S.138 of Negotiable Instruments Act, 1881, Cheque Dishonour and Principles of Quashing the Complaint against Directors of Company

S.138 of Negotiable Instruments Act, 1881, Cheque Dishonour and Principles of Quashing the Complaint against Directors of Company - "Unpaid cheque returned by bank" - Acquittal of Accused - Directors of Company - Offences by Company - Vicarious liability - Impleadment of Directors of Company - Managing Director of Company and Liability - Averments to show that Director was responsible - Approach to be adopted by Courts - Submissions of accused in a petition under S.482 of Code of Criminal Procedure, 1973 - Inherent powers of High Court  - Suspicious documents - Frivolous accusations against accused Director of Company - Companies Act, 2013 and its applicability on prosecution under S.138 of N.I. Act, 1881 - Executive Director and his role - Burden of proof and nature of evidence - Independent Additional Directors of Company 

In case of Rajeev Jain v. Abhishek Industries Pvt Ltd [2023] GCtR 2508 (Delhi), High Court had quashed the criminal proceedings against 4 accused persons while exercising jurisdiction under S.482 of Code, 1973. The accused persons were non-Executive Director, Executive Director and Additional Director. Prosecution against non-Executive Director was quashed ; prosecution against Executive director was not quashed ; prosecution against independent Additional Directors were quashed. 

However, where ingredients of an offence are lacking against an accused, it is the duty of the Court to discharge such accused. Holding a Trial against the petitioner no. 2,5,6, and 7 under Section 138 read with Section 141 of the NI Act would be an abuse of the process of law. 

The complaint under Section 138 of NI Act was filed against M/s. R.C.C Infra Ventures Limited, Mr. Ravi Kumar Jain (Managing Director) and seven others who were arrayed as Accused No.1 to 9 respectively. Petitioners were arrayed as accused No. 3 to 9. 

Petitioners were sought to be made vicariously liable for the cheques issued by the company for the reason that they are holding the position of a Director in the company.  

Section 141 of the NI Act deals with offences committed by the companies. In terms thereof, every person, who at the time of the offence, was in-charge of and was responsible to the company in the conduct of the business, is liable to be proceeded against and punished accordingly. 

Complainants unnecessarily implead all the Directors of the accused company irrespective of whether they were actually involved or responsible for the commission of the alleged offence.

 a director of a company would not, automatically be held guilty only for the reason of him/her being holding a position of a director. It is necessary to show that the person sought to be made vicariously liable was in-charge and was also responsible to the company for the conduct of its business.

In the case of Managing Director, it is not even necessary to make any averment in the complaint to the effect that he is in-charge of and is responsible to the company for the conduct of the business of the company. The prefix ‘Managing’ to the word ‘Director’ itself makes it clear that the said Director was in-charge of and responsible to the company for the conduct of the business of the company. 

in terms of Section 141 of the Act, every director of the company does not automatically become vicariously liable for commission of an offence by the company. It is required that sufficient averments are made to show that the person who is alleged to be made vicariously liable, was in-charge and was also responsible to the company for conduct of its business. 

While considering the complaint, the Courts ought not to adopt a hypertechnical approach. The Courts have to keep in mind the laudable object behind the NI Act, that is, sustaining the credibility of commercial transactions.  The provisions create a statutory presumption of dis-honesty in case payment is not made within the statutory period even after the issuance of notice. The Court, at the preliminary stage, has to take everything pleaded in the complaint as correct and is required to liberally construe the allegations in favour of the complainant. However, in case the Court comes across unimpeachable and incontrovertible evidence, which is beyond suspicion or doubt and clearly indicate that the director sought to be made vicariously liable could not have been concerned with the issue in subject, it is the Court’s duty to interfere. Therefore, if the Court is convinced that such prosecution is merely an arm-twisting tactics, the proceedings can be quashed.

The complainant, at the time of filing of the complaint, or at the time of issuance of the cheque, is not supposed to be aware as to the exact role of person in-charge or responsible for day-to-day affairs of the company. The complainant is only to aver generally as to who is incharge of the affairs of the Company since the administrative matters could not be within its knowledge.

The accused, therefore, when approaches the Court, seeking exercise of power under Section 482 of Cr.P.C., has to adduce some unimpeachable and incontrovertible evidence, beyond suspicion or doubt, pointing out towards his non-involvement. The burden is on the directors to show that they are not liable to be proceeded against. It is not in doubt that the criminal liability is attracted only on those officials, who at the time of commission of offence, were in-charge and responsible for conduct of the business of the company. The same, however, is a matter of trial. The Court, at this stage, is only concerned whether they should be proceeded against. 

If  director approaches the High Court under Section 482 of Code of Criminal Procedure, 1973, for quashing of the complaint, alleging that he is not concerned with the issuance of the cheque, he has to furnish some sterling incontrovertible evidence or acceptable circumstances to substantiate his contention and that making him stand the trial would be an abuse of the process of the Court. The complaint cannot be quashed on the ground that no particulars are given in the complaint about his specific role and the basic averments are sufficient for the Magistrate to proceed for trial.

High Court is not to conduct a mini trial by considering the defence of the accused or holding an inquiry into the merits of the matter at hand. However, if, on the face of the documents which are beyond suspicion or doubt, the accusations against the accused are found to be frivolous, in order to prevent the injustice and abuse of the process of law, it is incumbent that appropriate relief is granted by exercising power under Section 482 of the Code, 1973.

The role of a Director is well-defined in the Companies Act, 2013. Section 161 of the Companies Act, 2013, provides for appointment of an Additional Director. The Additional Director holds an office during the absence of a director, when the director is not in India for at least a period of three months. In terms of Section 149(12) the Companies Act, 2013, Non-executive directors are external professionals and are not involved in the everyday activities of the company whereas as per rule 2(k) of The Companies (Specification of Definition Details) Rules 2014, Executive Director means a wholetime director as defined in Section 2(94) of the Companies Act, 2013. 

If an Executive Director wants the process to be quashed, on the ground that only a bald averment has been made, the onus of providing unimpeachable and incontrovertible evidence, or acceptable circumstances to substantiate the contentions lies on him/her.

While quashing prosecution against Independent Additional Directors, the factor that was seen was that it has not been stated by the complainant in his complaint whether such Independent Additional Directors are in charge of the independent head which may be related to the transaction which led to the dishonour of the cheques, nor has it been stated that either of these petitioners were incharge of the finances. Even though it is alleged that one of the Independent Additional Director gave specific instructions to deposit the cheques, it cannot be assumed that he was in charge of the day-to-day functioning of the company as his role is that of an Independent Additional Director.