Court’s Decision
The Delhi High Court quashed the proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (“NI Act”) initiated against the petitioners in Complaint Case Nos. 3581/2017, 3582/2017, 3583/2017, and 3235/2017. The Court held that the petitioners cannot be made vicariously liable solely because the petitioner company previously held a 0.3% shareholding in the accused company. Justice Amit Mahajan observed:
“The principle of vicarious liability enshrined under Section 141 of the NI Act cannot be stretched to such extravagant lengths so as to enmesh any person even associated with the accused company to be caught in the web of culpability.”
Facts
- The petitioners challenged separate summoning orders dated 28.10.2017 passed by the Trial Court in multiple cheque dishonour complaints.
- M/s. SAM India Builtwell Pvt. Ltd. was arrayed as Accused No. 6 in the complaints. Its directors and shareholders, including the petitioners, were also named.
- The principal accused was M/s. AVJ Developers (India) Pvt. Ltd. (Accused No. 1), allegedly formed through a conspiracy involving various individuals and companies to defraud the public.
- The complaints arose from dishonoured post-dated cheques issued by Accused No. 1 for ₹1 crore, ₹30 lakhs, ₹20 lakhs, and ₹5 lakhs respectively, given as refund or return of advances paid under various Memoranda of Understanding (MoUs) between the complainants and Accused No. 1.
- The petitioners were neither directors nor signatories of the dishonoured cheques issued by Accused No. 1.
Issues
- Whether mere shareholding in the accused company by the petitioner company (Accused No. 6) could render its directors/shareholders vicariously liable under Section 141 of the NI Act?
- Whether summoning orders against the petitioners could be sustained when they had no direct involvement in the issuance or dishonour of the cheques?
Petitioners’ Arguments
- The petitioners contended that they were neither in charge of nor responsible for the day-to-day business of Accused No. 1.
- They argued that they were not signatories to the dishonoured cheques and had no connection with the affairs of Accused No. 1.
- M/s. SAM India Builtwell Pvt. Ltd., which previously held a mere 0.3% shareholding in Accused No. 1, had transferred its shares in 2014-2015, well before the alleged offences occurred in 2017.
- It was urged that the complaints contained only vague and general allegations and failed to establish the petitioners’ role as required under Section 141 NI Act.
Respondent’s Arguments
- The respondent argued that the petitioners formed part of the association involved in the affairs of Accused No. 1 and were thus liable under Section 141 of the NI Act.
- It was contended that the petitioners’ arguments were factual defences to be decided at trial, and not at the pre-trial summoning stage.
Analysis of the Law
- The Court reiterated that Section 141 NI Act, which imposes vicarious criminal liability, must be strictly construed.
- Citing Rathish Babu Unnikrishnan v. State (NCT of Delhi), the Court held that quashing is justified only where unimpeachable evidence demonstrates the accused’s non-involvement.
- Referring to S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and National Small Industries Corp. v. Harmeet Singh Paintal, the Court emphasized the necessity of specific averments showing how the accused was in charge of and responsible for the conduct of the business of the company at the relevant time.
- The use of the conjunctive “and” in Section 141(1) was highlighted, stressing that both conditions — being “in charge of” and “responsible to the company” — must be met.
Precedent Analysis
The Court relied on:
- S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005) 8 SCC 89: A director is liable only if in charge of and responsible for the conduct of business at the relevant time.
- National Small Industries Corp. v. Harmeet Singh Paintal (2010) 3 SCC 330: Mere designation is insufficient; specific role and responsibility must be shown.
- Ashok Shewakramani v. State of Andhra Pradesh (2023) 8 SCC 473: “In charge of” and “responsible to the company” must be read conjunctively.
- Susela Padmavathy Amma v. Bharti Airtel Ltd. (2024 INSC 206): Mere directorship does not imply involvement in day-to-day affairs.
Court’s Reasoning
- The Court found no material indicating the petitioners were either in charge of or responsible for the business of Accused No. 1 at the time of the alleged offence.
- The fact that M/s. SAM India Builtwell Pvt. Ltd. had divested its 2000 shares in Accused No. 1 in 2014-15 was crucial, as the cheques were issued and dishonoured in 2017.
- No specific averments were made about the petitioners’ involvement in day-to-day management of Accused No. 1.
- Holding otherwise would stretch the principle of vicarious liability beyond its permissible scope.
Conclusion
The High Court quashed the criminal complaints against the petitioners, stating:
“The petitioners cannot be stitched to be bound to the affairs of Accused No. 1 company by the mere thread that the petitioner company at some stage held 0.3% shareholding in Accused No. 1 company.”
Implications
This judgment reinforces the principle that criminal liability under Section 138 read with Section 141 of the NI Act cannot be imposed solely on account of shareholding or remote association with the principal offender. It underscores the need for courts to insist on specific allegations detailing the role of each accused, especially in cheque bounce cases involving corporate entities.