Liability of Directors under Negotiable Instruments Act, 1881

It is generally known that the directors are vicariously liable for the act of the company, as the company is an artificial person and shall act on behalf of its directors only. However, in this regard section 141 of the Negotiable Instruments Act, 1881 is worth noting:      

141 Offences by companies. -

(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly

However, the section further provided that: Nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence    

Thus as per the bare reading of the above provisions when a cheque issued by a company is dishonored, in addition to the Company, the following persons are deemed to be guilty of the offence and shall be liable to be proceeded against and punished:

•  Every person, who at the time the offence was committed, was in-charge of and was responsible to the company for the conduct of the business of the company;

• Any Director, Manager, Secretary or another officer of the company with whose consent and connivance, the offense under section 138 had been committed; and

• Any Director, Manager, Secretary or another officer of the company whose negligence resulted in the offense under section 138 being committed by the company.

Regarding the legal position of the as to vicarious liability of the directors in the company the Supreme Court has laid down following principles in the case of National Small Industries Corporation Limited v. Harmeet Singh Paintal

1.  In order to make the accused vicariously liable, the complainant must make specific averments as required under the law in the complaint. There is no presumption that the director knows about the transaction in order to make him criminally liable.

2. The director must be at the time of the commission of the offence in charge and responsible for the conduct of the business of the company. Section 141 does not make all the directors liable for the offence.

3. Vicarious liability should not be inferred but should be pleaded and proved.

4. It is not necessary that specific averments should be made in the complain if the accused is a managing director or a joint managing director. By the virtue of their position, they are liable to be proceeded with.

5. When a director or an officer of the Company signs the cheque on behalf of the Company, no specific averments are required to be made in the complaint.

Thus the person/director who is in-charge of the concerning affairs of the company at the time of commission of the offence is vicariously liable. However the person who was not in-charge of the affairs of the company but the offence was committed with his consent or as a result of his negligence, shall be vicariously liable.

As far as the liability of the former directors in the cheque bounce cases, the decision of Supreme Court in Anita Malhotra Vs Apparel Export Promotion Council and others is self-explanatory. Bench of justices P.Sathasivam and Jasti Chelameshwar said -

In the case of the director, the complaint should specifically spell out how and in what manner the director was in charge of or was responsible to the accused company for the conduct of its business”. The bench held that no complaint could be filed against a director who had resigned his / her post prior to the dishonor of the cheque.

 

Published in Corporate Law
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