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An estimated 6-minute read

Vicarious liability of director of a company in an offence under section 138 of the Negotiable Instruments Act 1881 – The Present Position

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Section 138 of the Negotiable Instruments Act, 1881(for short “NI Act” or “the said Act”) makes dishonor of cheques for insufficiency of funds in the account a criminal offence. Section 141 of the said Act, in case of offence by Company, provides for vicarious liability on 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.

There are various judicial pronouncements as to when a Director, Manager, Officer of Company, Secretary is vicariously liable. There has also been a debate as to whether the Company needs to be arrayed as an Accused in order to make those responsible for the Company vicariously liable. The said controversy has been put to rest by three-Judge Bench decision of the Hon’ble Supreme Court in Aneeta Hada v. Godfather Travels and Tours Private Limited[1] wherein it has been held 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 complaint. To summarize, they cannot be any vicarious liability unless there is prosecution against the Company.

A three-Judge Bench of the Hon’ble Supreme Court in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr.[2] referred to Section 138 and 141 of the Act and Sections 203 and 204 of Cr.P.C. and observed that complaint must contain material to enable the Magistrate to make up his mind for issuing process. What is required is that the persons who are sought to be criminally liable u/s 141 should be, at the time the offence was committed, in charge of and responsible to the Company for the conduct of the business of the Company. Every person connected with the Company shall not fall within the ambit of the provision. The liability arises from being in charge of and responsible for the conduct of the business of the Company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a Company. Section 141 (2) of the Act envisages direct involvement of any Director, Manager, Secretary or other Officer of the Company in the commission of the offence. It is because a person who is in charge of and responsible for the conduct of the business of the Company would naturally know why a cheque in question was issued and why it got dishonoured. The liability arises, as the three-Judge Bench opined, on account of conduct, act or omission on the part of an Officer and not merely on account of holding office or position in a Company and, therefore, in order to bring case within Section 141 of the Act, the complaint must disclose the necessary facts which makes a person liable.

Thereafter there have been various Judgments on the point that the complaint should contain that at the time the offence was committed, the person Accused was in charge of, and responsible for the conduct of the business of the Company. The Courts have further held that this averment is an essential requirement of Section 141 and has to be made in the complaint. Without this averment being made in the complaint, the requirements of Section 141 cannot be said to be satisfied. In this regard a passage from Sabitha Ramamurthy v. R.B.S. Channabasavaradhya[3] which reads:

            “7. A bare perusal of the complaint petitions demonstrates that the statutory requirements contained in Section 141 of the Negotiable Instruments Act had not been complied with. It may be true that it is not necessary for the complainant to specifically reproduce the wordings of the section but what is required is a clear statement of fact so as to enable the court to arrive at a prima facie opinion that the accused are vicariously liable. Section 141 raises a legal fiction. By reason of the said provision, a person although is not personally liable for commission of such an offence would be vicariously liable therefor. Such vicarious liability can be inferred so far as a company registered or incorporated under the Companies Act, 1956 is concerned only if the requisite statements, which are required to be averred in the complaint petition, are made so as to make the accused therein vicariously liable for the offence committed by the company. Before a person can be made vicariously liable, strict compliance with the statutory requirements would be insisted.”

The Hon’ble Supreme Court in K.K. Ahuja v. V.K. Vora & Anr. [4] explaining the position u/s 141 of the Act has stated thus:

            “The position under Section 141 of the Act can be summarized thus:

  1. (i) If the accused is the Managing Director or a Joint Managing Director, it is not necessary to make an averment in the complaint that he is in charge of, and is responsible to the company, for the conduct of the business of the company. It is sufficient if an averment is made that the accused was the Managing Director or Joint Managing Director at the relevant time. This is because the prefix “Managing” to the word “Director” makes it clear that they were in charge of and are responsible to the company, for the conduct of the business of the company.
  2. (ii)  In the case of a Director or an officer of the company who signed the cheque on behalf of the company, there is no need to make a specific averment that he was in charge of and was responsible to the company, for the conduct of the business of the company or make any specific allegation about consent connivance or negligence. The very fact that the dishonoured cheque was signed by him on behalf of the company, would give rise to responsibility under sub-section (2) of Section 141.
  3. (iii)  In the case of a Director, secretary or manager [as defined in Section 2(24) of the Companies Act] or a person referred to in clauses (e) and (f) of Section 5 of Companies Act, an averment in the complaint that he was in charge of, and was responsible to the company, for the conduct of the business of the company is necessary to bring the case under Section 141(1) of the Act. No further averment would be necessary in the complaint, though some particulars will be desirable. They can also be made liable under Section 141(2) by making necessary averments relating to consent and connivance or negligence, in the complaint, to bring the matter under that sub-section.
  4. (iv) Other officers of a company cannot be made liable under sub-section (1) of Section 141. Other officers of a company can be made liable only under sub-section (2) of Section 141, by averring in the complaint their position and duties in the company and their role in regard to the issue and dishonour of the cheque, disclosing consent, connivance or negligence.”

There are various other Judgments which reiterate what is stated above. In order to get process issued against other persons on the ground that they are vicariously liable, the averments in the complaint should clearly meet the requisite test. In a recent Judgment the Hon’ble Supreme Court in Standard Chartered Bank v. State of Maharashtra & Ors. [5] has gone extensively into the various Judgments pertaining to vicarious liability and has held that when there is specific averments in the complaint as to the role of every person in the commission of the offence, the process cannot be quashed.

by Dominic Braganza, Partner,

Abhay Nevagi and Associates, Advocates, Pune


[1] (2012) 5 SCC 661

[2] (2005) 8 SCC 89

[3] (2006) 10 SCC 581

[4] (2009) 10 SCC 48

[5] Criminal Appeal Nos. 271-273 of 2016

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