INTRODUCTIONSection 138 of the Negotiable Instruments Act, 1881 (‘the Act’) is one of the few provisions which is equally well known both by lawmen and laymen. The section imposes a criminal liability in case of a dishonoured or bounced cheque. In cases where the defendant is a company, there is a tendency on the part of the plaintiff to implicate all the Directors of the company, irrespective of whether they are professional Directors / Independent / Non-Executive Directors. There have been numerous representations from chambers of commerce and professional / trade bodies to the Government that this section should be amended to exempt Independent and Non-Executive Directors who are not connected with the day-to-day management of the company. However, there has been no action on this front. Interestingly, the Act was amended in 2002 to provide that the provisions of section 138 would not apply to a Nominee Director appointed by the Central / State Government or by a financial corporation owned / controlled by the Central / State Government. One wonders why a similar exemption was not provided to other professional Directors.
SECTION 138 OF THE ACT
Let us pause for a moment and examine the impugned section. Section 138 provides that if any cheque is drawn by a person to another person and if the cheque is dishonoured because of insufficient funds in the drawer’s bank account, then such person shall be deemed to have committed an offence. The penalty for this offence is imprisonment for a term which may extend to two years and / or with a fine which may extend to twice the amount of the cheque. Earlier, the maximum imprisonment was for one year; however, it was extended to two years by the Amendment Act of 2002.
In order to invoke the provisions of section 138, the following three steps are necessary:
(i) the cheque must be presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;
(ii) once the payee is informed by the bank about the dishonour of the cheque, he (the payee) must, within 30 days of such information, make a demand for the payment of the amount of the cheque by giving a notice in writing to the drawer of the cheque; and
(iii) the drawer of such cheque fails to make the payment of the said amount of money to the payee of the cheque within 30 days of the receipt of the said notice. Earlier, the time given to the drawer for responding to the notice was 15 days; but this was extended to 30 days by the Amendment Act of 2002.
A fourth step is specified under section 142 which provides that a complaint must be made to the Court within one month of the date from which the cause of action arises (i.e., the notice period). A rebuttable presumption is drawn by the Act that the holder of the cheque received it for the discharge, in whole or in part, of any debt or other liability.
VICARIOUS LIABILITY OF PERSONS IN CHARGE
Section 141 provides that in case the drawer of the cheque is a company then every person who at the time the offence was committed was in charge of and was responsible for the company’s conduct of business, shall be deemed to be guilty of the offence and liable to be proceeded against and punished. However, if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence, then he would not be liable to the punishment. The section also exempts Government Nominee Directors. Although the section speaks about a company, the explanation to the section extends the same position to a firm, any other body corporate or association of individuals.
In almost all cases of cheque-bouncing involving companies, firms, etc., the complainant files a case and implicates all the Directors of the company, including the Independent and Non-Executive Directors. Thus, professionals such as Chartered Accountants, lawyers, etc., who are only involved in broader policy and strategic decisions of the company, or with the Audit Committee or Shareholders’ Grievance Committee and are in no way connected with the day-to-day management of the company, are also made a party to the criminal proceedings.
SUPREME COURT JUDGMENTS
The Supreme Court has passed a landmark decision in the case of S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla (2005) 8 SCC 89. This decision is by a three-Member Larger Bench in response to a reference application made to it by a two-Member Bench of the Supreme Court. Three very important issues were placed before the Court for its consideration:
(a) Whether while making a complaint under the Negotiable Instruments Act must the complaint specifically state that the persons accused were in charge of, or responsible for, the conduct of the business of the company?
(b) Whether merely because a person is a Director of a company would he be deemed to be in charge of and responsible to the company for the conduct of its business and, therefore, deemed to be guilty of the offence unless he proves to the contrary?
(c) Would the signatory of the cheque and / or the Managing Directors / Joint Managing Director always be responsible to the company for the conduct of its business and hence could be proceeded against?
The Court held that since the provision fastens criminal liability, the conditions have to be strictly complied with. The conditions are intended to ensure that a person who is sought to be made vicariously liable for an offence of which the principal accused is the company, had a role to play in relation to the incriminating act and further that such a person should know what is attributed to him to make him liable. Persons who had nothing to do with the matter need not be roped in. A complaint must contain material to enable the Magistrate to make up his mind for issuing the process. A ground should be made out in the complaint for proceeding against the respondent. At the time of issuing of the process the Magistrate is required to see only the allegations in the complaint, and where the allegations in the complaint or the chargesheet do not constitute an offence against a person, the complaint is liable to be dismissed.
The Supreme Court observed that there is nothing in the Act to suggest that simply by being a Director in a company, one is supposed to discharge particular functions on its behalf. It may happen that a Director may not know anything about the day-to-day functioning of the company. He may only attend Board meetings, decide policy matters and guide the course of business of a company. The role of a Director in a company is a question of fact depending on the peculiar facts in each case. There is no universal rule that a Director of a company is in charge of its everyday affairs.
A very fitting comment made by the Court was that ‘…there is no magic as such in a particular word, be it Director, Manager or Secretary.’ What is relevant is the roles assigned to the officers in a company and not the mere use of a particular designation of an officer. Thus, merely mentioning all Directors in a compliant without anything more may not be enough. The accused should be in charge of and responsible to the company for the conduct of its business and a person cannot be subjected to liability of criminal prosecution without it being averred in the complaint that he satisfies those requirements. It is not that all and sundry connected with a company are made liable u/s 141. A person who is in charge of and responsible for the conduct of the business of a company would naturally know why the cheque in question was issued and why it was dishonoured. Specific allegations in the complaint would also serve the purpose that the person sought to be made liable would know what is the case that is alleged against him. This will enable him to meet the case at the trial.
When it came to the position of a Managing Director or a Joint Managing Director, the Court took a different view since these are persons in charge of a company and are responsible for the conduct of its business. In respect of such persons, the onus is on them to prove their innocence, i.e., when the offence was committed they had no knowledge of the offence or that they exercised all due diligence to prevent the commission of the offence.
The Supreme Court laid down another important principle, that the liability arises from being in charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company. Conversely, a person not holding any office or designation in a company may also be liable if he satisfies the main requirement of being in charge of and responsible for the conduct of the business of a company at the relevant time. It once again reiterates that liability depends on the role he plays in the affairs of a company and not on the designation or status. If being a Director or Manager or Secretary was enough to cast criminal liability, the section would have said so. Instead of ‘every person’ the section would have said ‘every Director, Manager or Secretary in a Company is liable’ …etc. The Court held that the Legislature was aware that a case of criminal liability has serious consequences for the accused. Therefore, only persons who can be said to be connected with the commission of a crime at the relevant time have been subjected to action. Thus, even a non-Director can be liable u/s 141.
Ultimately, the Supreme Court answered the queries posed to it as under:
(a) It is necessary to specifically aver in a complaint u/s 141 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. This averment is an essential requirement of section 141 and has to be made in the complaint. Without this averment being made in a complaint, the requirements of section 141 cannot be said to be satisfied.
(b) Merely being a Director of a company is not sufficient to make the person liable u/s 141. A Director in a company cannot be deemed to be in charge of and responsible to the company for the conduct of its business. The requirement of section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases.
(c) The Managing Director or Joint Managing Director would be in charge of the company and responsible to the company for the conduct of its business. Holders of such positions in a company become liable u/s 141. Merely by virtue of being a Managing Director or Joint Managing Director these persons are in charge of and responsible for the conduct of the business of the company. Therefore, they get covered u/s 141. So far as the signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the dishonour and will be covered u/s 141.
This very vital decision has been followed by the Supreme Court in cases such as S.K. Alagh vs. State of Uttar Pradesh, 2008 (5) SCC 662; Maharashtra State Electricity Distribution Co. Ltd. vs. Datar Switchgear Ltd., 2010 (10) SCC 479; GHCL Employees Stock Option Trust vs. India Infoline Limited, 2013 (4) SCC 505, etc.
RECENT SUPREME COURT DECISION
This issue was again examined recently by the Supreme Court in the case of Ashutosh Ashok Parasrampuriya vs. M/s Gharrkul Industries Pvt. Ltd., Cr. A, No. 1206/2021, order dated 27th September, 2021. In this case, the respondent filed a complaint u/s 138 with specific averments in the complaint that all the Directors (including those who were not signatories to the bounced cheque) were involved in the day-to-day management / business affairs of the company whose cheque had bounced.
Accordingly, the trial court issued summonses against all the Directors. The Directors contended that they were only Non-Executive Directors and, hence, no complaint could lie against them. Against this argument, the respondent proved that the Form filed with the Ministry of Corporate Affairs showed the Directors as Executive Directors. Hence, the matter was a fit case for a trial which needed to be decided by the Court and the entire process needed to be gone through without quashing the summons at source.
The Court held that the settled principle was that for Directors who were not signatories / not MDs, it was clear that it was necessary to aver in the complaint filed u/s 138 that at the relevant time when the offence was committed the Directors were in charge and were actually responsible for the conduct of the business of the company.
The Court further held that this averment assumed more importance because it was the basic and essential averment which persuaded the Magistrate to issue a process against the Director. If this basic averment was missing, the Magistrate was legally justified in not issuing a process. In the case on hand, the Court observed that the complainant had specifically averred that all the Directors were in charge. Further, the MCA Forms also demonstrated the same. Hence, this was an issue on which a trial is appropriate and the complaint cannot be quashed at source.
EPILOGUE
Although this is a judgment under the Negotiable Instruments Act, it has several far-reaching consequences and its ratio descendi can be applied under various other statutes which affix a vicarious criminal liability on Directors in respect of offences committed by a company.
One can only hope that taking a cue from this epoch-making Supreme Court judgment, the Government would amend the Negotiable Instruments Act to exempt Independent and Non-Executive Directors. In fact, such an amendment is also welcome in other similar statutes prescribing a criminal liability on the Directors.
