A Non-executive Director not involved in the day to day affairs of the Company is not liable under section 138 of Negotiable Instruments Act: Delhi HC

The Delhi High Court ruled that a Non-executive Director who is not involved in the day to day affairs of the Company would not be liable under section 138 of Negotiable Instruments Act, 1881 (NI Act). The Court went on to hold that the persons who are sought to be made criminally liable under Section 141 of the NI Act should be, at the time when the offence was committed, in charge of and responsible to the company for the conduct of the business of the company. Every person connected with the company shall not fall within the ambit of the provision

In the present case, proceedings were instituted under Section 482 Cr.P.C challenging the order passed by the Metropolitan Magistrate whereby the petitioners were summoned for the offence punishable under Section 138 of the Negotiable Instruments Act, 1881 (NI Act).

The accused were regular purchasers of goods from the complainant – a private limited company which was engaged in the business of plywood – on credit basis. The petitioners owed an outstanding balance of Rs. 36,46,758/-. The cheques issued by the petitioners were dishonoured. A complaint was filed under Section 138 read with Sections 141 and142 of the NI Act.

The petitioners contended that they were the independent Non-executive Additional Directors and were never involved in the day to day affairs of the company at any point of time.

The Delhi High Court ruled that a Non-executive Director is a custodian of the governance of the Company but does not involve in the day-today affairs of the running of its business and only monitors the executive activity. To fasten vicarious liability under Section 141 of the NI Act on a person, at the material time that person shall have been at the helm of affairs of the Company, one who actively looks after the day-to-day activities of the Company and particularly responsible for the conduct of its business.

The Court reiterated that only those persons who were in charge of and responsible for the conduct of the business of the Company at the time of commission of an offence will be liable for criminal action in cases of dishonour of cheques under section 138 of the NI Act.

The Court further held that merely being a Director of a company is not sufficient to make the person liable under Section 141 of the Act, till it is shown that the said Director was in-charge of and responsible for the conduct of his business.

The Court went on to hold that the requirement under Section 141 of the NI Act is that the persons who are sought to be made criminally liable under the said section should be, at the time the offence was committed, in charge of and responsible to the company for the conduct of the business of the company. Every person connected with the company shall not fall within the ambit of the provision. It is only those persons who were in charge of and responsible for the conduct of business of the company at the time of commission of an offence, who will be liable for criminal action. It follows from this that if a director of a company, who was not in charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable under the provision.

Justice Manoj Kumar Ohri held that the liability arises from being in charge of and responsible for the conduct of business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company.