Supreme Court Quashes Criminal Proceedings Against Company Director: Emphasizes Need for Prosecuting Company in Offences Involving Vicarious Liability  

A two-judge bench of the Supreme Court consisting of Justice Pankaj Mithal and Justice Prashant Kumar Mishra passed a judgment dated April 16,2025 in the case of S.C. Garg Versus State of Uttar Pradesh & Anr. Criminal Appeal No. 438 of 2018 wherein the Supreme Court held that prosecution of a company’s officer under Section 420 IPC and Section 138 of the NI Act cannot be sustained without prosecuting the company itself, as vicarious liability under Section 141 arises only when the company is made an accused.

The Present Appeal arose from the Judgment of Allahabad High Court wherein the Petition under Section 482 Criminal Procedure Code,1973 was filed which sought quashing of criminal case pending under Section 420 Indian Penal Code, 1860.

 

Facts of the Case:

The Appellant was the Managing Director of a craft paper manufacturing company named Ruchira Papers Ltd. The company had business dealings with ID Packaging (Company) which is a partnership firm of R.N. Tyagi.  Tyagi issued 11 cheques between 22.12.1997 to 30.01.1998 which got dishonored due to insufficiency of funds in the account so both the parties agreed to present the cheques later to maintain business relations. He also issued 3 demand drafts in the name of Appellant’s company. Later on, 08.06.1998, when the cheques were presented again, 4 cheques got cleared and 7 got dishonored. Then the Appellants filed a complaint case under Section 138 of Negotiable Instruments Act 1881 against ID packaging and Tyagi for 7 dishonored cheques. That on 25.10.2002, the Learned Magistrate convicted Tyagi for offence under Section 138[1] of NI Act and was sentenced to imprisonment till rising of Court and pay fine of Rs. 3,20,385/- (Total amount of the 7 dishonored cheques). The Appeal filed by Tyagi was dismissed by Additional Sessions Judge.

Analysis of the High Court

Then the Criminal Revision was filed in High Court. The High Court on the basis of compromise between them suspended the sentence upon deposit of Rs. 3,20,385/-. During the pendency, Tyagi moved an application under Section 156(3) Cr.P.C. seeking registration of FIR alleging that despite payment of amount in 7 dishonored cheques. Garg, Managing Director of the Company again presented 11 cheques and recovered the amount from 4 out of 11 cheques thereby cheating Tyagi. The Company was not made an accused in the FIR. The chargesheet against Garg is again without joining the Company. Garg preferred a Petition under Section 482 Cr.P.C. for quashing of the chargesheet and summoning Order dated 19.06.2002 which was dismissed by the High Court. The Appellant then approached the Supreme Court against the High Court Order of 19.06.2002.

Arguments of behalf of Appellants

The Counsel for the Appellants argued that Appellant cannot be prosecuted for an offence which is committed by the Company without making it an Accused with no specific allegation against Garg.

Arguments on behalf of Respondents

The Counsel for the Respondents argued that it will be decided in trial whether Garg encashed the amount in 4 cheques despite having received the amount by demand draft separately. He asserted that it is a clear case of receiving double payment for the same dues thus committing cheating.

Analysis of the Hon’ble Supreme Court

The Hon’ble Supreme Court analyzed the above Judgment and discussed the applicability of res judicata in criminal proceedings. It also discussed that under Section 141[2], vicarious liability is extended to the officers of a company by deeming fiction, which arises only when the offence is committed by the company itself and not otherwise.  The Court held that the company is a juristic person so it cannot be imprisoned but can be subjected to a fine, which itself is a punishment. So, prosecution of the Company is mandatory. Moreover, the Court held that, the filing of multiple FIRs suggested possible misuse of the legal process driven by personal vendetta. Recognizing this as an abuse of process, the Court quashed the criminal proceedings under Section 420 IPC. This ruling reinforces the judiciary’s role in preventing harassment through malicious prosecution.

Conclusion

In the case of S.C. Garg v. State of Uttar Pradesh & Anr., the Supreme Court concluded that the prosecution of a company’s officer under Section 420 IPC and Section 138 of the NI Act cannot be sustained without prosecuting the company itself, as vicarious liability under Section 141 arises only when the company is made an accused. The Court also noted that the filing of multiple FIRs indicated a possible misuse of the criminal justice system to settle personal scores. Recognizing this as an abuse of process, the Court quashed the criminal proceedings against the Appellant, reinforcing the principle that criminal law must not be used as a tool for harassment.

 

TRISHA SAXENA

SENIOR LEGAL ASSOCIATE

THE INDIAN LAWYER AND ALLIED SERVICES

 

[1] Section 138 of Negotiable Instruments Act states -Dishonour of cheque for insufficiency, etc., of funds in the account.

 

[2] Section 141 states Offences by companies.

 

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