Introduction
Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”), ascribes criminal liability for dishonour of a cheque. The purpose of the provision has been held by the Hon’ble Supreme Court to be the promotion of efficacy of banking operations and to ensure credibility in transacting business through cheques.[i] Since a large number of such transactions and cheque payments are done by companies, the very same intent appears to be captured in Section 141 of the NI Act, which extends vicarious criminal liability on officers associated with the company or firm. The law on Section 141 of the NI Act has been clarified and elaborated upon from time to time. However, the broad principle guiding the extent of liability remains the involvement of the director concerned in the day-to-day business affairs of the company. This is, however, not a straight-jacket formula, and the nuances determining the extent of liability need to be examined closely.
The Requirements of Section 141 of the Negotiable Instruments Act and the Extent of Vicarious Liability
The settled law in this regard is that for launching a prosecution under Section 141 against a director, there must be a specific allegation in the complaint, mentioning the part played by the director concerned in the transaction. In addition, there should be a clear and unambiguous allegation and description detailing how the directors are in-charge of, and responsible for, the conduct of the business of the company.[ii] The requirements of Section 141 were defined in the landmark decision in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla[iii], wherein the Hon’ble Supreme Court had reiterated and clarified that essentially in a case under Section 141, there ought to be a specific averment in the pleadings of the complainant that at the time the offence was committed, the person accused was in charge of, and responsible for the conduct of the business of the company. It was further held that (a) a director would not be liable simply because they are holding that position. It needs to be shown that the director being made liable should be in charge of and responsible for the conduct of the business of the company at the time of committing the offence; and (b) the persons holding the office of “Managing Director” or “Joint Managing Director”, by virtue of the very nature of their role, renders them in charge of, and responsible for the conduct of the business of the company, can be made liable under Section 141.
Creation of a Legal Fiction and Strict Construction of the Statute
Section 141 of the NI Act provides for a constructive liability on directors on behalf of the company, thereby creating a legal fiction.[iv] A legal fiction is created in the manner that by reason of the said provision, a person although not personally liable for commission of such an offence, would be vicariously liable therefor.[v] In fixing such a vicarious liability upon the director on behalf of the company, it is essential that the provisions and requirements of Section 141 are strictly complied with.[vi]
In a recent decision in Dilip Hariramani v. Bank of Baroda,[vii] the Hon’ble Supreme Court held that the provisions of Section 141 impose vicarious liability by a deeming fiction which presupposes and requires the commission of the offence by the company or firm. Therefore, unless the company or firm has committed the offence as a principal accused, the persons mentioned in Section 141 would not be liable and convicted as vicariously liable.[viii] This view is in line with the decision of the Hon’ble Supreme Court in a 2014 judgment, in Anil Gupta v. Star India (P) Ltd., wherein it was held that criminal proceedings under Section 141 of the NI Act were not maintainable against the directors when the same had been quashed qua the company.[ix]
The emphasis of the courts in recent times thus seems to be that this vicarious liability as a result of the legal fiction created must be affixed only after strictly complying with the provisions of the statute. No liability can be affixed when the offending company is not being held liable.
Recent developments and the general treatment of the provisional requirement
The law as laid down in SMS Pharmaceuticals[x] has stood the test of time and the courts are largely still governed by the same parameters. The importance of a specific pleading with regard to the role of directors has been repeatedly emphasised to be critical for prosecution.[xi]
In a recent decision in Sunita Palita v. M/s Panchami Stone Quarry,[xii] the Hon’ble Supreme Court has made some critical observations. While reiterating the importance of specific averments with regard to the directors’ role in the pleadings, the Hon’ble Supreme Court has held that no such specific averment with regard to the role is needed when the person has the term “Managing” affixed to their position as Director, as it would be clear that they are in charge of and responsible for the company.[xiii] The Supreme Court clarified an exception however, where liability could not be assumed – persons in directorial roles in the field of Human Resource or Personnel cannot be assumed to be liable only because of their designation when they might not even be linked with the issuance/ dishonour of the cheque.[xiv] In this regard, the court also placed reliance on its decisions in National Small Industries Corporation Ltd. v. Harmeet Singh Paintal[xv] and Pooja Ravinder Devidasani v. State of Maharashtra,[xvi] both of which hold that impleadment of directors of a company on the basis of a statement that they are in charge of and responsible for the conduct of the business of the company, without anything more, does not fulfil the requirements of Section 141 of the NI Act.
Analysis and Conclusions Drawn
The trend with regard to the Hon’ble Supreme Court’s interpretation of Section 141 of the NI Act seems to consistently require that there be specific pleading with regard to the role of the officer and that the officer is in charge of and responsible for the day to day activities of the company.
The courts do not seem inclined to blindly prosecute any and every person in the role of a director in a drawee company. There is more and more emphasis, visible from the recent decision in Sunita Palita v. M/s Panchami Stone Quarry,[xvii] on the importance of courts not simply ascribing liability basis a person’s designation in the drawee company, instead examining the nature of their role, which would show some knowledge or awareness of the day-to-day functioning of the company, thereby creating vicarious liability. Recent decisions in general also show a trend of not roping in non-executive directors within the category of vicariously liable persons as per the provision.
Further, in 2020, the Ministry of Finance issued a recommendation for decriminalising minor economic offences due to the high pendency in courts, including Sections 138 and 143(1) of the NI Act.[xviii] While the said proposal has still not come into effect, this is largely being seen as a welcome and progressive move because of the large pendency of such cases clogging up the judicial system.
For further information, please contact:
Jyoti Dastidar , Partner, Cyril Amarchand Mangaldas
jyoti.dastidar@cyrilshroff.com
[i] Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249.
[ii] N.K. Wahi v. Shekhar Singh, (2007) 9 SCC 481.
[iii] (2005) 8 SCC 89.
[iv] DCM Financial Services Ltd. v. J.N. Sareen, (2008) 8 SCC 1.
[v] Sabitha Ramamurthy v. R.B.S. Channabasavaradhya, (2006) 10 SCC 581.
[vi] Ibid; a similar emphasis on care to be taken while proceeding against a director as a consequence of creation of a legal fiction was seen in the matter of Kirshna Texport & Capital Markets Ltd. v. Ila A. Agrawal, (2015) 8 SCC 28, wherein the court held that it was essential that the director be given separate notice so they have an opportunity to rectify the mistake before being made vicariously liable. See also B. Raman, 2006 SCC OnLine Mad 757.
[vii] 2022 SCC OnLine SC 579.
[viii] Ibid.
[ix] (2014) 10 SCC 373; see also Anil Hada v. Indian Acrylic Ltd, (2000) 1 SCC 1.
[x] Supra note (iii).
[xi] Standard Chartered Bank v. State of Maharashtra, (2016) 6 SCC 62.
[xii] Supreme Court judgment dated August 1, 2022 in SLP (Crl.) No. 10396 of 2019.
[xiii] Ibid, at Para 30.
[xiv] Ibid, at Para 42.
[xv] (2010) 3 SCC 330
[xvi] (2014) 16 SCC 1
[xvii] Supra note xii.
[xviii] Ministry of Finance, Govt. of India Recommendation dated June 8, 2022 titled “Decriminalisation of Minor Offences For Improving Business Sentiment And Unclogging Court Processes”, available at: https://financialservices.gov.in/sites/default/files/Decriminalization%20-%20Public%20Comments.pdf.
