In the intricate tapestry of corporate law, where the threads of individual responsibility and corporate liability intertwine, the Supreme Court of India has once again provided a clarifying stitch. The recent judgment in the present case marks a significant development in the interpretation of Section 141 of the Negotiable Instruments Act of 1881. This case, arising from the quashing of criminal proceedings against a company director, delves into vicarious liability in cases of dishonored cheques. The Court's decision addresses a perennial issue in corporate criminal jurisprudence, to what extent can directors be held personally liable for the financial misdeeds of their companies?
The Supreme Court, after carefully considering the arguments presented by both parties and examining the relevant legal precedents, allowed the appeals reaffirmed the principle that merely being a director of a company does not automatically make one liable under Section 141 of the Negotiable Instruments Act. Relying on State of Haryana vs. Brij Lal Mittal and others (1998) 5 SCC 343, the Court emphasized that vicarious liability arises only if, at the material time, the person was in charge of and responsible for the conduct of the company's business. The Court relied on the judgment in S.M.S. Pharmaceuticals Ltd. vs Neeta Bhalla and another (2007) 9 SCC 481, which established that there must be clear and specific averments showing how a director was responsible for the company's conduct. The Court noted that simply reproducing the words of Section 141 without supporting facts is insufficient to establish vicarious liability. Further, the Court found that the only specific allegation against the appellant was that she, along with the second accused, had no intention to pay the dues owed to the complainant. The complaint stated that both were directors and promoters of the company, but crucially, it specified that only the second accused was the authorized signatory in charge of day-to-day affairs. The Court determined that these averments were not sufficient to invoke Section 141 against the appellant. It noted the absence of any specific allegation that the appellant was in charge of or responsible for the day-to-day affairs of the company. The Court also observed that it was not the complainant's case that the appellant was either the Managing Director or Joint Managing Director of the company.
The Court referred to a series of its own judgments, including Pooja Ravinder Devidasani vs. State of Maharashtra and another (2014) 16 SCC 1, Ashoke Mal Bafna vs. Upper India Steel Manufacturing and Engineering Company Limited (2005) 8 SCC 89, and Lalankumar Singh and others vs. State of Maharashtra 2022 SCC OnLine SC 1383. These cases consistently held that for making a director liable under Section 141, there must be specific averments showing how and in what manner the director was responsible for the conduct of the company's business. The Supreme Court found that the High Court had erred in dismissing the appellant's petition for quashing the criminal complaints. It held that given the lack of specific allegations against the appellant regarding her role in the company's affairs, the continuation of criminal proceedings against her was not justified.
Consequently, the Supreme Court allowed the appeals and set aside the judgment of the High Court, It further quashed and set aside the under Section 138 read with Section 142 of the Negotiable Instruments Act, but only insofar as they pertained to the appellant.
The Court's decision serves as a significant precedent, offering protection to directors who are not actively involved in a company's daily affairs from being automatically implicated in criminal proceedings related to the company's financial transactions. The judgment reiterated the position upheld in various judgments. Earlier, in National Small Industries Corporation Limited v. Harmeet Singh Paintal & Anr. (2010) 3 SCC 330, the Supreme Court reiterated the principle laid down in S.M.S. Pharmaceuticals Ltd., emphasizing that specific allegations against the directors regarding their role in the day-to-day management of the company are necessary for their liability under Section 141 of the Negotiable Instruments Act, 1881. In Ashoke Mal Bafna v. M/s. Upper India Steel Manufacturing And Engineering Company Ltd. the Supreme Court reiterated that to hold a director liable under Section 138, it must be shown that the director was in charge of and responsible for the conduct of the business of the company. Vague and general allegations without specific details are not sufficient.