Supreme Court rules that a person can't be indicted for cheque default only because of managing company’s business

Supreme Court rules that a person can't be indicted for cheque default only because of managing company’s business

Explains there cannot be any vicarious liability when it comes to a penal provision

The Supreme Court has held that under Section 141 of the Negotiable Instruments Act, 1881, a person will become vicariously liable when a company is accused of the offense under Section 138 (dishonor of cheque for insufficiency of funds), only if he was ‘in charge of’ and ‘responsible for conducting the businesses’ at the time, the offence was committed.

A division bench of Justice Abhay S Oka and Justice Sanjay Karol observed that merely because a person was managing a company and was involved in its day-to-day affairs, does not automatically mean that he comes under the NI Act. The requirement under sub-section 1 of Section 141 of the Act is ‘something different and higher.

It clarified that under Section 141 of the Act, every person who was in charge of and was responsible to the company for the conduct of the business of the company at the time the offense was committed, would be guilty of the offense under Section 138 of the NI Act along with the company.

The Court observed, “Section 141 is an exception to the normal rule that there cannot be any vicarious liability when it comes to a penal provision. The vicarious liability is attracted when the ingredients of sub-section 1 of Section 141 are satisfied.”

The bench held that the words "was in charge of" and "was responsible to the company for the conduct of the business of the company", needed to be read conjunctively.

The Court was considering the appeals by Directors of a company, who were accused in a complaint filed under Section 138 of the NI Act.

Earlier, the High Court had dismissed their petitions under Section 482 of the Code of Criminal Procedure, 1973 for quashing the complaints against the appellants.

The contention of the complainant (second respondent in the appeal) was that the appellants were liable for transactions of the company and were fully aware of the issuance and dishonor of the cheques.

Relying on the SP Mani and Mohan Diary versus Dr Snehalatha Elangovan 2022 case, the complainant contended that the appellants failed to reply to the statutory notice.

However, the Apex Court held that the requirements under Section 141 had not been met. It observed, “The most important averment which is required by sub-Section (1) of Section 141 of the NI Act is that the directors were in charge of and responsible for the company’s conduct. The appellants are neither the signatories to the cheques nor are whole-time directors. The decision in the ‘SP Mani and Mohan Diary vs Dr Snehalatha Elangovan’ will have no application here. The statutory notice was admittedly not served to the accused. Obviously, the high Court has not adverted to aforesaid two glaring deficiencies in the complaint.”

Thus, while allowing the appeals, the Top Court emphasized the distinction between being in charge of the company and being responsible for the conduct of the business of the company.

It stated, “The allegation that they are in charge of the company is neither here nor there. By no stretch of the imagination, on the basis of such averment, one can conclude that the allegation of the second respondent is that the appellants were also responsible to the company for the conduct of the business. Only by saying that a person was in charge of the company at the time when the offense was committed is not sufficient to attract sub-section 1 of Section 141 of the NI Act.”