For prosecution u/s 138 of NI Act 1881 reproducing language of Section 141 in verbatim or attributing specific role to the directors not necessary – SC
In a recent judgment Hon’ble Supreme Court held for prosecution under section 138 of Negotiable Instrument Act, 1881 reproducing language of Section 141 in verbatim not necessary. Also, attributing specific role to the directors was not necessary when it was clearly averred that the accused being directors were responsible for its day-to-day affairs, management and working of the Company
ABCAUS Case Law Citation:
4570 (2025) (05) abcaus.in SC
Important Case Laws relied upon by Parties:
S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Another (2005)
Sabitha Ramamurthy and Another vs. R.B.S. Channabasavaradhya, (2006) 10 SCC 581
Siby Thomas vs. Somany Ceramics Limited (2024) 1 SCC 34
Monaben Ketanbhai Shah and Another vs. State of Gujarat and Others (2004) 7 SCC
In the instant case, the appellant Bank had challenged the order passed by the Bombay High Court quashing the criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881 (‘NI Act’) against the accused director of the company.
The proceedings had been quashed on the ground that there were no sufficient averments in the complaint filed by the appellant to invoke the vicarious liability against the director under Section 141 of the NI Act.
The accused was a director of a company which along with accused director and other two directors approached the appellant bank/complainant for grant of credit facility. Later, on account of the failure of the company to repay the outstanding dues, the account of the company was classified as a Non-Performing Asset.
A cheque issued by the accused company to the appellant bank was dishonored for the reason “account blocked”. The legal notice issued to all the accused was returned back as “unclaimed”.
The appellant bank prosecuted the company and the three directors and prayed for appropriate punishment of imprisonment as well as direction to pay fine up to double the amount of the dishonored cheque.
The Trial Court issued process to all the directors in the complaint. However, the Hon’ble High Court quashed the proceedings against the accused director herein.
The Hon’ble Supreme Court observed that the appellant had clearly averred that accused director were the directors of the company and were responsible for its day-to-day affairs, management and working of the company. It was also mentioned that the company through its directors (including the accused director) had approached the complainant above named for grant of credit facility in the form of Revolving Loan Facility as inventory funding for the working capital requirements.
The Hon’ble Supreme Court further observed that as per the Board Resolution, the accused director (along with other directors) was authorized jointly and/or severally to further negotiate with Bank and accept the revised terms and conditions the securities on behalf of the company. Not only this, the accused director was authorized, jointly and/or severally to be present in Bank and deposit /redeposit the original tittle deeds of the Company’s immovable properties with an intention to create security thereof and to make necessary declarations on behalf of the Company.
In other words, apart from holding negotiations with the bank, the accused director was also authorized to deposit the original title deeds of the company’s immovable property.
The Hon’ble Supreme Court also observed that under the resolution, the accused director was authorized to sign demand promissory notes, hypothecation agreements, mortgages, guarantees and indemnities and any other documents, writings and instruments, as may be required, from time to time. Further, accused director was also authorized to file the requisite particulars of charge created in favour of the bank with the Registrar of Companies. The accused director was also authorized to be present at the office of Sub-Registrar for registration of various documents and also authorized to affix the common seal on all the relevant documents.
It was further noted that the sanction letter of the bank revealed that for grant of credit facilities, the performance guarantee of the directors including the accused director was required to be given.
The case of the accused director was that the averments in the complaint fell short of the requirement mandated by the Hon’ble Supreme Court which held that if it is not averred in the complaint that the accused was “in charge of the conduct of the business” at the relevant time, the prosecution must fail; and that not only the basic averment as enshrined in Section 141 of the NI Act has to be incorporated in the complaint but also the specific role should be attributed to the persons who are directors or employees of the company.
The Hon’ble Supreme Court observed that in the background of the averments, they clearly fulfilled the requirement of Section 141. Regarding the contention that actual words mentioned in Section 141 in the same form be employed in the complaint, for the complaint to be sustained, the Hon’ble Supreme Court noted that the Court had held that it was not necessary to reproduce the language of Section 141 verbatim in the complaint since the complaint was required to be read as a whole. In another case the Court had held that had held that if the substance of the allegations made in the complaint fulfil the requirements of Section 141, the complaint has to proceed and is required to be tried with.
The Hon’ble Supreme Court opined that the repetition of the exact words of the Section in the same order, like a mantra or a magic incantation is not the mandate of the law. What is mandated is that the complaint should spell out that the accused sought to be arrayed falls within the parameters of Section 141(1) of the NI Act. Only then could vicarious liability be inferred against the said accused, so as to proceed to trial. Substance will prevail over form.
It was also the case of the accused director that in the absence of the words “was in charge of”, the present case cannot be proceeded. The Hon’ble Supreme Court rejected this submission. It was observed that the Court, in Siby Thomas case on facts, found that on an overall reading of the complaint it did not disclose any clear and specific role to the appellant-accused therein. It was further held that what was averred was only that the accused being partners are responsible for the day-to-day conduct of business of the company. This is vastly different from the averments in the present case that the accused director along with other accused being directors were responsible for its day-to-day affairs, management and working of the Company. Hence, the judgment in Siby Thomas can be of no help.
The last contention of the accused was that the specific role must be attributed to the persons who are mere directors or employees of the company. The Hon’ble Supreme Court rejected the said contentions. It was observed that the Court had held that insofar as the director was concerned, 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 was enough and no further averment was necessary though some particulars will be desirable. It was held that the administrative role of each director would be within the special knowledge of the company or the director of the firm and it is for them to establish that they were not in charge of the affairs of the company. The complainant is supposed to know only generally as to who are in charge of the affairs of the company. There is no obligation on the complainant to plead in the complaint as to matters within the special knowledge of the company or the directors or firm about the specific role attributed to them in the company.
The Hon’ble Supreme Court held that the averments in the complaint against the accused director fulfilled the requirement of Section 141(1) of the NI Act, and this was not a case where trial against her can be aborted by quashment of proceedings. The High Court was completely unjustified in quashing the proceedings.
Accordingly, the appeal was allowed and the judgment of the High Court was set aside. Consequently, the order issuing process to to the accused director was restored to the file of the Metropolitan Magistrate to be proceeded with in accordance with law.
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