The Supreme Court recently held that no liability could be fixed on independent, non-executive directors who were not involved in the day-to-day functioning of the defaulting company. Directors of a company cannot be held criminally liable under section 138 read with section 141 of the Negotiable Instruments Act, 1881, if they were not responsible for conducting the business of the company.
The Supreme Court recently in the case of Sunita Palita & Others versus M/s Panchmani Stone Quarry arising out of S.L.P (Crl.) No. 10396 of 2019 set aside the judgement of the Hon’ble Calcutta High Court filed under section 138 and 141 of the Negotiable Instruments Act, 1881.
Brief facts:
M/s Panchmani Stone Quarry (“PSQ”) had received a purchase order approximately worth Rs. 2 crores from MBL Infrastructure (“MBL”) for the purchase of stone dust and stone aggregate. In lieu of the same, MBL had issued an A/c payee cheque amounting to Rs. 1,71,08,512, drawn in favor of PSQ which was duly signed by the Managing Director of MBL.
The said cheque was however dishonored for reasons that the A/c had been closed. Pursuant to the said dishonor, PSQ sent across to MBL, a demand notice under section 138 and 141 of the Negotiable Instruments Act. However, MBL failed to make the said payment.
As a result of the non-payment of dues even after the expiry of the notice period, the Respondent/PSQ filed a complaint case against MBL, its Managing Director, as well as the Independent, Non-executive Directors.
The Applicants, who are the Independent and Non-executive Directors, approached the Hon’ble Calcutta High Court under section 482 of the Cr.P.C., praying that the proceedings initiated in the above-mentioned matter filed under section 138 and 141 of the Negotiable Instruments Act be quashed, as they were not in any way involved in the day-to-day business being conducted by the said company being mere Independent and Executive Directors.
The Hon’ble Calcutta High Court had denied quashing of charges against the Accused persons on the ground that there is an inherent presumption of dishonesty along with the accused person being exposed to criminal liability in cases filed under section 138 and 141 of the Negotiable Instruments Act and that the powers of the High Court under section 482, Cr.P.C. are to be sparingly used.
The Supreme Court, while allowing the said appeal to set aside the judgement of the Hon’ble Calcutta High Court, held:
That the High Court failed to appreciate the fact that the Applicants were neither the Managing Directors nor the Joint Managing Directors of the Accused company/MBL, and neither were they the signatories of the dishonored cheque. Hence, they cannot in any way be named as the accused person in the said case.
That a director of a company who was not in charge or responsible for the management or functioning of company at the time when the alleged offence takes place, will not be held liable under those provisions.
That the liability under section 138/141 of the Negotiable Instruments Act would only arise on if the Applicants were involved in the day-to-day functioning of the enterprise in any way, and not merely on the basis of designation or post that the person holds.
Our Analysis:
This decision reiterates the settled principle that though the identity of the company, including its brain, overlaps with that of its board (directors), it is imperative that only such individuals in that board are held criminally liable who manage the day-to-day affairs and are in the know of things. The principle is oft-quoted in authoritative decisions but it is a grim scenario out on the field where more often than not all individuals in the board of any company are impleaded along with the company in criminal cases.
The Supreme Court while pronouncing the above summarized judgment has safeguarded the rights of the Independent and Non- Executive Directors of a company and has also saved them from being made criminally answerable under section 138/141 of the N.I. Act, unnecessarily. The proceedings initiated in cases filed under section 138 of the N.I. Act should only implicate signatories of the dishonored cheque along with the managing directors/ other members of the company who were actively involved in the business and functioning of the defaulting company.
Authored by: Anshi Bhatia, Advocate, Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.