Directors of a company hold a fiduciary position and are expected to manage the affairs of the company in a manner beneficial to the company's interests. Directors' liability arises because of their position as agents or officers or trustees of the Company as also for having fiduciary relation with the Company and its shareholders. Non-executive directors or independent directors are not charged with the day to day affairs and management of the company and are usually involved in the planning and decision-making activities.
The question of liability of independent directors on account of dishonour of cheques has more often than not, come for consideration in various cases before different Indian courts. Once again on March 3, 2020, in the case of Sunita Palta vs. M/s Kit Marketing Private Limited1 it was observed that the non-executive directors of a company are exempt from Section 138 of the Negotiable Instrument Act, 1881 ("NI Act"), which pertains to the dishonour of cheque and attracts criminal liability for the same.
In this case, a petition was instituted for challenging an order passed by the Metropolitan Magistrate where the petitioners (Sunita Palta and Bhagwan Singh Duggal) were summoned for the offence punishable under Section 138 of the NI Act. Initially, a complaint was filed against the respondent private limited company along with seven other accused persons, including the petitioners who were independent non-executive directors of the said company. The complaint was filed under Section 138 read with Sections 141/142 of the NI Act.
The petitioners contended that the cheques in question were drawn from the account which was maintained by the company, wherein the petitioners were non-executive directors and never involved in the day to day affairs of the company. The issue raised in this case was whether the non-executive directors of a company are liable for cheque dishonour proceedings under Section 138 of the NI Act?
The Court discussed the vicarious liability of a person in terms of Section 141 of the NI Act. It was observed that what is required is that the persons who are sought to be made criminally liable under Section 141 of the NI Act, should be, at the time the offence was committed, in charge of and responsible to the company for the conduct of business of the company. Every person connected with the company shall not fall within the ambit of this provision. Therefore, if a director of a company was not in charge of and was not responsible for the conduct of the business of the company at the relevant time, he will not be liable under the said provision. Conversely, a person not holding any office or designation in a company may be liable if he satisfies the main requirement of being in charge of and responsible for the conduct of business of a company at the relevant time.
It is also an abundantly clear position that necessary averments ought to be contained in a complaint before a person can be subjected to criminal process. A liability under Section 141 of the NI Act is sought to be fastened vicariously on a person connected with a company, the principal accused being the company itself. It is a departure from the rule in criminal law against vicariously liability.
The court, in this case, reiterated out the dictum laid down in Pooja Ravinder Devidasani v. State of Maharashtra & Anr2. where the issue was relating to the vicarious liability of a non-executive director. The Apex Court said, "Non-executive Director is no doubt a custodian of the governance of the Company but does not involve in the day-to- day affairs of the running of its business and only monitors the executive activity. To fasten vicarious liability under Section 141 of the 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. Simply because a person is a director of a company, does not make him liable under the N.I. Act. Every person connected with the company will not fall into the ambit of the provision. Time and again, it has been asserted by this Court 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. A director, 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 for an offence under Section 141 of the N.I. Act.”
In the case of Sunita Palta vs. M/s Kit Marketing Private Limited, it was an admitted fact that the petitioners were neither the managing directors nor the authorized signatories of the accused company. Further, no specific role had been attributed to the petitioners, except for the general allegation stating that the petitioners were responsible for control and management and day to day affairs of the accused company. The Court held that such generalised averment is not enough and in view of the same, the petition was allowed. The impugned order with respect to summoning the petitioners was this quashed.
It can be seen from the above that it is very important to clarify in the complaint itself how an independent director was engaged in the day- to-day affairs of the running of the company at the time the offence was committed.
Footnotes
1 CRL.M.C. 1410/2018
2 Criminal Appeal Nos.2604-2610 of 2014
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