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

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.

[Image Sources : Shutterstock]

Section 141

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.

Leave a Reply

Categories

Archives

  • February 2024
  • January 2024
  • December 2023
  • November 2023
  • October 2023
  • September 2023
  • August 2023
  • July 2023
  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • September 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010