In the judgment, K. Srikanth Singh vs. North East Securities Ltd., the Supreme Court has held that the vicarious liability of directors must be pleaded and proved in case of offense committed by the company under section 138 of the Negotiable Instrument Act, 1881 as the same cannot be a subject matter of inference.
A director, merely because he participated in the negotiation of a contract for obtaining financial assistance for his company, cannot be held vicariously liable under section 141 of the Act unless it is shown and pleaded that he was, in fact, in charge of the day to day affairs of the accused company Though the complete judgment is not available with me right now, the brief details of the case are given below. Issue: –
The issue before the Supreme Court was whether the vicarious liability of a director of a company can be inferred in the case of an offense committed under section 138 of the Negotiable Instrument Act, 1881, merely because that director participated in the negotiation of a contract on behalf of the company.
Decision & Findings: –
The Supreme Court referred to several of its earlier decisions including the case of SMS Pharmaceuticals Ltd. v. Neeta Bhalla, [2005] 8 SCC 89 where it was categorically held that the liability for directors under section 141 of the Act arises from being in-charge of and responsible for the conduct of the business of the company at the relevant time when the offense was committed and not based on merely holding a designation or office in a company.
The Court observed that section 141 uses the term “every director, manager or secretary of the company….” instead of using the term “every person” and therefore, only those persons who can be said to be connected with the commission of the offense at the relevant time could be subjected to criminal action under the Act.
In the facts of the instant case, the Supreme Court noted that the Respondent-Company had not expressly pleaded that the Appellant was, in fact, in charge of the accused company’s day-to-day business, although the same was incumbent upon the complainant (Respondent-Company) given the earlier decisions of the Supreme Court.
The Supreme Court held that negotiation for obtaining financial assistance on behalf of the company by its directors is not an ingredient to constitute an offense under section 138 of the Act. A mere inference of vicarious liability would not be sufficient to establish the offense; the same must be pleaded and proved by the complainant. Accordingly, the Supreme Court set aside the High Court’s order and quashed the criminal proceedings against the Appellant.