Cheque Dishonour | Former Directors Cannot Be Made Liable For Cheques Issued By Company After Their Resignations Were Accepted: Rajasthan HC

The Rajasthan High Court (“the Court”) has reiterated that after resignation, directions cannot be made liable for dishonour of cheques that were issued by the company pursuant to the resignation. It further stated that to prove that the accused was responsible for the day-to-day affairs of the company, as required under Section 141 of the NI Act, repetition of the wordings used in the section to that effect is not enough, it had to be proved in what manner the person was in charge of the company's functioning.

Section 141 of the NI Act provides that if a company has been accused under Section 138 of the NI Act, then every person who was in charge of and responsible for the conduct of the business of the company at the time of the commission of the offence shall also be deemed to be guilty.

A bench of Justice Anil Kumar Upman was hearing a petition filed by two former directors of a company seeking quashing of proceedings filed against them under Section 138 of the NI Act. It was the case of the petitioners that the respondent had made two fixed deposits with the company in return of two cheques issued in his favour. The cheques were issued by the managing director and an authorized officer of the company. The cheques were dishonoured on account of “insufficient funds” which led to the respondent filing the case.

It was argued by the counsel for the petitioners that the petitioners had ceased to be the directors of the company at least one year prior to the issuance of the cheques in question. The resignation was notified to the registrar of companies by filing Form 32 which was also a public document. It was further argued that pursuant to the resignation, the petitioners were in no way responsible for the functioning of the company. The counsel contended that the trial court took cognizance of the offence, in a mechanical manner, without applying any judicial mind.

On the contrary, the counsel for the respondent argued that furnishing resignation certificates of the petitioners was not enough for their acquittal under Section 138. The counsel highlighted that the chairman along with directors of the company including the petitioners had insisted the complainant to invest his money in the company. Hence, the petitioners could not escape the liability merely because they were not the directors at the time of issuance of the cheques.

Considering arguments from both sides, the Court made reference to a recent Supreme Court case of Rajesh Viren Shah v Redington (India) Limited which highlighted the principle that directors who have resigned from the company could not be made liable for the company's actions that occurred after their disassociation from the company. It stated:

“A director who has resigned from such post cannot be held liable for failure in realization of cheques issued by the Company as they cannot be held responsible for the conduct of business at the relevant time post their resignation.”

The Court also referred to the case of J.N. Bhatia & Ors. v State & Anr. of the Delhi High Court. In this case, the dishonoured cheques were issued much after the resignation of the petitioner as the director of the company. The case observed that since the petitioner was not a director nor was involved in the day-to-day running of the company as was required under Section 141 of the NI Act at the time of the offence, the complaint against him was liable to be quashed. The case also observed that the requirement of Section 141 was not fulfilled merely by repetition of the phrase of the section to the effect that the accused “is in charge of and responsible for the conduct of the day-to-day affairs of the company' but it needed to be shown how he was so responsible.

A decision to a similar effect was also made by the Supreme Court in another case of Harshendra Kumar D. v. Rebatilata Koley and Others by observing that a director who had resigned could not be made accountable for anything done by the company after such resignation was accepted. In light of Section 141, the criminal liability of a director was determined on the date when the offence was allegedly committed.

In the background of this position of law, the Court observed the following:

“In cases where the accused has resigned from the Company and Form 32 has also been submitted with the Registrar of Companies, in such cases, if the cheques are subsequently issued and dishonoured, it cannot be said that such an accused is in charge of and responsible for the conduct of the day-to-day affairs of the company, as contemplated in Section 141 of Negotiable Instrument Act. It is also well settled law that mere repetition of the phraseology of Section 141 of NI Act that the accused is in-charge and responsible for the day-to-day conduct and affairs of the Company would not be sufficient and facts stating as to how and in what manner the accused was so responsible must be averred.”

The Court observed that Form 32 proved that the petitioners were not the directors of the company when the cheques were issued. Furthermore, they were nowhere involved in the company's affairs when the money was invested by the complainant.

“Apart from bald allegation that they were in charge of the affairs of the company, nothing is stated as to how they were in charge of and/or responsible for the conduct of the day-to-day business of the company,” it held.

Accordingly, the petition was allowed and the complaint against the directors was quashed.

Title: Pankaj Anand Mudholkar v State of Rajasthan

Citation: 2024 LiveLaw (Raj) 134

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