The Negotiable Instruments Act, 1881 (hereafter referred to as the “NI Act”) serves as a safety cushion for creditors and lenders (real or implied) who have trouble retrieving defaulted funds due to debt or other liability. Section 138 of the NI Act entails the offence of the dishonour of cheques and specifies the elements of the crime. Section 141 of the NI Act deals with the liability of the persons when the offence under section 138 is committed by a company. The section has a broad interpretation of the term ‘company’, as it covers ‘firms as well as an association of individuals’. It holds directors of a company or partners of a firm ‘vicariously liable’ for the acts of the company that led to unfulfillment of an obligation i.e; dishonouring a cheque arising out of ‘any debt or other liability’.
However, the issue regarding directors and the company’s liability and more so the issue of burden of proof has been a grey area. This blog relies on various settled and evolving jurisprudence of the Court on this subject matter so as to clarify the same.
Who can be prosecuted under Section 141 of the NI Act
Any person who was ‘in charge’ and ‘responsible’ for the functioning and the activities of the business of a company at the commission of the offence, can be proceeded against, for the offence under section 138 of the NI Act, along with the company. Along with the Directors, the company must also be arrayed as an accused (case). The section also ropes in any ‘director, manager, secretary or officer of the company’ if proved that the offence was committed with their ‘consent’ or ‘connivance’ or due to any ‘neglect’ on their part.
Supreme Court through its judgement Girdhari Lal Gupta v. D.N. Mehta affirmed that the words ‘in charge’ refers to that the person who has control over the day-to-day activities of the company. The same was reiterated in State of Karnataka v. Pratap Chand and Katta Sujatha vs. Fertiliser & Chemicals Travancore Ltd. SC in its judgement K.K. Ahuja v. V.K. Vora &Anr stated that, to hold a person liable for this offence, primarily the ‘legal requirement’ has to be fulfilled that is the person must be responsible for the acts of the company, followed by the ‘factual requirement’ of being in charge of the business has to be satisfied.
Liability of the Managing Directors
Managing Directors or Joint Managing Directors by way of the position held by them are deemed to be aware of the day-to-day affairs of the company and thus, are in charge and responsible for the acts of the company. Owing to their position, the Managing directors bear the highest responsibility for the actions of the company and its management. While deciding the aforementioned K.K. Ahuja case, the SC held that no specific averment concerning the Managing Directors’ responsibility and involvement in daily activities has to be made. The court opined that the prefix ‘Managing’ establishes the required responsibility. It was further clarified that this exception did not apply to the Deputy Managing Directors.
Liability of the Signatories of the cheque.
Signatories, refer to the persons who sign the cheque on behalf of the company. Their responsibility is equated with that of the Managing Directors meaning, they are equally accountable in case of default arising out of a cheque signed by them. Supreme court through its judgement Sunita Palita v. Panchami Stone Quarry has remarked that the signatory of a cheque is liable and is deemed to be guilty owing to the fact that the cheque was signed by him. The complainant need not make any further averment stating that the signatory was in charge or had responsibility for the conduct of the company. The responsibility merely arises by the act of signing the cheque.
Liability of Executive Director and Non-Executive or Independent Director.
The involvement of a director in the day-to-day management of the company is an important factor in order to ascertain if he is an executive director. Non-executive directors serve as independent consultants and are not in charge of the company’s day-to-day operations. An executive director has knowledge of the company’s operations owing to their position. Therefore, there is a possibility that there exists an imbalance between the executive and non-executive directors’ knowledge pertaining to the activities of the company. Thus, the executive directors are entrusted with the conduct of the company and bear an added responsibility towards the outside world.
Independent Directors are the non-executive directors who are not involved in the daily operations of the company. Though they are members of the board of directors they have no material relations with the company and are present just to ensure the interest of the minority shareholders. In the case of Sunita Palita, the court held that independent directors and non-executive directors cannot be held liable due to the non-involvement and lack of knowledge about the day-to-day activities of the company.
Onus to prove
In S.M.S. Pharmaceuticals Ltd vs Neeta Bhalla, the Supreme Court established that it is necessary to make specific averments in the complaint stating that the person sought accused was in charge or responsible for the company’s conduct at the time of the offence. A director cannot be deemed to be in charge or responsible for the conduct of a company. Thus, the onus lies on the complainant to specify in his complaint the facts highlighting the involvement of the directors sought as accused. But the complainant can’t be aware of the specific knowledge as to the roles and responsibilities of the directors in the company for alleging it in the complaint.
The Supreme Court while dealing with a similar issue in S.P. Mani and Mohan Dairy v. SnehalathaElangovan gave the guiding principles. Previously Madras HC had quashed the proceedings under sections 138 and 141 of the NI Act owing to a lack of specific averment in the complaint. The Hon’ble SC while setting aside the said order held that instead of knowing each and every intricate detail, the complainant was only supposed to have a general idea as to who was in charge of the conduct of the company.
Section 141 deals with the liability of the directors. However, broad and sometimes varied interpretation of the section exposes the directors to frivolous criminal proceedings, wherein every director of the company gets arrayed by the complainant. Thus, the complainant has to specify in his complaint some facts which showcase the involvement of the directors. However, this requirement does not have to be viewed strictly for the simple reason that the complainant lacks special knowledge as to what are the duties or roles of a specific director in the company.
This highlights the loophole, as on one hand specifics by the complainant are not to be given and due to this, the directors get exposed to a number of suits. Also, the proviso to section 141 says that a director cannot be proceeded or punished if he proves that he exercised due diligence to prevent or had no knowledge about the occurrence of the offence. In order to realize the maximum benefit of the law, the issue of whom should burden of proof lies in the aforementioned situations still remains a grey area. Thus, the facts and the circumstances of each case should be looked into and analysed in a holistic manner.
Author(s) Name: Pulkit Rajmohan Agarwal (Gujarat National Law University)