Navigating Director Liability in Cheque Dishonour Cases
Background of the Case
The Delhi High Court, by a Single Judge Bench recently addressed a case involving Anees Ur Rahman Vs. M/S Small Farmers Agribusiness Consortium, CRL.M.C. 5464/2019, concerning allegations under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), related to dishonour of a cheque. The case revolves around a financial agreement established in 2009, in which M/s Fresco Foods Pvt. Ltd., where Rahman served as a director, received a venture capital loan of ₹1.6 crores from the Respondent. The agreement specified repayment terms and included a post-dated cheque to cover potential liabilities. However, when the cheque for ₹1.6 crores, dated 26.09.2016, was presented for payment, it was dishonoured due to insufficient funds. The Respondent subsequently filed a complaint under Section 138 of the NI Act, triggering the legal proceedings.
Key Legal Issues
The primary legal question in this Petition concerns the extent of vicarious liability under Section 141 of the NI Act for directors in cheque dishonour cases, specifically when a director, like Rahman, had resigned well before the dishonoured cheque was issued. Rahman sought to quash the proceedings against him, contending he had resigned from the company in 2009 and was not associated with the company at the time of the cheque’s dishonour in 2016. His defence was based on two arguments:
1. He was no longer a director and thus not involved in managing the company at the time of the alleged offence.
2. The complaint did not explicitly detail his role in managing the company’s affairs after his resignation.
Applicable Law: Section 138 and Section 141 of the NI Act
Section 138 of the NI Act criminalises cheque dishonour if the issuer fails to pay the payee after receiving due notice. Section 141[1] holds company officials (such as directors) accountable if they were in charge of and responsible for the company’s affairs at the time of the offence. To establish liability under Section 141, the prosecution must prove that the accused was not only associated with the company but was actively involved in the conduct of its business during the offence.
Legal Precedents and Judicial Reasoning
In examining the Petitioner’s liability, the Court relied on landmark cases that have clarified the scope of vicarious liability under Section 141.
a. SMS Pharmaceuticals Ltd. v. Neeta Bhalla, 2005 8 SCC 89: This case emphasised that only individuals actively managing the company’s business when the offence occurred could be held liable. The Supreme Court held that mere designation as a director was insufficient to impose criminal liability; the director must have been in charge of the company’s affairs at the relevant time.
b. K.K. Ahuja v. V.K. Vora, 2009 10 SCC 48: Here, the Court highlighted that, while managing directors or joint managing directors are presumed to be in charge of the company’s affairs, other directors are not automatically liable unless it can be shown that they had a direct role in the company’s operations.
c. National Small Industries Corp. Ltd. v. Harmeet Singh Paintal, 2010 3 SCC 330: This judgement reinforced the need for specific allegations outlining the director’s role in the alleged offence. General statements regarding the director’s responsibility were deemed insufficient.
d. Ashok Shewakramani v. State of Andhra Pradesh, 2023 8 SCC 473: The Supreme Court held that terms like “in charge of” and “responsible for the conduct of the business” should be read conjunctively, meaning that both elements must be met to establish liability.
The High Court further noted that penal provisions, like Section 141 of the NI Act, must be interpreted strictly. In cases where vicarious liability is imposed, the accused must have a clear role in the company’s day-to-day operations. Given the serious nature of criminal charges, courts require evidence of direct involvement, especially where directors or other officials are concerned.
The Delhi High Court
Upon reviewing the facts, the Court concluded that the Petitioner could not be held liable under Section 138 read with Section 141 of the NI Act because he had resigned in 2009, long before the dishonoured cheque was issued. The Petitioner’s role as a director and signatory in 2009 did not translate into responsibility for the company’s actions in 2016. The Court found no evidence suggesting he was involved in the management or affairs of M/s Fresco Foods Pvt. Ltd. during the relevant time when the offence was committed.
The Court ultimately held that mere association with the company in the past was insufficient to impose criminal liability, as Rahman was no longer in control of the company’s affairs when the alleged default occurred. His resignation, duly documented with Form-32 filed with the Registrar of Companies, confirmed his lack of involvement in the company’s day-to-day affairs post-2009. Consequently, the Court granted Rahman’s petition and quashed the proceedings against him in the complaint case.
Implications of the Judgment
This judgement reaffirms the strict standards required to establish vicarious liability for corporate directors under the NI Act. It underlined that liability under Section 141 cannot be imputed based solely on a director’s past association with a company. Courts are likely to scrutinise the timing of directorial responsibilities in relation to alleged offences closely, ensuring that only those actively involved in the company’s management are held accountable.
The judgement reinforces the legal protections available to former directors and company officials by requiring specific allegations that demonstrate involvement in the company’s affairs during the offence. For companies and directors, this ruling emphasises the importance of clear and timely resignation documentation, as well as detailed record-keeping, to prevent unwarranted legal implications.
Conclusion
The Delhi High Court’s decision in this case is an important precedent emphasising the necessity of direct and active involvement to attribute liability under Section 138 and 141 of the NI Act. The judgement aligns with principles of fair justice by safeguarding individuals from undue vicarious liability based on past associations, reinforcing that criminal liability cannot be imposed lightly and requires clear proof of responsibility and control over a company’s affairs at the relevant time.
Shikha
Associate
The Indian Lawyer & Allied Services
[1]https://www.indiacode.nic.in/show-data?actid=AC_CEN_2_33_00042_00042_1523271998701§ionId=45721§ionno=141&orderno=146
Leave a Reply