A Single Bench of the Hon’ble Delhi High Court in Sunita Palta and Others v/s M/s Kit Marketing Pvt. Ltd. has on March 03, 2020, ruled that Non-Executive Directors of a company cannot be held liable for dishonor of a cheque under Section 138 of the Negotiable Instruments Act, 1881 (“N.I Act”) without any specific allegations levelled against them.
Facts and Petitioner’s Arguments:
The present proceedings were instituted under Section 482 of the Cr.P.C. challenging an order passed by the Metropolitan Magistrate whereby the present petitioners had been summoned for the alleged offence under Section 138 of N.I Act.
The Respondent, a private company engaged in the business of plywood, were regular purchasers of goods from the Complainant on a credit basis. The Respondent Company had issued four cheques which were returned unpaid to the Complainant with the remarks “funds insufficient”. Hence, a complaint was filed against the accused company and all its directors including the Petitioners.
The Petitioners, contended in defence that they were independent non-executive additional directors of the Company and were never involved in the day to day affairs of the Company at any point of time. Hence, the summons issued against them may be quashed.
Court’s ruling:
The Hon’ble Delhi High Court relied upon the dictum in the decision of the Hon’ble Supreme Court of India in S.M.S. Pharmaceuticals Ltd. v/s Neeta Bhalla1 , pertaining to the vicarious liability of a person in terms of Sec 141 of the N.I Act. It was held that under this section the keywords “Every Person” which shall meant only the persons who are in charge of and are responsible to the company for the conduct of the business of the company. The Supreme Court had even held that for this reason, every person connected with the company shall not fall within the ambit of the provision of Section 141 of N.I Act.
This Court further relied upon another decision of the Hon’ble Supreme Court of India in K.K. Ahuja v/s V.K. Vora2 , where the vicarious liability of the officers of the company were summarized and the Court held that a Managing Director or Joint Managing Director of the company, a Director who has signed a cheque on behalf of the company, a Director, Secretary or Manager (as defined under Section 2(24) of the Companies Act) or a person referred to in clauses (e) and (f) of Section 5 of Companies Act, only shall be held liable under Section 141 of the N.I Act. The Supreme Court had further also ruled that other officers of a company cannot be made liable under sub-section (1) of Section 141.
1 (2005) 8 SCC 89
2(2009) 10 SCC 48
The Delhi High Court, further also relied on the dictum laid down by the Supreme Court in Pooja Ravinder Devidasani v. State of Maharashtra and Anr. , where the Supreme Court had decided the issue in relation to vicarious liability of a Non-executive Director as follows:-
“17...Non-executive Director is no doubt a custodian of the governance of the Company but does not involve in the day-to-day affairs of the running of its business and only monitors the executive activity. To fasten vicarious liability under Section 141 of the Act on a person, at the material time that person shall have been at the helm of affairs of the Company, one who actively looks after the day-to-day activities of the Company and particularly responsible for the conduct of its business. Simply because a person is a Director of a Company, does not make him liable under the N.I. Act. Every person connected with the Company will not fall into the ambit of the provision. Time and again, it has been asserted by this Court that only those persons who were in charge of and responsible for the conduct of the business of the Company at the time of the commission of an offence will be liable for criminal action. A Director, who was not in charge of and was not responsible for the conduct of the business of the Company at the relevant time, will not be liable for an offence under Section 141 of the N.I. Act.”
3 2014(14) SCALE
Finally, the Court also referred to a recent dictum of the Supreme Court in Chintalapati Srinivasa Raju v/s Securities and Exchange Board of India 4, where the Supreme Court held that the Non-Executive Directors are the persons who are not involved into the day to day affairs of the company and are not in charge and not responsible for the conduct of the business of the company.
Accordingly, the Delhi High Court held that the petitioners were neither the Managing Directors nor the Authorized Signatories of the accused company. The Court also observed that in the complaint filed by the complainant, except for a general allegation stating that the petitioners were responsible for control and management and day to day affairs of the accused company, no specific role had been attributed to the petitioners to fasten the criminal liability under the N.I Act. It therefore took the view that, a mere generalized averment without any specific details as to how and in what manner, the petitioners were responsible for the control and management of affairs of the company, was not enough. Finally, the Court also cited the Supreme Court’s ruling in Pepsi Foods v. Special Judicial Magistrate and Ors5. Stating that summoning an accused person cannot be resorted to as a matter of course and the order must show due application of mind.
Accordingly, the Court allowed the petition and quashed the summons issued against the present Petitioners for the alleged offences under Section 138 of the N.I Act.
4 (2018) 7 SCC 443
5 (1998) 5 SCC 749
Conclusion
This judgement recognises the fact that executive directors are liable for day-to-day management of the business of the company including liability under the N.I Act towards cheques issued by the company. Whilst, it will also generate greater confidence amongst individuals who desire to accept directorships of a non-executive nature due to being insulated against business liabilities. Nevertheless, sight should not be lost of the fact that non-executive directors remain answerable for governance of the company.