Court: all directors can’t be prosecuted for cheque bounce

NEW DELHI: All directors of a company cannot be prosecuted for an offence in cheque bouncing cases under the Negotiable Instruments Act, the Supreme Court held on Monday.

A Bench comprising Justices P. Sathasivam and H.L. Dattu said: “Every person connected with the company shall not fall within the ambit of the Section 141 of the Act. Only those who were in charge of and responsible for the conduct of the business of the company at the time of commission of an offence will be liable for criminal action. If a director was not in charge of and was not responsible for the conduct of business at the relevant time, [he] will not be liable for a criminal offence under the provisions.”

The Bench said: “The liability arises from [one] being in charge of and responsible for the conduct of the business at the relevant time when the offence was committed, and not on the basis of [one] merely holding a designation or office in a company. Section 141 is a penal provision creating vicarious liability, which, as per settled law, must be strictly construed.

“It is therefore not sufficient to make a bald, cursory statement in a complaint that the director (arrayed as an accused) is in charge of and responsible for the conduct of the business of the company without anything as to the role of the director.”

Justice Sathasivam, writing the judgment, said: “A company may have a number of directors, and to make any or all directors accused in a complaint merely on the basis of a statement that they are in charge of and responsible for the conduct of the business without anything more [on their role] is not a sufficient fulfilment of the requirements under Section 141.”

The Bench said: “Vicarious liability on the part of a person must be pleaded and proved, and not inferred. If the accused is the managing director or joint managing director, then it is not necessary to make a specific averment in the complaint, and by virtue of their position, they are liable to be proceeded against.

“If the accused is a director or an officer who signed cheques on behalf of the company, then also it is not necessary to make a specific averment in complaint.”

The Bench said: “The person sought to be made liable should be in charge of and responsible for the conduct of the business at the relevant time. This has to be averred as a fact as there is no deemed liability of a director in such cases.”

In the instant case, the National Small Industries Corporation challenged a Delhi High Court judgment, in a batch of cases, quashing the summons issued to the directors of various companies in cheque bouncing cases. The Bench dismissed the appeals agreeing with the High Court’s findings.