Court’s Decision
The Supreme Court allowed the appeal filed by HDFC Bank Ltd. and set aside the judgment of the Bombay High Court dated 10.01.2024, which had quashed proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (NI Act) against Respondent No. 2, a director of the company accused of issuing a dishonoured cheque. The Court restored the Magistrate’s order dated 16.12.2019 issuing process and directed that the trial be proceeded with in accordance with law.
“What is important to note is that the repetition of the exact words of the Section in the same order, like a mantra or a magic incantation is not the mandate of the law.”
Facts
- A private limited company availed a Revolving Loan Facility from HDFC Bank, initially sanctioned at ₹5 crore and later enhanced to ₹8 crore.
- Directors of the company, including Respondent No. 2, actively negotiated the facility, executed the loan and security documents, and provided personal guarantees.
- A cheque for ₹6,02,04,217/- issued by the company was dishonoured with the remark “account blocked.”
- Legal notice was issued but returned unclaimed. The bank filed a complaint under Section 138 NI Act, naming the company and its directors as accused.
- The Magistrate issued process against all accused. Respondent No. 2 challenged the proceedings under Section 482 CrPC, and the Bombay High Court quashed them, stating that the complaint did not adequately aver her role to attract vicarious liability under Section 141.
Issues
- Whether the complaint contained sufficient averments to invoke vicarious liability under Section 141 NI Act against Respondent No. 2.
- Whether the Bombay High Court was justified in quashing proceedings based on alleged insufficiency of pleadings.
Petitioner’s Arguments (HDFC Bank)
- The complaint clearly stated that Respondent No. 2 was a director and was “responsible for the day-to-day affairs, management, and working” of the company.
- Respondent No. 2 was authorized through board resolutions to:
- Negotiate with the bank,
- Execute documents (promissory notes, hypothecation agreements),
- Mortgage company property,
- Register charges with the Registrar of Companies.
- She also provided personal and performance guarantees, which show her involvement and responsibility.
- Relied on various Supreme Court judgments holding that substance, not form, is key in evaluating Section 141 compliance.
Respondent’s Arguments
- Merely being a director is not sufficient; the complaint must specifically aver that the person was “in charge of and responsible to the company for the conduct of its business”.
- The complaint does not use the exact language of Section 141 and is therefore deficient.
- Relied on the judgment in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005) 8 SCC 89 to argue that strict compliance with Section 141 is required.
- Also cited Siby Thomas v. Somany Ceramics Ltd. (2024) 1 SCC 348 and Harmeet Singh Paintal (2010) 3 SCC 330, among others.
Analysis of the Law
Section 141 of the NI Act
It deems a person liable for a company’s offence under Section 138 if:
- He/she was in charge of and
- Responsible to the company for the conduct of its business at the time of the offence.
The proviso protects a person who proves the offence was committed without their knowledge or despite due diligence.
Key Legal Principle
The complaint must disclose that the accused:
- Was in charge of the business, and
- Was responsible to the company at the time of the offence.
But repeating statutory language verbatim is not mandatory if the complaint’s substance meets the legal test.
Precedent Analysis
1. S.M.S. Pharmaceuticals-I (2005) 8 SCC 89
- Held that specific averments are necessary.
- Reproducing Section 141 verbatim is not required if the substance of the complaint meets the test.
- Complaints should not be dismissed by taking a hyper-technical view.
2. Monaben Ketanbhai Shah (2004) 7 SCC 15
- Held that a broad reading of the complaint is required.
- Focus should be on whether the substance meets Section 141’s requirement.
3. Sabitha Ramamurthy (2006) 10 SCC 581
- Clear statement of fact showing vicarious liability is essential.
- Reiteration that strict compliance is required—but verbatim language is not.
4. A.K. Singhania (2013) 16 SCC 630
- Substance-over-form approach reiterated.
- Complaint need not set out specific roles in detail.
5. Ashok Shewakramani (2023) 8 SCC 473 – Distinguished
- Court quashed proceedings due to omnibus and vague averments.
- In contrast, present case has specific board resolutions and authorizations.
6. Siby Thomas (2024) 1 SCC 348 – Distinguished
- Complaint lacked role-specific allegations.
- Present complaint provides detailed description of Respondent No. 2’s responsibilities.
7. S.P. Mani and Mohan Dairy (2023) 10 SCC 685
- Confirmed that complainant need not know internal administrative details.
- Once basic averments are made, burden shifts to the accused to prove non-involvement.
8. K.K. Ahuja (2009) 10 SCC 48
- Averment that the accused was in charge of and responsible is enough.
- No requirement to provide administrative specifics.
9. Harmeet Singh Paintal (2010) 3 SCC 330
- Cited by respondent to argue for detailed role attribution.
- Supreme Court clarified that this judgment only applies to matters within complainant’s knowledge, not internal company affairs.
Court’s Reasoning
- The complaint explicitly stated Respondent No. 2 was responsible for day-to-day operations and was involved in negotiating, executing, and managing the loan transaction.
- Board resolutions empowered her to:
- Execute documents,
- Register mortgages,
- Affix the company seal,
- Register charges,
- Provide performance guarantees.
- These averments go beyond mere designation as director and show direct involvement.
- It is not required to mechanically parrot statutory language; the substance of the complaint suffices.
“Substance will prevail over form.”
“It is only the Directors of the company… who have the special knowledge about the role they had played… It is for them to establish at the trial to show that… they were not in charge.”
Conclusion
The Supreme Court found the Bombay High Court’s approach to be hyper-technical and erroneous. The complaint contained sufficient factual material to proceed to trial. The respondent’s role was clearly spelt out, and vicarious liability under Section 141 was made out.
The Court allowed the appeal, set aside the quashing order, and restored the Magistrate’s order issuing process against Respondent No. 2.
Implications
- Clarifies that verbatim use of Section 141 language is not mandatory if complaint averments indicate actual involvement and responsibility.
- Ensures that directors cannot escape liability merely by insisting on form over substance.
- Strengthens the enforcement of cheque dishonour provisions and protects the integrity of commercial lending.
- Emphasizes that defences like lack of knowledge or involvement are to be tested at trial, not at the threshold stage.