Supreme Court clarifies liability of company directors in cheque dishonor cases: Pawan Kumar Goel vs. State of U.P. (2022) INSC 1005 (17 November 2022)

Supreme Court Clarifies Liability of Company Directors in Cheque Dishonor Cases

Date of the Judgment: 17 November 2022
Citation: (2022) INSC 1005
Judges: Krishna Murari, J. and Bela M. Trivedi, J.
Can a company director be held liable for a cheque bounce if the company isn’t named in the complaint? The Supreme Court of India addressed this crucial question in a recent judgment, clarifying the responsibilities of company directors in cases of cheque dishonor under Section 138 of the Negotiable Instruments Act, 1881. The Court emphasized that for a director to be held liable, the company must also be named as an accused, and specific averments must be made in the complaint stating that the director was in charge of and responsible for the company’s business.

Case Background

Pawan Kumar Goel, the appellant, runs a business selling machinery and spare parts under the name ‘M/s Pawan Hardware Store.’ Ravi Organics Limited, the second respondent, is a company that manufactures and sells chemicals. They had a business relationship, with Ravi Organics having a running account with Pawan Hardware Store.

On 20 November 2012, Devendra Kumar Garg, a director of Ravi Organics Limited, issued a cheque for Rs. 10 lakhs to Pawan Kumar Goel to settle outstanding payments. The cheque was drawn on Union Bank of India, Muzaffarnagar. When the cheque was presented on 24 December 2012, it was dishonored with the remark “exceeds arrangement.”

Pawan Kumar Goel sent a legal notice to Devendra Kumar Garg on 1 January 2013, but received no response. Consequently, Pawan Kumar Goel filed a criminal complaint against Devendra Kumar Garg under Section 138 of the Negotiable Instruments Act, 1881.

Timeline

Date	Event
20 November 2012	Cheque of Rs. 10 lakhs issued by Ravi Organics Limited to Pawan Hardware Store.
24 December 2012	Cheque dishonored by the bank.
1 January 2013	Legal notice sent by Pawan Kumar Goel to Devendra Kumar Garg.
18 March 2013	Additional Chief Judicial Magistrate summons Devendra Kumar Garg.
2 December 2013	Additional Sessions Judge dismisses Devendra Kumar Garg’s revision petition.
19 November 2019	High Court quashes the summoning order and proceedings.
17 November 2022	Supreme Court dismisses the appeals.

Course of Proceedings

The Additional Chief Judicial Magistrate-II, Muzaffarnagar, took cognizance of the complaint and summoned Devendra Kumar Garg for trial on 18 March 2013. The Additional Sessions Judge, Muzaffarnagar, dismissed the revision petition filed by Devendra Kumar Garg on 2 December 2013.

Devendra Kumar Garg then filed a Criminal Miscellaneous Writ Petition before the High Court of Judicature at Allahabad, seeking to quash the summoning order and the order of the Sessions Court. The High Court allowed the writ petition on 19 November 2019, quashing the entire proceedings, relying on the Supreme Court’s judgments in Aneeta Hada vs. Godfather Travels & Tours Pvt. Ltd. [(2012) 5 SCC 661] and S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla & Another [(2005) 8 SCC 89].

Legal Framework

The case revolves around Section 138 and Section 141 of the Negotiable Instruments Act, 1881.

Section 138 of the Negotiable Instruments Act, 1881, deals with the dishonor of a cheque for insufficient funds. It states:

“Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence…”

Section 141 of the Negotiable Instruments Act, 1881, extends this liability to companies and their directors, stating:

“(1) If the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly…”

This section also clarifies that a director can be held liable if the offense was committed with their consent, connivance, or negligence.

Arguments

Appellant’s Arguments:

The appellant argued that the cheque was issued by the respondent towards payment of outstanding dues, and its dishonor makes the respondent guilty under the Negotiable Instruments Act, 1881.
The appellant contended that the High Court erred in quashing the summoning order, as the respondent was clearly identified as a director of Ravi Organics Limited.
The appellant submitted that a typographical error led to the company not being named as an accused, but all necessary factual allegations were made in the complaint.
The appellant argued that there is no legal bar to amending a complaint or adding an accused after the complaint is filed.
The appellant relied on the decisions of the Supreme Court in N. Harihara Krishnan vs. J. Thomas [(2018) 13 SCC 663], Bilakchand Gyanchand Co. vs. A. Chinnaswami [(1999) 5 SCC 693], and Rajneesh Aggarwal vs. Amit. J. Bhalla [(2001) 1 SCC 631].

Respondent’s Arguments:

The respondent argued that the summoning order was erroneous because the company was not named as an accused in the complaint.
The respondent contended that it is mandatory to include averments in the complaint stating that the accused was in charge of and responsible for the company’s business when the offense was committed, as required by Section 141 of the Negotiable Instruments Act, 1881.
The respondent argued that the defect of not impleading the company or making specific averments is not curable.
The respondent relied on the decisions of the Supreme Court in Aneeta Hada (Supra), SMS Pharmaceuticals Ltd. (Supra), and Himanshu vs. B. Shivamurthy & Another [(2019) 3 SCC 797].

Submissions Table

Main Submission	Sub-Submissions (Appellant)	Sub-Submissions (Respondent)
Liability under Section 138 of NI Act	✓ Dishonored cheque makes respondent guilty. ✓ Respondent was rightly summoned by the trial court.	✓ Summoning order is erroneous without the company as an accused. ✓ Complaint must contain averments that the accused was in charge of and responsible for the company’s business.
High Court’s Interference	✓ High Court erred in quashing the summoning order and proceedings. ✓ Respondent was described as a director.	✓ Complaint is not maintainable without the company being an accused. ✓ Defect in the complaint is not curable.
Amendment of the Complaint	✓ No provision prohibits amendment or impleadment of additional accused.	✓ Reliance on previous judgments of the Supreme Court.

Issues Framed by the Supreme Court

Whether a director of a company would be liable for prosecution under Section 138 of the Negotiable Instruments Act, 1881, without the company being arraigned as an accused.
Whether a complaint under Section 138 of the Negotiable Instruments Act, 1881, would be liable to be proceeded against the director of the company without there being any averments in the complaint that the director arrayed as an accused was in charge of and responsible for the conduct and business of the company.

Treatment of the Issue by the Court

Issue	Court’s Decision	Reason
Liability of Director without Company as Accused	No	The Court held that for a director to be prosecuted under Section 138 of the NI Act, the company must also be named as an accused. This is based on the principle of vicarious liability where the company is the primary offender.
Complaint against Director without Specific Averments	No	The Court ruled that a complaint against a director must specifically state that the director was in charge of and responsible for the company’s business at the time the offense was committed. This is a mandatory requirement under Section 141 of the NI Act.

Authorities

Cases Relied Upon by the Court:

K.K. Ahuja v. V.K. Vora & Anr. [(2009) 10 SCC 48] – Supreme Court of India: Explained the vicarious liability of persons under Section 141 of the NI Act.
S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr. [(2005) 8 SCC 89] – Supreme Court of India: Clarified that only those persons who were in charge of and responsible for the conduct of business of the company at the time of commission of an offence, will be liable for criminal action.
Himanshu v. B. Shivamurthy & Anr. [(2019) 3 SCC 797] – Supreme Court of India: Held that a complaint against the director without arraigning the company as an accused is not maintainable.
Aneeta Hada v. Godfather Travels & Tours (P) Ltd. [(2012) 5 SCC 661] – Supreme Court of India: Ruled that arraigning a company as an accused is imperative for maintaining a prosecution under Section 141 of the NI Act.
N. Harihara Krishnan v. J. Thomas [(2018) 13 SCC 663] – Supreme Court of India: Highlighted that a complaint must contain all necessary factual allegations constituting each of the ingredients of the offense under Section 138.
State of Haryana v. Brij Lal Mittal & Ors. [(1998) 5 SCC 343] – Supreme Court of India: Held that vicarious liability of a person for being prosecuted for an offence committed under the Act by a company arises if at the material time he was in charge of and was also responsible to the company for the conduct of its business.
K.P.G. Nair v. Jindal Menthol India Ltd. [(2001) 10 SCC 218] – Supreme Court of India: Ruled that the allegations in the complaint did not make out a case that at the time of commission of the offence, the appellant was in charge of and was responsible to the company for the conduct of its business.

Legal Provisions Considered by the Court:

Section 138 of the Negotiable Instruments Act, 1881: Deals with the dishonor of a cheque for insufficient funds.
Section 141 of the Negotiable Instruments Act, 1881: Extends liability to companies and their directors for offenses under Section 138.

Authority Analysis Table

Authority	Court	How Considered
K.K. Ahuja v. V.K. Vora & Anr. [(2009) 10 SCC 48]	Supreme Court of India	Explained the vicarious liability of persons under Section 141 of the NI Act.
S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr. [(2005) 8 SCC 89]	Supreme Court of India	Clarified that only those persons who were in charge of and responsible for the conduct of business of the company at the time of commission of an offence, will be liable for criminal action.
Himanshu v. B. Shivamurthy & Anr. [(2019) 3 SCC 797]	Supreme Court of India	Held that a complaint against the director without arraigning the company as an accused is not maintainable.
Aneeta Hada v. Godfather Travels & Tours (P) Ltd. [(2012) 5 SCC 661]	Supreme Court of India	Ruled that arraigning a company as an accused is imperative for maintaining a prosecution under Section 141 of the NI Act.
N. Harihara Krishnan v. J. Thomas [(2018) 13 SCC 663]	Supreme Court of India	Highlighted that a complaint must contain all necessary factual allegations constituting each of the ingredients of the offense under Section 138.
State of Haryana v. Brij Lal Mittal & Ors. [(1998) 5 SCC 343]	Supreme Court of India	Held that vicarious liability of a person for being prosecuted for an offence committed under the Act by a company arises if at the material time he was in charge of and was also responsible to the company for the conduct of its business.
K.P.G. Nair v. Jindal Menthol India Ltd. [(2001) 10 SCC 218]	Supreme Court of India	Ruled that the allegations in the complaint did not make out a case that at the time of commission of the offence, the appellant was in charge of and was responsible to the company for the conduct of its business.

Judgment

How each submission made by the Parties was treated by the Court?

Submission	Party	Court’s Treatment
The cheque was issued towards payment of outstanding dues and its dishonor makes the respondent guilty.	Appellant	Not accepted as the company was not arrayed as an accused and there was no specific averment of the director being in charge of the company.
The High Court erred in quashing the summoning order and the proceedings.	Appellant	Rejected. The High Court was correct in quashing the proceedings because the company was not arrayed as an accused and there was no specific averment of the director being in charge of the company.
There is no legal bar to amending a complaint or adding an accused after the complaint is filed.	Appellant	Rejected. The court held that once the limitation period for taking cognizance of the offense under Section 142 of the NI Act has expired, an additional accused cannot be impleaded.
The summoning order is erroneous as the company was not arrayed as an accused.	Respondent	Accepted. The Court upheld that the company must be named as an accused for the proceedings to be valid.
The complaint must contain averments that the accused was in charge of and responsible for the company’s business.	Respondent	Accepted. The Court held that this is an essential requirement under Section 141 of the NI Act.
The defect in the complaint is not curable.	Respondent	Accepted. The Court stated that the defect of not impleading the company or making specific averments is not curable.

How each authority was viewed by the Court?

The Court relied heavily on the precedent set by Aneeta Hada vs. Godfather Travels & Tours Pvt. Ltd. [(2012) 5 SCC 661]*, emphasizing that the company must be arraigned as an accused for proceedings against a director to be valid. The Court also followed S.M.S Pharmaceuticals Ltd. vs. Neeta Bhalla & Another [(2005) 8 SCC 89]*, which clarified that the director must be in charge of and responsible for the conduct of the business of the company at the time of the offense.

The Court distinguished the facts of the case from N. Harihara Krishnan vs. J. Thomas [(2018) 13 SCC 663]*, where the court held that the complaint must contain all necessary factual allegations constituting each of the ingredients of the offense under Section 138. The court also relied on Himanshu vs. B. Shivamurthy & Another [(2019) 3 SCC 797]* where it was held that the complaint against the director without arraigning the company as an accused is not maintainable.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the strict interpretation of Section 141 of the Negotiable Instruments Act, 1881. The Court emphasized that vicarious liability under this section requires the company to be the primary accused. The Court also stressed the need for specific averments in the complaint, ensuring that directors are not held liable merely by virtue of their position but only when they are actively involved in the company’s business.

The Court’s reasoning was also influenced by previous judgments, particularly Aneeta Hada (Supra) and S.M.S Pharmaceuticals Ltd. (Supra), which clearly laid out the requirements for holding a director liable in cheque dishonor cases.

Sentiment	Percentage
Strict Interpretation of Law	40%
Adherence to Precedent	30%
Protection of Directors from Vicarious Liability	20%
Procedural Compliance	10%

Fact:Law Ratio

Category	Percentage
Fact	30%
Law	70%

Logical Reasoning

Issue: Is the Director liable under Section 138 of NI Act without the Company as an accused?

↓

Does Section 141 require the Company to be an accused?

↓

Yes, Section 141 stipulates that the Company must be an accused for vicarious liability.

↓

Was the Company arrayed as an accused in the complaint?

↓

No, the Company was not arrayed as an accused in the complaint.

↓

Therefore, the Director is not liable under Section 138 of NI Act.

↓

Issue: Is the Director liable without specific averments in the complaint?

↓

Does Section 141 require specific averments that the Director was in charge of the company?

↓

Yes, Section 141 requires specific averments about the director’s role.

↓

Were there specific averments made in the complaint?

↓

No, there were no specific averments in the complaint.

↓

Therefore, the Director is not liable under Section 138 of NI Act.

The Court considered the argument that the complaint could be amended to include the company as an accused, but rejected it based on the principle that once the limitation period for taking cognizance of the offense under Section 142 of the NI Act has expired, an additional accused cannot be impleaded.

The Court reasoned that the complaint lacked the necessary averments to establish the director’s liability under Section 141 of the Negotiable Instruments Act, 1881. The Court also emphasized the need for strict compliance with the requirements of Section 141, which is a departure from the general rule against vicarious liability in criminal law.

The court quoted from the judgment: “Applying the doctrine of strict construction, we are of the considered opinion that commission of offence by the company is an express condition precedent to attract the vicarious liability of others.”

The court quoted from the judgment: “Thus, the words “as well as the company” appearing in the Section make it absolutely unmistakably clear that when the company can be prosecuted, then only the persons mentioned in the other categories could be vicariously liable for the offence subject to the averments in the petition and proof thereof.”

The court quoted from the judgment: “In view of our aforesaid analysis, we arrive at the irresistible conclusion that for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative.”

Key Takeaways

Company as an Accused: For a director to be prosecuted under Section 138 of the Negotiable Instruments Act, 1881, the company must also be named as an accused.
Specific Averments: The complaint must specifically state that the director was in charge of and responsible for the company’s business at the time the offense was committed.
No Amendment After Limitation: Once the limitation period for taking cognizance of the offense has expired, an additional accused cannot be impleaded.
Vicarious Liability: The principle of vicarious liability under Section 141 of the NI Act requires the company to be the primary offender.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that for maintaining a prosecution under Section 141 of the Negotiable Instruments Act, 1881, arraigning the company as an accused is imperative. The other categories of offenders can only be brought in on the basis of vicarious liability. This case reaffirms the position of law established in Aneeta Hada (Supra) and S.M.S Pharmaceuticals Ltd. (Supra). It also clarifies that a director cannot be held liable under Section 138 of the Negotiable Instruments Act, 1881, without the company being named as an accused and without specific averments in the complaint.

Conclusion

The Supreme Court dismissed the appeals, upholding the High Court’s decision to quash the summoning order and proceedings against the director. The Court reiterated the importance of strict compliance with Section 141 of the Negotiable Instruments Act, 1881, emphasizing that a company must be named as an accused and specific averments must be made in the complaint to hold a director liable for cheque dishonor.

FAQ

Q: Can a company director be held liable for a bounced cheque if the company is not named in the complaint?

A: No, according to the Supreme Court, the company must also be named as an accused in the complaint for a director to be held liable under Section 138 of the Negotiable Instruments Act, 1881.

Q: What specific details must be included in a complaint against a company director for a bounced cheque?

A: The complaint must specifically state that the director was in charge of and responsible for the company’s business at the time the offense was committed.

Q: Can a complaint be amended to include the company as an accused after it has been filed?

A: No, the Supreme Court has clarified that once the limitation period for taking cognizance of the offense has expired, an additional accused cannot be impleaded.

Q: What does vicarious liability mean in the context of cheque bounce cases involving companies?

A: Vicarious liability means that the company is the primary offender, and the director’s liability arises because of their role in the company’s management. For this to apply, the company must be named as an accused.

Q: What happens if a director signs a cheque on behalf of the company and it bounces?

A: The director can be held liable only if the company is also named as an accused and the complaint contains specific averments about the director’s role in the company’s business.

Source: Pawan Kumar Goel vs. State of U.P.