Date of the Judgment: 08 October 2021
Citation: (2021) INSC 659
Judges: Justices Ajay Rastogi and Abhay S. Oka
Can a company director be held liable in a cheque bounce case if they weren’t directly involved in the day-to-day business? The Supreme Court addressed this crucial question, clarifying the extent of a director’s responsibility under Section 138 of the Negotiable Instruments Act, 1881. This judgment clarifies when a director can be held liable for a company’s bounced cheque. The judgment was authored by Justice Ajay Rastogi.
Case Background
The case involves a financial dispute between M/s. Gharrkul Industries Pvt. Ltd. (the complainant) and Ameya Paper Mills Pvt. Ltd. (the company) along with its directors. M/s. Gharrkul Industries, a spice production company, provided financial assistance to Ameya Paper Mills, a paper manufacturing company, through various cheques between November 23, 2007, and March 12, 2009, totaling ₹1,50,19,831. A Memorandum of Understanding (MOU) was signed, with the understanding that the amount would be repaid within a specified time.
On June 2, 2012, Ameya Paper Mills issued a cheque for ₹10,00,000 to M/s. Gharrkul Industries as part payment. However, this cheque was dishonored due to insufficient funds. Despite a legal notice being issued, the appellants refused to accept it. Consequently, M/s. Gharrkul Industries filed a complaint under Section 138 of the Negotiable Instruments Act, 1881 against the company and its directors.
Timeline
| Date | Event |
|---|---|
| November 23, 2007 – March 12, 2009 | M/s. Gharrkul Industries provides financial assistance of ₹1,50,19,831 to Ameya Paper Mills through various cheques. |
| August 18, 2010 | A letter was issued to the appellants demanding balance sheet of the Company. |
| June 2, 2012 | Ameya Paper Mills issues a cheque for ₹10,00,000 to M/s. Gharrkul Industries. |
| June 4, 2012 | M/s. Gharrkul Industries receives intimation of cheque dishonor. |
| June 21, 2012 | Appellants issued a letter admitting the outstanding balance of respondent no. 1-complainant as on 31st March, 2012 to the extent of Rs.1,49,94,831/-. |
| June 26, 2012 | Legal notice issued to the appellants demanding payment of the dishonored cheque amount. |
| November 10, 2012 | Trial Court issues summons to the appellants. |
| July 18, 2014 | High Court dismisses the petitions filed by the appellants under Section 482 CrPC. |
| October 17, 2014 | Supreme Court passes an interim order. |
| October 08, 2021 | Supreme Court dismisses the appeals. |
| November 22, 2021 | All parties shall record their attendance before the concerned trial court. |
Course of Proceedings
The trial court, upon taking cognizance of the complaint, issued summons to the appellants on November 10, 2012. The appellants then challenged this order in the High Court of Judicature at Bombay, seeking to quash the criminal complaints and summons under Section 482 of the Code of Criminal Procedure, 1973. The High Court dismissed these petitions on July 18, 2014, leading to the present appeals before the Supreme Court.
Legal Framework
The case revolves around Section 138 of the Negotiable Instruments Act, 1881, which deals with the dishonor of cheques for insufficient funds. It also involves Section 141 of the same Act, which extends liability to the directors of a company in such cases. Section 141(1) states:
“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.”
The Supreme Court also considered the provisions of Sections 200 to 204 of the Code of Criminal Procedure, 1973, which outline the procedure for taking cognizance of offences and issuing process.
Arguments
Appellants’ Arguments:
- The appellants argued that the complaint lacked specific averments that they were responsible for the conduct of the company’s business. They contended that merely being directors does not make them vicariously liable.
- It was argued that they did not receive notice of the dishonor of the cheque.
- Some appellants claimed to be non-executive directors, not involved in the day-to-day operations of the company.
- Reliance was placed on S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Another [2005(8) SCC 89] and Pooja Ravinder Devidasani vs. State of Maharashtra and Another [2014(16) SCC 1], which emphasize the need for specific averments regarding a director’s role in the company’s business.
Respondents’ Arguments:
- The respondents argued that the appellants were indeed directors of the company, as evidenced by Form No. 32 from the Registrar of Companies.
- They contended that the complaint contained sufficient averments that the directors were responsible for the company’s business.
- The respondents stated that the appellants’ claim of being non-executive directors was a matter of defense to be proven during the trial.
- Reliance was placed on A.K. Singhania vs. Gujarat State Fertilizer Company Limited and Another [2013(16) SCC 630] and Gunmala Sales Private Limited vs. Anu Mehta and Others [2015(1) SCC 103].
| Main Submission | Sub-Submissions |
|---|---|
| Appellants’ Submission: Lack of specific averment regarding responsibility for company’s business. |
|
| Respondents’ Submission: Sufficient averments and directors’ responsibility. |
|
Issues Framed by the Supreme Court
The main issue before the Supreme Court was:
- Whether the role of the appellants in the capacity of the Director of the defaulter company makes them vicariously liable for the activities of the defaulter Company as defined under Section 141 of the NI Act?
- Whether the appellant had committed the offence chargeable under Section 138 of the NI Act?
Treatment of the Issue by the Court
| Issue | Court’s Decision |
|---|---|
| Whether the role of the appellants in the capacity of the Director of the defaulter company makes them vicariously liable for the activities of the defaulter Company as defined under Section 141 of the NI Act? | The Court held that the complaint did contain averments that the directors were responsible for the conduct of the company’s business, and thus, they could be held vicariously liable. |
| Whether the appellant had committed the offence chargeable under Section 138 of the NI Act? | The Court held that the complaint contained sufficient averments to proceed against the directors under Section 138 of the NI Act. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How it was Considered |
|---|---|---|
| S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Another [2005(8) SCC 89] | Supreme Court of India | Explained the necessity of specific averments in a complaint under Section 141 of the NI Act. |
| S.K. Alagh vs. State of Uttar Pradesh & Others [2008 (5) SCC 662] | Supreme Court of India | Reiterated the principles laid down in S.M.S. Pharmaceuticals Ltd. |
| Maharashtra State Electricity Distribution Co. Ltd. & Another vs. Datar Switchgear Ltd. and Others [2010 (10) SCC 479] | Supreme Court of India | Reiterated the principles laid down in S.M.S. Pharmaceuticals Ltd. |
| GHCL Employees Stock Option Trust vs. India Infoline Limited [2013 (4) SCC 505] | Supreme Court of India | Reiterated the principles laid down in S.M.S. Pharmaceuticals Ltd. |
| A.K. Singhania vs. Gujarat State Fertilizer Company Limited and Another [2013(16) SCC 630] | Supreme Court of India | Cited in support of the respondent’s arguments. |
| Pooja Ravinder Devidasani vs. State of Maharashtra and Another [2014(16) SCC 1] | Supreme Court of India | Emphasized the need for specific averments regarding a director’s role in the company’s business. |
| Gunmala Sales Private Limited vs. Anu Mehta and Others [2015(1) SCC 103] | Supreme Court of India | Cited in support of the respondent’s arguments. |
The Court also considered Section 138 of the Negotiable Instruments Act, 1881, which defines the offense of dishonor of cheques, and Section 141 of the same Act, which extends liability to the directors of a company.
Judgment
| Submission | Court’s Treatment |
|---|---|
| Appellants are not responsible for the conduct of business. | The Court found that the complaint contained sufficient averments that the directors were responsible for the company’s business. The Court held that the appellants’ claim of being non-executive directors was a matter of defense to be proven during the trial. |
| Appellants did not receive notice of dishonor. | The Court noted that the complaint stated that legal notice was issued to the appellants, and they refused to accept it. |
| Authority | Court’s View |
|---|---|
| S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Another [2005(8) SCC 89] | The Court reiterated the principles laid down in this case, emphasizing the need for specific averments in the complaint. However, the Court found that the complaint in the present case did meet the requirements. |
| S.K. Alagh vs. State of Uttar Pradesh & Others [2008 (5) SCC 662] | The Court reiterated the principles laid down in S.M.S. Pharmaceuticals Ltd. |
| Maharashtra State Electricity Distribution Co. Ltd. & Another vs. Datar Switchgear Ltd. and Others [2010 (10) SCC 479] | The Court reiterated the principles laid down in S.M.S. Pharmaceuticals Ltd. |
| GHCL Employees Stock Option Trust vs. India Infoline Limited [2013 (4) SCC 505] | The Court reiterated the principles laid down in S.M.S. Pharmaceuticals Ltd. |
| A.K. Singhania vs. Gujarat State Fertilizer Company Limited and Another [2013(16) SCC 630] | The Court found that this case supported the respondent’s argument. |
| Pooja Ravinder Devidasani vs. State of Maharashtra and Another [2014(16) SCC 1] | The Court recognized the need for specific averments. However, the Court found that the complaint in the present case did meet the requirements. |
| Gunmala Sales Private Limited vs. Anu Mehta and Others [2015(1) SCC 103] | The Court found that this case supported the respondent’s argument. |
What weighed in the mind of the Court?
The Supreme Court focused on whether the complaint contained the essential averments to hold the directors liable under Section 141 of the Negotiable Instruments Act, 1881. The Court emphasized that while specific averments about a director’s role in the company’s business are necessary, the complaint, when read as a whole, did contain these averments. The court also considered the fact that the appellants were indeed directors of the company as per the records of the Registrar of Companies. The court further noted that the cheque was indeed dishonored and the legal notice was issued to the appellants.
| Sentiment | Percentage |
|---|---|
| Complaint’s averments regarding directors’ responsibility | 40% |
| Documentary evidence of directorship | 30% |
| Dishonor of cheque and issuance of notice | 20% |
| Rejection of the argument of non-executive director | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 60% |
| Law | 40% |
Logical Reasoning
The Court rejected the argument that the complaint lacked necessary averments, stating, “It may not be proper to split while reading the complaint so as to come to a conclusion that the allegations as a whole are not sufficient to fulfil the requirement of Section 141 of the NI Act.” The Court also noted that the appellants’ claim of being non-executive directors is a matter of defense to be proven during the trial. As the court observed, “The submission of learned counsel for the appellants that they are the non-executive Directors in the light of the documentary evidence placed on record by Form No. 32 issued by the Registrar of Companies, both the appellants are shown to be the Directors of the Company, still open for the appellants to justify during course of the trial.” The court also observed, “In the given circumstances, we have no hesitation in overruling the argument made by the learned counsel for the appellants.”
Key Takeaways
- A complaint under Section 138 of the Negotiable Instruments Act, 1881, must contain specific averments that the directors were in charge of and responsible for the conduct of the company’s business at the time the offense was committed.
- Merely being a director is not sufficient to establish liability; there must be a clear link to the company’s business operations.
- The claim of being a non-executive director is a matter of defense to be proven during the trial.
- The court can look at the complaint as a whole and not split the averments.
Directions
The Supreme Court directed that all three cases related to cheque dishonor against the appellants be clubbed together and disposed of expeditiously, preferably within six months. The parties were directed to appear before the trial court on November 22, 2021.
Development of Law
The judgment reinforces the principles laid down in S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Another [2005(8) SCC 89], emphasizing the need for specific averments in a complaint under Section 141 of the Negotiable Instruments Act, 1881. It clarifies that while such averments are necessary, the complaint should be read as a whole to determine if the requirements of Section 141 are met. The court also clarified that the claim of being a non-executive director is a matter of defense to be proven during the trial.
Conclusion
The Supreme Court dismissed the appeals, upholding the High Court’s decision. The Court clarified that while specific averments are required to hold directors liable under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881, the complaint in this case contained sufficient averments to proceed against the directors. The Court emphasized that the claim of being a non-executive director is a matter of defense to be proven during the trial. This judgment provides clarity on the extent of a director’s liability in cheque dishonor cases.
Category
Parent Category: Negotiable Instruments Act, 1881
Child Category: Section 138, Negotiable Instruments Act, 1881
Child Category: Section 141, Negotiable Instruments Act, 1881
Parent Category: Criminal Law
Child Category: Dishonor of Cheque
Child Category: Director’s Liability
FAQ
Q: Can a director be held liable if a company’s cheque bounces?
A: Yes, a director can be held liable if they were in charge of and responsible for the conduct of the company’s business when the offense was committed. The complaint must contain specific averments to that effect.
Q: What if a director is not involved in the day-to-day business?
A: If a director claims to be a non-executive director, it is a matter of defense to be proven during the trial. The complaint must still contain averments that the directors were responsible for the conduct of the company’s business.
Q: What should a complaint under Section 138 of the Negotiable Instruments Act, 1881, contain?
A: The complaint must specifically state that the directors were in charge of and responsible for the conduct of the company’s business when the cheque was dishonored. Merely stating that they are directors is not sufficient.
Q: What is the significance of this judgment?
A: This judgment clarifies the extent of a director’s liability in cheque bounce cases and emphasizes the need for specific averments in the complaint. It also highlights that the claim of being a non-executive director is a matter of defense to be proven during the trial.