National Housing Bank Act | No Vicarious Liability For Directors Without Specific Pleading That They Were Responsible For Company's Business : Supreme Court

The Supreme Court on Thursday (August 1) held that a complaint against company's directors for offence committed by the company under the National Housing Bank Act, 1987 must contain specific averments that the directors were responsible for the business of the company at the time of the offence.

A bench of Justice Abhay Oka and Justice Augustine George Masih quashed a complaint against directors of a company under Section 200 of the CrPC alleging violations of Section 29A of the 1987 Act.

“there were no assertions made that the second to seventh accused, at the time of the commission of the offence, were in charge of, and responsible to the first accused company for the conduct of its business. Unless assertions, as required by sub-Section (1) of Section 50, are made, vicarious liability of the Directors of the first accused company is not attracted”, the court held.

The court added –

“Hence, in the absence of the averments as contemplated by sub-section (1) of Section 50 of the 1984 Act in the complaint, the Trial Court could not have taken cognizance of the offence against the third to seventh accused, who are allegedly the directors of the first accused company”, the court held.

The first accused in this case is a company, while the second accused is its Managing Director, and the other five accused are its Directors. The complaint led to the Magistrate taking cognizance of the alleged offences under Section 29A(i) read with Section 50, punishable under Section 49(2A) of the 1987 Act, which prescribes a minimum sentence of one year, extendable to five years.

Section 29A(i) provides that no housing finance institution which is a company shall commence or carry on the business of housing finance as its principal business without obtaining a certificate of registration and having the net owned fund of ten crore rupees or such other higher amount, as the Reserve Bank may, by notification, specify.

The High Court quashed the complaint in its entirety, citing non-compliance with the requirements of Section 50(1) (offences by company) of the 1987 Act, which are akin to those in Section 141 of the Negotiable Instruments Act, 1881 (NI Act). The Complainant challenged this order in the present appeal.

The appellant's counsel argued that the complaint sufficiently demonstrated a violation of Section 29A(i) of the 1987 Act. The counsel emphasized that the second accused was identified as the Managing Director, implying he was in charge of and responsible for the company's business. The appellant asserted that the complaint contained sufficient allegations to implicate the other accused as well.

Counsel for the accused supported the High Court's judgment, arguing that the complaint failed to include necessary averments as required by Section 50(1) of the 1987 Act.

Section 50 of the 1987 Act stipulates that every person in charge of and responsible to the company at the time the offence was committed is deemed guilty. The Court noted that Section 50(1) of the 1987 Act is pari materia to Section 141 of the NI Act.

Paragraph 9 of the complaint described the company structure and roles of the accused, stating that all were responsible for managing the company's business. However, the Court found that the complaint did not specifically assert that the third to seventh accused were responsible for the conduct of the company's business at the time of the alleged offence.

The Court relied on a previous ruling in SMS Pharmaceuticals Ltd. v. Neeta Bhalla and Anr., where it was held that specific averments are necessary to establish a director's responsibility under Section 141 of the NI Act. It was held that simply being a director is insufficient; the complaint must explicitly state the director's involvement in the company's business conduct at the relevant time.

The Supreme Court in the present case said that the second accused, as Managing Director, was deemed to be in charge of and responsible for the company's business. The Court found no justification for quashing the complaint against the first accused company and the second accused.

Thus, the Supreme Court modified the impugned order, quashing the complaint against the third to seventh accused. The Court directed that the complaint proceed according to law against the first accused company and the second accused.

Case no. – Criminal Appeal Nos. 3176-3177 of 2024

Case Title – National Housing Bank v. Bherudan Dugar Housing Finance Ltd. & Ors.

Citation : 2024 LiveLaw (SC) 541