Introduction
In a recent judgment in the matter of Susela Padmavathy Amma vs. Bharti Airtel Limitedi, the Hon'ble Supreme Court ("Court"), quashed a criminal complaint filed against one of the directors of a company for the offence punishable under section 138 read with section 142 of the Negotiable Instruments Act, 1881 ("NI Act"). The Court held that the vicarious liability of a director for an offence committed by a company under the NI Act arises if at the time of commission of an offence the director was in-charge of the company and responsible for the conduct of business of the company.
Factual Background
Fibtel Telecom Solutions (India) Private Limited ("Fibtel" or "Company"), approached Bharti Airtel Limited ("Respondent") to obtain telecom resources for the purpose of transactional communication. Susela Padmavathy Amma ("Appellant") was one of the director of Fibtel. According to the Respondent, Fibtel failed to make payments for the services provided as the cheques given by it to the Respondent was returned as unpaid with reason "payment stopped by drawer". Accordingly, the Respondent filed two criminal complaints for offences punishable under section 138 read with section 142 of the NI Act, in relation to dishonour of cheques, against three accused persons including Fibtel and the Appellant. The Appellant, being director of Fibtel, approached the High Court of Madras to quash the criminal complaints against her under section 482 of the Criminal Procedure Code, 1973. The court dismissed her plea, following which she filed an appeal before the Supreme Court. The Appellant contended that she is a senior citizen and an aged lady who was not involved in the day-to-day affairs of Fibtel, and she was also not a signatory to the cheques in question. Therefore, she cannot be held vicariously liable for the default of Fibtel.
Issue
Whether a director of the Fibtel be held vicariously liable for an offence committed by Fibtel under section 138 and section 141 of the NI Act, by virtue of being a director?
Supreme Court Judgment and Rationale
The Court was of the view that to fasten vicarious liability on a person under section 141 of the NI Act, the complainant should specifically show as to how and in what manner the accused was responsible. Simply because a person is a director of a defaulter company, does not make him liable under the NI Act. The Court emphasised that only the person who was at the helm of affairs of the company and in charge of and responsible for the conduct of the business at the time of commission of an offence will be liable for criminal action. The Appellant was not the in-charge and not responsible for the affairs of Fibtel.
The Court referred to the State of Haryana vs. Brij Lal Mittal and others2 and observed that the vicarious liability of a person for being prosecuted for an offence committed by a company arises if at the material time he was in charge of and was also responsible to the company for the conduct of its business.
The Court referred to another case (S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and another3) wherein the Court had earlier ruled that merely because a person is a director of a company, it is not necessary that he is aware about the day-today functioning of the company. There is no universal rule that a director of a company is in charge of its everyday affairs. The Court had therefore held that it was 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 had however clarified in the above case that the position of a managing director or a joint managing director in a company may be different. These persons, as the designation of their office suggests, are in charge of a company and are responsible for the conduct of the business of the company. To escape liability, they will have to prove that when the offence was committed, they had no knowledge of the offence or that they exercised all due diligence to prevent the commission of the offence.
The Court then referred to Pooja Ravinder Devidasani vs. State of Maharashtra and another4, wherein it was held that a company may have a number of directors and to make any or all the directors as accused in a complaint merely on the basis of a statement that they are in charge of and responsible for the conduct of the business of the company without anything more is not a sufficient or adequate fulfilment of the requirements under section 141 of the NI Act.
Summation:
The law on vicarious liability of a person under section 141 of the NI Act is well settled by the Supreme Court in a catena of cases wherein the complainant is required to specifically show as to how and in what manner the accused director is responsible. This has however not stopped frivolous litigation by complainants against any and all directors of defaulting companies who may not have any real control and responsibility with regard to the operations of the defaulting companies and hence not liable under the NI Act. Time and again, it has been asserted by the Supreme Court that only the person who is at the helm of affairs of the company and in charge of and responsible for the conduct of the business at the time of commission of an offence will be liable for criminal action. It is hoped that going forward the complainants will make specific and clear averments supported by evidence to show how the directors can be held accountable for the offence of the defaulting companies under section 141 of the NI Act in tandem with the recent judgment.
Footnotes
1 2024 SCC Online SC 311
2 (1998) 5 SCC 343
3 MANU/SC/0622/2005
4 (2014) 16 SCC 1
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