (2009)10SCC48

7 AIR2006SC3086