This article has been written by Taru Agarwal, pursuing a Diploma in International Contract Negotiation, Drafting and Enforcement from LawSikho and edited by Shashwat Kaushik.
It has been published by Rachit Garg.
Table of Contents
Introduction
Section 138 of the Negotiable Instruments Act, 1881 (NI Act) enacts the principle of criminal liability in cases of dishonour of a cheque due to insufficiency of funds for the discharge of any debt or liability. According to the provisions of the NI Act, the offence of cheque bounce is punishable with imprisonment extending up to two years and a fine extending up to twice the amount of the cheque. The object of imposing criminal liability in such cases is to ensure the credibility of business transactions and the efficacy of banking operations.
Most large business transactions involve large entities like companies or partnership firms. Since companies or firms are not natural persons, they can not be subject to criminal liability directly under Section 138 of the NI Act. In order to ensure these entities fall within the ambit of the NI Act, Section 141 of the NI Act was enacted, which extended criminal liability to the officers associated with the company or firm vicariously.
Scope of Section 141 of NI Act
Section 141 of the NI Act specifically deals with the offence of dishonour of cheques by companies and is divided into two clauses. Clause 1 imposes vicarious liability on any person for the commission of the offence if, at the time of the offence, such person could be held responsible for or was in charge of the conduct of the business of the company along with the company, unless such person can prove that he had no knowledge or had taken all steps in his power to prevent the commission of the offence. The second proviso to clause 1 exempts nominated directors of a company and persons in employment in the Central Government or State Government from the provisions of clause 1. Clause 2 additionally provides that any director, manager, secretary, partner or other officer of the company or firm with whose consent or connivance, or due to whose neglect, such offence was committed shall be vicariously prosecuted along with the company or firm.
A company or firm does not enter into business transactions directly but instead is represented by various people working for the company or firm. These people become the face of the company or firm, instilling confidence in business transactions as well as loans from the banks. When a company or a firm enters into contractual relationships on the basis of postdated checks, the goodwill of the company represented by the people working for the company or firm becomes relevant. Thus, if there is a default in honouring checks, a complaint is filed against the company or firm along with the persons responsible for the business of the company or firm on a daily basis.
The principle of criminal vicarious liability under Section 141 of the NI Act is taken from the general principle of tort. The concept of vicarious liability is based on the Latin maxim Qui facit per alium facit per se, according to which a person is liable for the actions of the other person due to the nature of the relationship between the two persons on the basis of the law of agency. In the case of companies and firms, the relationship is that of a juristic person and natural persons who are responsible for the business of the company or the firm.
Principles laid down in various judicial pronouncements
Since Section 141 of the NI Act provides for vicarious liability that is imposed on directors or partners on behalf of the company or firm through a legal fiction, it becomes imperative that the provisions and requirements of Section 141 of the NI Act are strictly complied with. While the general principles of liability under Section 141 of the NI Act remain the same, the nitty-gritty have been explored, elaborated and clarified by various courts over time.
Company as co-accused
An important aspect of prosecution under Section 141 of the NI Act is whether the company or the firm is to be mandatorily prosecuted along with the directors, partners or other persons as well. In Anil Gupta vs. Star India (P) Ltd & Anr. (2014), the Supreme Court held that the proceedings under Section 141 of the NI Act are initiated against the persons on the basis of legal fiction. Hence, the accused persons under Section 141 of the NI Act can be held liable as co-accused vicariously only if the company or firm has been accused of the offence as a principal accused. Thus, if the complaint does not disclose any commission of offence by the company or the firm or if the complaint is quashed by the company or the firm, the other persons accused of the offence cannot be held liable or convicted of any offence under Section 141 of the NI Act.
Requirement of specific allegations in complaint
Further, through various judicial pronouncements, a major principle that emerges is that a complaint under Section 141 of the NI Act must contain specific allegations mentioning the role played by the person concerned in the transaction. In S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Anr. (2007), the Supreme Court held that it is necessary to specifically allege allegations against the director of the company in the complaint, mentioning the role played by the director when the offence was committed. If such allegations are not stated, then it cannot be said that the requirements of Section 141 of the NI Act have been satisfied.
Director in-charge of a company
Another major holding by the Supreme Court in the S.M.S. Pharmaceuticals case was that a person does not become liable under Section 141 of the NI Act solely on the ground of such person being a director of the company, as “a director in a company cannot be deemed to be in charge of and responsible to the company for the conduct of its business”. A director can be held liable for the offence of cheque dishonour under Section 141 of the NI Act only if it can be shown that, at the time of the commission of the offence, he was the person in charge of and responsible for the conduct of the business of the company and this must be specifically averred as a fact by the complainant. The Court held that if such a standard of responsibility or conduct cannot be attributed to the director, then he can not be deemed liable in such cases. The Court further observed that in the case of a “Managing” or “Joint Managing” Director, an inference may be drawn against such a person by virtue of the position held by them. The Court held that such a position itself entails that the director would be in charge and responsible for the conduct of the company’s business. Thus, if the complaint is against a managing director or a joint managing director, then such a person will become liable under Section 141 of the NI Act.
But the courts have repeatedly held that any and every person in the role of a director in a drawee company must not be blindly prosecuted under the NI Act. In another landmark judgement of K.K. Ahuja vs. V.K. Vora and Anr. (2009), the Supreme Court took notice of the various precedents to hold that if the accused is a Managing Director or a Joint Managing Director of the company, then no specific averments are necessary to be made as the prefix “Managing” in itself is enough to deduce that such a person was in charge of and is responsible to the company for the conduct of the business of the company. Even in cases where the accused is any other director or officer of the company who signed the cheque, there is no need to make specific averments in the complaint since the signing of the cheque on behalf of the company is enough to deduce that such a person was aware that he was acting on behalf of the company. This in turn would give rise to the culpability of such a director or officer in accordance with clause 2 of Section 141 of the NI Act. But the Court ruled that if the accused person is a director, secretary or manager of the company who, by very nature, is not involved in the day-to-day functions of the business of the company or firm, then in order to fasten liability on such persons, the complaint must have specific allegations alleging the involvement of the accused persons in the commission of the offence of dishonour of cheque. The complaint in such cases must explicitly state how the accused persons were responsible for the offence by either showing that such an act was committed with their consent or knowledge or that such an act could not have happened without the negligence of such persons in order to bring the case under clause 1 or clause 2 of Section 141 of the NI Act. In the case of all other officers of the company, they can only be made liable under clause 1 of Section 141 of the NI Act by making specific averments in the complaint stating their position and duties in the company, showing some knowledge or awareness, and the role played by them in the day-to-day functioning of the company, coupled by special averments to show how such accused persons were involved in the offence of dishonouring the cheque, be it through explicit consent, connivance or negligence. This proposition was recently upheld by the Apex Court in the case Dilip Hariramani vs. Bank of Baroda (2022), where the Supreme Court held that no vicarious liability under Section 141 of the NI Act fastened upon a partner of a firm merely because he was the partner of the firm or stood guarantor to the loan taken by the firm. The Court held that in such cases, the partner would be subject to civil liability under the Partnership Act but not criminal liability under the NI Act.
Quashing of complaint under Section 141
Another aspect of prosecution under Section 141 of the NI Act is that of quashing the complaint under Section 482 of the Code of Criminal Procedure. Recently, in S.P. Mani and Mohan Dairy vs Dr. Snehalatha Elangovan (2022), the Supreme Court reiterated that the High Court must not quash cheque bounce cases in a mechanical manner. Instead, the power to quash such a case must be exercised only on the basis of the existence of some unimpeachable and incontrovertible evidence after considering the complaint as a whole. The Court held that before quashing a complaint, the High Court must satisfy itself from the facts in hand that, at the time of the issuance of the cheques in question, the director or partner of a company or firm was not responsible for the issuance of the cheques in question.
Inter-play between NI Act and IBC
While dealing with penal liability under Section 141 of the NI Act, the Supreme Court came across another issue as to whether natural persons, such as the director or partner, continue to be liable under the NI Act even if the company or firm is discharged of liability due to insolvency under the Insolvency and Bankruptcy Code, 2016 (IBC).
This issue was considered by the Supreme Court in the case of P. Mohanraj vs. M/S Shah Brothers Ispat Pvt. Ltd. (2021), where the Supreme Court held that though the proceedings under the NI Act fall within the ambit of the IBC, the benefit of the protection during the moratorium period would only extend to the company, and natural persons that may be accused under Section 141 of the NI Act, such as the directors of the company, would continue to be held liable if they are involved in the day-to-day operations of the company. The Court noted that though the company is a separate legal entity from its shareholders, extending the shield provided by the IBC to natural persons would open a floodgate for the management or directors of the company to exploit the company for personal gain. In line with this observation, various recent judicial pronouncements have held that directors of a company must be held accountable for their actions carried out in their capacity as office bearers of the company.
Conclusion
From the various judicial pronouncements, it is clear that in cases of dishonour of a cheque, the criminal liability imposed on the directors and partners of the company or firm has been interpreted in a strict manner to include all those persons who are responsible for the business and conduct of the business or firm but one does not become subject to penal liability under Section 141 of the NI Act merely by being the director or partner in the company or firm. There must be some nexus between the accused person and the conduct of the business of the company or firm. This nexus may be evident from the nature of the position held by the accused, such as in the case of the managing director or joint managing director, or it must be specifically averred in the complaint by placing material on record to prove the prima facie involvement of the accused person at the time of the commission of the offence in the business of the company or firm.
References
- https://indiankanoon.org/doc/1823824/
- https://www.khuranaandkhurana.com/2023/04/11/vicarious-liability-under-current-legal-regime-of-negotiable-instruments-act-an-analysis-of-evolving-judicial-precedents/
- https://indiankanoon.org/doc/686130/.
- https://www.mondaq.com/india/trials-amp-appeals-amp-compensation/1228188/supreme-court-on-vicarious-liability-of-partner-for-cheque-dishonour
- https://www.scconline.com/blog/post/2022/06/13/dishonour-of-cheque-partner-partnership-vicarious-liability-negotiable-instruments-act-section-141-section-138-supreme-court-judgments-legal-research-updates-news/
- https://taxguru.in/corporate-law/liability-director-negotiable-instruments-act-1881.html
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