Vicarious Liability under S. 138 Negotiable Instruments Act : Necessary Averments must be made in Complaint

Justice C.K. Prasad
Supreme Court of India

The Hon'ble Supreme Court in A.K. Singhania Vs. Gujarat State Fertilizer Co. Ltd. & Anr. has reiterated that a complaint under S. 138 read with S. 141 of the Negotiable Instruments Act must necessarily contain specific averments with respect to the role of each Director in cases where a Company is arrayed as an accused. While examining previous decisions on this subject, the Bench has held as under:

16. In case of offence by company for dishonour of cheque, the culpability of the Directors has to be decided with reference to Section 141 of the Act, same reads as follows: 

“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:  

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 to prevent the commission of such offence:  

Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.  

(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.  

Explanation.- For the purposes of this section,-
(a) "company" means any body corporate and includes a firm or other association of individuals; and  

(b) "director", in relation to a firm, means a partner in the firm.” 

17. From a plain reading of the aforesaid provision it is evident that every person who at the time the offence was committed is in charge of and responsible to the Company shall be deemed to be guilty of the offence under Section 138 of the Act. In the face of it, will it be necessary to specifically state in the complaint that the person accused was in charge of and responsible for the conduct of the business of the Company? In our opinion, in the case of offence by Company, to bring its Directors within the mischief of Section 138 of the Act, it shall be necessary to allege that they were in charge of and responsible to the conduct of the business of the Company. It is necessary ingredient which would be sufficient to proceed against such Directors. However, we may add that as no particular form is prescribed, it may not be necessary to reproduce the words of the section. If reading of the complaint shows and substance of accusation discloses necessary averments, that would be sufficient to proceed against such of the Directors and no particular form is necessary. However, it may not be necessary to allege and prove that, in fact, such of the Directors have any specific role in respect of the transaction leading to issuance of cheque. Section 141 of the Act makes the Directors in charge and responsible to Company “for the conduct of the business of the Company” within the mischief of Section 138 of the Act and not particular business for which the cheque was issued. We cannot read more than what has been mandated in Section 141 of the Act. 

18. A large number of authorities of this Court have been cited by the counsel representing the party to bring home their point. We deem it inexpedient to refer to all of them. Suffice it to say that this question has been answered eloquently by a three-Judge Bench decision of this Court in the case of S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89, in the following words: 

“19. In view of the above discussion, our answers to the questions posed in the reference are as under: 

(a) It is necessary to specifically aver in a complaint under Section 141 that at the time the offence was committed, the person accused was in-charge of, and responsible for the conduct of business of the company. This averment is an essential requirement of Section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of Section 141 cannot be said to be satisfied.” 

20. This Court in the case of National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, (2010) 3 SCC 330, after reviewing all its earlier judgments summarized the legal position as follows: 

“39. From the above discussion, the following principles emerge:  

(i) The primary responsibility is on the complainant to make specific averments as are required under the law in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no presumption that every Director knows about the transaction.  

(ii) Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company.  

(iii) Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make the accused therein vicariously liable for offence committed by the company along with averments in the petition containing that the accused were in charge of and responsible for the business of the company and by virtue of their position they are liable to be proceeded with.  

(iv) Vicarious liability on the part of a person must be pleaded and proved and not inferred.  

(v) If the accused is a Managing Director or a Joint Managing Director then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with.  

(vi) If the accused is a Director or an officer of a company who signed the cheques on behalf of the company then also it is not necessary to make specific averment in the complaint.  

(vii) The person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases.” 

21. In Harshendra Kumar D. v. Rebatilata Koley, (2011) 3 SCC 351, after referring to its earlier decisions in S.M.S. Pharmaceuticals Ltd.(supra), National Small Industries Corpn. Ltd.(supra), N. Rangachari v. Bharat Sanchar Nigam Ltd., (2007) 5 SCC 108 and K.K. Ahuja v. V.K. Vora, (2009) 10 SCC 48, this Court reiterated the same view. 

22. We have found on fact that there is no averment that the two accused herein were in charge of and responsible for the conduct of the business of the company at the time the offence was committed. Hence, there is no essential averment in the complaints. In view of what we have observed above, the prosecution of accused A.K. Singhania and accused Vikram Prakash cannot be allowed to continue. Accordingly, the order of the High Court quashing the prosecution of the accused Vikram Prakash is not fit to be interfered with. For the same reason the order passed by the High Court declining the prayer of A.K. Singhania for quashing of the prosecution cannot be sustained and the appeals preferred by him deserve to be allowed. 

23. In the result, we dismiss the appeals preferred by the complainant Gujarat State Fertilizers Company Ltd. and allow the appeals preferred by A.K. Singhania and quash his prosecution in all these cases.