Vicarious Liability under Current Legal Regime of Negotiable Instruments Act: An Analysis of Evolving Judicial Precedents

11th April, 2023 - 7:06 am Categories: Legal Issues 0 Comments

Introduction

Section 138 of the Negotiable Instruments Act of 1881 (“NI Act”) makes it a crime to dishonour a cheque. The purpose of the provision, according to the Hon’ble Supreme Court, is to promote the efficacy of banking operations and to ensure credibility in conducting business via cheques. Because companies conduct a large number of such transactions and cheque payments, the same intent appears to be captured in Section 141 of the NI Act, which imposes vicarious criminal liability on officers associated with the company or firm. Section 141 of the NI Act has been clarified and expanded on numerous occasions. The involvement of the director, however, remains the broad principle guiding the extent of liability. Involved in the company’s day-to-day business operations. This is not, however, a one-size-fits-all formula, and the nuances determining the extent of liability must be carefully examined.

The Requirements of Section 141 of the Negotiable Instruments Act and the Extent of Vicarious Liability

The settled law in this regard is that in order to initiate a prosecution under Section 141 against a director, the complaint must contain a specific allegation mentioning the director’s role in the transaction. Furthermore, there should be a clear and unambiguous allegation and description of how the directors are in charge of, and responsible for, the company’s business operations. [ii] In the landmark case of S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, the requirements of Section 141 were defined  in which the Hon’ble Supreme Court reiterated and clarified that, in a case under Section 141, there must be a specific averment in the complainant’s pleadings that, at the time the offence was committed, the accused was in charge of and responsible for the company’s business operations. It was also decided that (a) a director is not liable simply because they hold that position. It must be demonstrated that the director being held liable was in charge of and responsible for the conduct of the company’s business at the time of the offence; and (b) persons holding the office of “Managing Director” or “Joint Managing Director” can be held liable under Section 141 by virtue of the nature of their role, which places them in charge of and responsible for the conduct of the company’s business.

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Supreme Court: Explaining the law relating to the vicarious liability of a company’s directors under Sections 138 and 141 of the Negotiable Instruments Act, 1881, the bench of Ajay Rastogi and Abhay S. Oka, JJ has held that if, at the time the offence was committed, the person accused was in charge of, and responsible for the conduct of business of the company, and statutory compliance of Section 141 of the NI Act has been made, It can do so, however, if”… it comes across some unimpeachable, incontrovertible evidence that is beyond suspicion or doubt, or totally acceptable circumstances that may clearly indicate that the Director could be a suspect…” He was not concerned with the issuance of cheques, and asking him to stand trial would be an abuse of the Court’s process. Despite the presence of basic averment, it may be concluded that no case is made out against the specific Director for a variety of, The Magistrate must consider only the allegations in the complaint, and if the allegations in the complaint or charge-sheet do not constitute an offence against a person, the complaint may be dismissed. “The same decision went on to explain the requirements of Section 141 of the NI Act: (a) In a complaint under Section 141, the person accused must specifically allege that at the time the offence was committed, he or she was in charge of and responsible for the company’s business operations. The requirements of Section 141 cannot be said to be met unless this averment is made in a complaint.

(b) Being a director of a company alone does not make a person liable. According to Section 141 of the Act. A director of a company cannot be considered to be in charge of and accountable to the company for its operations. Section 141 requires that the person sought to be held liable be in charge of and responsible for the conduct of the company’s business at the relevant time. As there is no deemed liability of a director in such cases, this must be averred as a fact.

(c) The managing director or joint managing director would be admittedly in charge of the company and accountable to it for its operations. When this occurs, the holders of such positions in a company become liable under the law. The Act, Section 141. These individuals are in charge of and responsible for the company’s business operations as a result of their position as managing director or joint managing director.

The Court was concerned in this case with Directors who were not signatories to the cheques. In the case of Directors who are not cheque signatories or who are not Managing Directors or Joint Managing Directors, it is necessary to allege in the complaint filed under the company.

Recent developments and the general treatment of the provisional requirement

SMS Pharmaceuticals law has stood the test of time, and the courts are still largely governed by the same parameters. The significance of a specific pleading regarding the role of directors has been repeatedly emphasised as critical for prosecution.]The Hon’ble Supreme Court made some critical observations in its recent decision in Sunita Palita v. M/s Panchami Stone Quarry. While reiterating the importance of specific averments regarding the directors’ role in the pleadings, the Hon’ble Supreme Court has held that when the person has the term “Managing” affixed to their position as Director, they are in charge. of and responsible for the company. However, the Supreme Court clarified an exception where liability could not be assumed: persons in directorial roles in the field of Human Resources or Personnel cannot be assumed to be liable solely because of their designation when they may not even be associated with the issuance/dishonour of the cheque.

Analysis and Conclusions Drawn

The trend in the Hon’ble Supreme Court’s interpretation of Section 141 of the NI Act appears to be that specific pleading regarding the role of the officer and that the officer is in charge of and responsible for the day-to-day activities of the company is required. The courts do not appear to be inclined to prosecute anyone who holds the position of director in a drawee company. There is a growing emphasis, as evidenced by the recent decision in Sunita Palita v. M/s Panchami Stone Quarry, on the importance of courts not simply imposing liability based on a person’s designation in the drawee company, but rather examining the nature of their role, which would demonstrate some knowledge or expertise. Awareness of the company’s day-to-day operations, resulting in vicarious liability. Recent decisions in general show a trend of not including non-executive directors in the provision’s definition of 1the Ministry of Finance issued a recommendation in 2020 to decriminalise minor economic offences, including Sections 138 and 143(1) of the NI Act. While the proposal has yet to be implemented, it is widely regarded as a welcome and progressive step given the large number of such cases clogging the judicial system.

Author: Kavya, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

References

• The Negotiable Instruments Act of 1881
• https://www.scconline.com/blog/post/2021/10/18/explained-section-138-read-with-section-141-of-the-ni-act-vicarious-liability-of-directors-of-a-company-for-dishonour-of-cheques/
• Case Ashutosh Ashok Parasrampuriya v. Gharrkul Industries Pvt. Ltd., 2021 SCC OnLine SC 915, decided on 08.10.2021
• Case M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89
• https://corporate.cyrilamarchandblogs.com/2022/10/directors-vicarious-liability-under-current-legal-regime-of-negotiable-instruments-act-an-analysis-of-evolving-judicial-precedents/
• Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249.
• (20  N.K. Wahi v. Shekhar Singh, (2007) 9 SCC 481.
• DCM Financial Services Ltd. v. J.N. Sareen, (2008) 8 SCC 1.
• Sabitha Ramamurthy v. R.B.S. Channabasavaradhya, (2006) 10 SCC 581.

10) 10 SCC 373; see also Anil Hada v. Indian Acrylic Ltd, (2000) 1 SCC 1.

11.Standard Chartered Bank v. State of Maharashtra, (2016) 6 SCC 62.

12.Supreme Court judgment dated August 1, 2022 in SLP (Crl.) No. 10396 of 2019.