Supreme Court Quashes Cheque Bounce Case Against Director: Susela Padmavathy Amma vs. Bharti Airtel (2024)

Date of the Judgment: March 15, 2024
Citation: 2024 INSC 206
Judges: B.R. Gavai, J. and Sandeep Mehta, J.
Can a company director be held liable in a cheque bounce case simply by virtue of their position? The Supreme Court of India addressed this critical question in a recent judgment, clarifying the extent of vicarious liability under the Negotiable Instruments Act, 1881. The Court quashed the criminal proceedings against a director, emphasizing that mere designation is insufficient to establish liability; there must be clear evidence of involvement in the company’s day-to-day operations. The judgment was delivered by a two-judge bench comprising Justice B.R. Gavai and Justice Sandeep Mehta, with Justice B.R. Gavai authoring the opinion.

Case Background

M/s Bharti Airtel Limited, the respondent, provides telecommunication services in India. M/s Fibtel Telecom Solutions (India) Private Limited, a telemarketer, approached Bharti Airtel for telecom resources for transactional communication. A service agreement was entered into, requiring Fibtel Telecom Solutions to pay fixed monthly recurring charges. The respondent claimed that Fibtel Telecom Solutions owed them Rs. 2,55,08,309/- for services provided. Despite reminders, Fibtel Telecom Solutions failed to clear the dues. Subsequently, they issued five post-dated cheques to the respondent on June 17, 2016.

When the first cheque was deposited, it was returned with the remark “payment stopped by drawer”. Following an oral agreement and a subsequent payment of Rs. 25,00,000, the remaining four cheques were deposited, but they were also returned unpaid with the same remark. Consequently, the respondent filed two criminal complaints before the XVIII Metropolitan Magistrate, Saidapet, Chennai, under Section 138 read with Section 142 of the Negotiable Instruments Act, 1881, against Fibtel Telecom Solutions, Manju Sukumaran Lalitha (Director & Authorized Signatory), and Susela Padmavathy Amma (Director and the appellant).

Timeline

Course of Proceedings

The High Court of Judicature at Madras dismissed the petitions filed by Susela Padmavathy Amma (Crl. O.P. Nos. 3470 & 5767 of 2019), seeking to quash the criminal complaints against her. The High Court directed the trial court to dispose of the case within three months. Aggrieved by this decision, the appellant approached the Supreme Court.

Legal Framework

The case revolves around Section 138 of the Negotiable Instruments Act, 1881, which deals with the dishonour of cheques for insufficiency of funds. Section 141 of the same Act extends this liability to directors of companies under certain circumstances. Specifically, Section 141 states:

“141. Offences by companies.—(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.”

The provision also includes a proviso that protects individuals who can prove the offense was committed without their knowledge or that they exercised due diligence to prevent it. The Supreme Court considered the interpretation of Section 141 in light of its previous judgments.

Arguments

Appellant’s Arguments:

• The appellant, an elderly lady, was not involved in the day-to-day affairs of the company.
• The complaint lacked specific averments that the appellant was in charge of the company’s daily operations.
• The appellant was not a signatory to the cheques in question; only accused No. 2 was.
• The appellant’s counsel relied on judgments such as N.K. Wahi vs. Shekhar Singh and others, S.M.S. Pharmaceuticals Ltd. vs Neeta Bhalla and another, Ashoke Mal Bafna vs. Upper India Steel Manufacturing and Engineering Company Limited, Krishi Utpadan Mandi Samiti and others vs Pilibhit Pantnagar Beej Ltd. and another and Laxmi Dyechem vs. State of Gujarat and others to support the argument that a director cannot be held liable merely by virtue of their position.

Respondent’s Arguments:

• The High Court had rightly dismissed the petition for quashing of criminal complaints after considering the material on record.
• The grounds raised by the appellant were defenses that could only be raised during the trial.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether a director of a company can be held liable for an offense under Section 138 of the Negotiable Instruments Act, 1881, merely by virtue of their position, without specific averments of their involvement in the day-to-day affairs of the company.

Treatment of the Issue by the Court

Authorities

The Court relied on several precedents to clarify the interpretation of Section 141 of the Negotiable Instruments Act, 1881. These cases established that vicarious liability cannot be imposed on a director simply because of their position in the company.

Judgment

The Supreme Court, after considering the arguments and precedents, held that the appellant could not be held liable under Section 138 of the Negotiable Instruments Act, 1881, merely because she was a director of the company. The Court emphasized that there must be specific averments and evidence showing that the director was in charge of and responsible for the day-to-day affairs of the company.

The Court observed that the complaint only stated that the appellant and the second accused had no intention to pay the dues and that they were directors and promoters of the company. However, there was no specific allegation that the appellant was in charge of the company’s day-to-day affairs. The Court reiterated that merely reproducing the words of the section is not sufficient to establish vicarious liability.

The Supreme Court cited various authorities, including State of Haryana vs. Brij Lal Mittal and others [(1998) 5 SCC 343], 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], to support its conclusion that a director cannot be held liable unless there is specific evidence of their involvement in the company’s daily operations.

The Court concluded that the averments in the complaint were insufficient to invoke the provisions of Section 141 of the N.I. Act against the appellant. Therefore, the Court allowed the appeals and quashed the proceedings against the appellant.

“It can thus be clearly seen that there is no averment to the effect that the present appellant is in -charge of and responsible for the day -to-day affairs of the Company.”

“It can thus clearly be seen that the averments made are not sufficient to invoke the provisions of Section 141 of the N.I. Act qua the appellant.”

“In the result, we find that the present appeal s deserve to be allowed.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that vicarious liability under Section 141 of the Negotiable Instruments Act, 1881, cannot be imposed on a director of a company merely based on their designation. The Court emphasized the necessity for specific averments and evidence demonstrating the director’s active involvement in the company’s day-to-day operations. The absence of such specific allegations in the complaint was a significant factor in the Court’s decision to quash the proceedings against the appellant. The Court’s reasoning was also shaped by a strict interpretation of penal statutes, where vicarious liability is created, and the need to ensure that individuals are not unfairly subjected to criminal proceedings without sufficient cause.

Key Takeaways

• A director of a company cannot be held liable for cheque bounce offenses under Section 138 of the Negotiable Instruments Act, 1881, simply by virtue of their position.
• To establish liability, there must be specific averments and evidence demonstrating that the director was in charge of and responsible for the day-to-day affairs of the company.
• Complaints must clearly state how and in what manner the director was responsible for the conduct of the business of the company.
• The judgment reinforces the principle that penal statutes, especially those creating vicarious liability, must be strictly construed.

Directions

The Supreme Court quashed the proceedings in CC Nos. 3151 and 3150 of 2017 against the appellant.

Development of Law

The ratio decidendi of this case is that a director of a company cannot be held liable for an offense under Section 138 of the Negotiable Instruments Act, 1881, merely by virtue of their position. The case reinforces the position of law that for a director to be held liable, there must be specific averments and evidence showing that the director was in charge of and responsible for the day-to-day affairs of the company. This case clarifies the interpretation of Section 141 of the Negotiable Instruments Act, 1881, and reinforces the principle that vicarious liability cannot be imposed on a director simply because of their position in the company.

Conclusion

The Supreme Court’s judgment in Susela Padmavathy Amma vs. M/s Bharti Airtel Limited provides significant clarity on the vicarious liability of company directors in cheque bounce cases. The Court emphasized that mere designation is not enough; there must be concrete evidence of a director’s involvement in the company’s day-to-day operations for them to be held liable under Section 138 of the Negotiable Instruments Act, 1881. This ruling protects directors from being unfairly implicated in criminal proceedings simply due to their position, reinforcing the need for specific allegations and evidence of their active involvement in the company’s affairs.