Supreme Court: Director Not Liable For Dishonour of Cheque Issued After Their Retirement Unless Credible Evidence Presented To Prove Culpability

Supreme Court: Director Not Liable For Dishonour of Cheque Issued After Their Retirement Unless Credible Evidence Presented To Prove Culpability

The Supreme Court has noted that the liability of the company's director cannot be established for the dishonour of a cheque issued by the company following the director's retirement unless credible evidence is presented to prove the director's culpability.

Overturning the High Court's decision to uphold the criminal proceedings against the accused director, the bench consisting of Justices B.R. Gavai and Sanjay Karol stated that the director could only be held accountable for the dishonour of the cheque following retirement if it's demonstrated that any action of the company was carried out with the director's connivance, consent, or attributable conduct.

The court observed that the legal understanding concerning the liability of a director for the non-realization of a cheque is well-established. Referring to Section 141 of the Negotiable Instruments Act (N.I. Act), the court highlighted that individuals responsible for the affairs or conduct of the company at the time of the offense are liable under Section 138 of the N.I. Act. However, exceptions exist where such actions, if undertaken without their knowledge or after taking all necessary precautions, would not render them liable. Crucially, the court emphasized that if it is proven that any action of the company was conducted with the connivance, consent, or attributable conduct of a director, manager, secretary, or any other officer, they would be deemed guilty of the offense and subject to appropriate legal proceedings.

The complaint was filed against the accused directors under the provisions of the Negotiable Instruments Act. The accused director sought to have the complaint quashed by petitioning the High Court, but the High Court rejected this request. Dissatisfied with the High Court's decision, the accused director appealed to the Supreme Court. The key question before the Supreme Court was whether a director who has resigned from their position in a company can still be held liable for certain negotiable instruments that fail to be realized.

The court, answering the aforementioned question in the negative, examined the evidence presented on record and concluded that the directors could not be held liable. The court noted that the resignations occurred on 9th December 2013 and 12th March 2014, while the cheques in question were issued on 22nd March 2014. The court held that since the appellants had already severed their ties with the respondent company, they could not be held responsible for the conduct of business at the relevant time. Therefore, the court concluded that they should be discharged from prosecution.

The court observed that there was a lack of evidence provided by the complainant to indicate the involvement of the present appellants in the alleged crime. Particularly noteworthy was the fact that the appellants had no role in the issuance of the instrument, as evidenced by Form 32 (Exh.P.59), which was issued much earlier than the date on which the cheque was drawn and presented for realization.

The court considered proviso 1 to Section 141 of the Negotiable Instruments Act, 1881, which stipulates that every person responsible for the affairs or conduct of the company's business at the time of the offense shall be held liable under Section 138 of the N.I. Act. However, an exception exists wherein if the act was performed without the person's knowledge or after taking all necessary precautions, they would not be held liable.

Further, citing the case of S.M.S. Pharmaceuticals, the court emphasized that a director who was not involved in the issuance of cheques should not be summoned to trial unless credible evidence is presented against them alleging their involvement in the issuance of the cheque.

The court observed that in cases involving negotiable instruments, interference through the exercise of inherent powers under Section 482 of the CrPC would not be justified unless there was some unimpeachable, incontrovertible evidence. This evidence should be beyond suspicion or doubt or should present totally acceptable circumstances that clearly indicate that the director could not have been involved in the issuance of cheques. Asking such a director to stand trial under these circumstances would amount to an abuse of the court's process.

Based on the aforementioned observations, the court granted the criminal appeal of the accused directors and quashed the ongoing criminal proceedings against them.