Director Can't Be Prosecuted U/S 138 NI Act When He Is Not Involved In Day To Day Affairs Of The Company: Allahabad High Court

The Respondent-company M/S Statcon Power Controls Ltd.) had filed a complaint against M/s G.E.T. Power Ltd. and the present applicant-Director, following dishonour of two cheques (worth Rs. 1,00,00,000 each) issued by the latter company to the former, pursuant to an agreement for sale of certain goods.

A legal notice was issued by the complainant to applicant demanding payment of the amount due under the said two cheques. Due to the failure of payment, the complainant filed complaint, consequentially to which summons were issued to the applicant to face trials. The applicant filed a criminal revision against the summoning order by the Magistrate which was later dismissed.

Hence, this application to seek quashing of order and summon issued.

The counsel for the applicant contended that applicant cannot be held liable for dishonour of any cheque issued by other Managing Directors as he was only a nominee Director appointed and was not involved in daily affairs of the company.

The counsel also contended that the complainant has not made any specific averment against the applicant as to the part played by him in the whole transaction and being a Director in a company it is not sufficient to make the applicant liable under section 141 of the N.I. Act.

The applicant relied on the judgement of apex court namely K. Srikanth Singh V. North East Securities Limited [(2007) 12 SCC 788] where it was held that to implicate the applicant in the instant matter, it is necessary to prove that the applicant is incharge of and responsible for the conduct of affairs of the company. The counsel also submitted that proceedings under section 138 N.I. Act cannot be proceeded against non Executive Directors.

The counsel for the respondent submitted that the present complaint was filed due to the non-compliance of the legal notice served upon the applicant, and the summoning orders were issued by the Magistrate on being satisfied with the material on record. The counsel also submitted that present complaint is lingering before the trial court and only the applicant has put his appearance before the trial court. None of the remaining accused has appeared. He further submitted that a direction be issued to the trial court to ensure the presence of the other accused persons and decide the case expeditiously.

Findings

The court relied upon the Supreme Court judgement namely S.M.S. Pharmaceuticals Ltd. Vs. Neta Bhalla and another [(2005) 8 Supreme Court Cases 89] where the certain conditions u/s 141 N.I. Act have been laid which have to be satisfied before the liability can be extended to officers of a company and stated that –

"The conditions are intended to ensure that a person who is sought to be made vicariously liable for an offence of which the principal accused is the Company, had a role to play in relation to the incriminating act and further that such a person should know what is attributed to him to make him liable. In other words, persons who had nothing to do with the matter need not be roped in."

On vicarious liability of Director of a company, the court further relied on the judgement of Srikanth Singh Vs. North East Securities Limited [(2007) 12 SCC 788], where it was held –

"it must be pleaded and shown that the Director was responsible for the conduct of the business of the company at the time of commission of offence. Only being a Director is not enough to cast a criminal liability. Vicarious liability must be pleaded and proved and can not be merely inferred."

In view of the peculiar facts and circumstances of the case, the court held that the trial court failed to consider the matter properly and applicant cannot be prosecuted for any offence under section 138 N.I. Act.

Accordingly, the application was allowed, judgement and summoning order were quashed.

Case Title : Jatinder Pal Singh vs M/S Statcon Power Controls Ltd
Citation:2022 LiveLaw (AB) 107

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