Jahanvi Agarwal
On March 15, the Supreme Court made a pivotal observation regarding the liability of company Directors in cases of cheque dishonor under the Negotiable Instruments Act, 1882. In a significant turnaround from the High Court’s stance, which had earlier declined to dismiss proceedings under Section 138 of the N.I. Act against a Director accused of such an offense, the Bench led by Justices B.R. Gavai and Sandeep Mehta clarified the legal position. They highlighted that a Director not involved in the day-to-day operations of a company cannot be automatically held accountable for offenses under this act.
The Bench articulated that the liability of a company Director for offenses committed by the company, as per Section 141 of the Act, necessitates explicit allegations. These must detail the Director’s role in the company’s operations to establish their accountability. “It could thus be seen that this Court had held that simply because a person is a director of the company, it does not necessarily mean that he fulfills the twin requirements of Section 34(1) of the said Act so as to make him liable. It has been held that a person cannot be made liable unless, at the material time, he was in charge of and was also responsible to the company for the conduct of its business,” Justice B.R. Gavai penned in the judgment.
This ruling essentially asserts that a Director’s liability for a cheque’s dishonor is contingent upon concrete proof of their involvement in the company’s day-to-day affairs. “It was, therefore, necessary, to aver as to how the director of the company was in charge of day-to-day affairs of the company or responsible to the affairs of the company,” the court added for clarity.
The case in question involved a complaint under Section 138 of the N.I. Act against the appellant, who held a directorial position within the company. The complainant, however, failed to establish the director’s direct involvement in the company’s daily management or how they were specifically responsible for the conduct leading to the dishonored cheque.
Upon reviewing the complaint, the Supreme Court noted that holding the title of a company Director does not imply awareness or involvement in its daily operations. The lack of specific allegations meant that the provisions of Section 141 of the N.I. Act could not be applied to the appellant.
Given these observations, the Supreme Court decided to quash the ongoing proceedings against the accused, emphasizing the need for clear, specific allegations to hold a Director liable under the N.I. Act for cheque dishonor.