Holding

A director can be held vicariously liable under Section 138 only if the complaint expressly alleges that he was responsible for the conduct of the company's business; mere participation in negotiations is insufficient.

Summary

The complainant filed a criminal complaint under Section 138 of the Negotiable Instruments Act against a company and its directors for dishonouring a cheque. The appellant, a director, argued that he was not a director at the relevant time and that the complaint failed to satisfy the statutory requirements of Section 141 for vicarious liability. The High Court dismissed his petition under Section 482 of the CrPC, but the Supreme Court held that to invoke vicarious liability a complaint must expressly allege that the director was responsible for the conduct of the company's business, which was absent. Participation in negotiations for obtaining finance does not establish such responsibility, and vicarious liability must be pleaded and proved, not inferred. Consequently, the Supreme Court set aside the High Court’s judgment and quashed the order taking cognizance of the complaint.

Issues considered

Whether a director can be held vicariously liable under Section 138 of the Negotiable Instruments Act without a specific allegation of responsibility for the company's business under Section 141.
Whether participation in negotiations for financial assistance suffices to infer a director's responsibility for day‑to‑day affairs of the company.
Whether the complaint petition complied with the statutory requirements of Section 141 for invoking vicarious liability.

Legislation cited

Code of Criminal Procedure, 1973s. 200, s. 482
Negotiable Instruments Act, 1881s. 138, s. 141

Subjects

Negotiable Instruments ActSection 138vicarious liabilitydirector liabilitySection 141Section 482criminal complaintcompany directorsquashing of proceedings

Judgment

A K. SRIKANTH SINGH
v.
MIS. NORTH EAST SECURITIES LTD. AND ANR.

JULY 20, 2007

B [S.B. SINHA AND H.S. BEDI, JJ.]

Negodable Instruments Act, 1881; Ss. 138 and 141:

Complaint against a company and its directors for committing offence
C u/s. 138 of the Act-One of the directors filing a petition u/s. 482 Cr. P. C.
for quashing the proceedings-Dismissed by High Court-On appeal, Held:
For showing vicarious liability of a Director of a Company, it is incumbent
on complainant to plead that the accused was responsible for conducting the ·
business of the company-No such a/legation made by the complainant-
D Merely because the accused-director participated in negotiations for ·obtaining
finance from the complainant, it cannot be said that he was responsible for
day to day affairs of the company-Further, vicarious liab/ity against accused
must be pleaded and proved and it cannot be a subject matter of mere
inference-Under the circumstances, impugned judgment cannot be sustained,
thus, set aside and the order taking cognizance of the complaint quashed-
E Code of Criminal Procedure, 1973; s. 482.

The question which arose for determination in this appeal was as to
whether in the facts and circumstances of the case, the appellant, a director
of accused company could be held vicariously liable for committing offence
u/s. 138 of the Negotiable Instruments Act.
F
Appellant-director contended that at the relevant point of time, he was
not the director of the Company; and that no cognizance could be taken on
the basis of the allegations made in the complaint petition as the same do not
satisfy the requirement of the provisions under Section 141 of the Negotiable
G Instrument Act.

Allowing the appeal, the Court

HELD: 1.1. For showing a vicarious liability of a Director of a Company, r ,

H 452
K. SRIKANTH SINGH~" NOR TH EAST SECURITIES LTD. [S B. SINHA, J.] 453
,,,._
upon the complaint it is incumbent to plead that the accused was responsible A
to the Company for the conduct of the business of the Company. No such
allegation having been made in the complaint petition, the High Court was
not correct in passing the impugned judgment. !Para 4) 1455-D, E)

1.2. Allegation that all the accused Directors participated in the
negotiations for obtaining financial help for accused No. 1 would not give rise B
to an inference that the appellant was responsible for day-to-day affairs of the
')(
Company. !Para 411455-E, Fl

S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr., 120051 8 SC 89,
relied on.
c
1.3. Negotiation for obtaining financial assistance on behalf of the
Company by its Directors itself is not an ingredient for the purpose of
constituting ah offence under Section 138 of the Negotiable Instruments Act.
Furthermore, a vicarious liability on the part of a person must be pleaded and
proved. It cannot be a subject matter of mere inference. (Para 5) 1456-E)
,,. D
}--- Sabitha Ramamurthy & Anr. v. R.B.S. Channabasavaradhya, (2006) 10
SCC 581, relied OR.

2. In the facts and circumstances of the case, the impugned judgment
cannot be sustained and the same is accordingly set aside. The order taking
E
cognizance is quashed. !Para 7) 1457-F)

CRIMINAL APPELLATE JURISDICTION: Criminal Appeal No. 919 of
2007.

From the Judgment & Order dated 12.09 .2006 of the High Court of
F
Judicature, Andhra Pradesh at Hyderabad in Criminal Petition No. 4084 of
2006.

Anil Kumar Tandale for the Appellant.

The Judgment of the Court was delivered by
G
S.B. SINHA. J. l. Leave granted.
---.. 2. Appellant has been proceeded against for alleged commission of an
offence under Section 138 of the Negotiable Instruments Act. First respondent
filed a complaint in the Court of 3rd Additional Chief Metropolitan Magistrate,
H
454 SUPREME COURT REPORTS [2007] 8 S.C.R.

A Hyderabad. In regard to the liability of the appellant, which is vicarious in ~
nature, the following statement has been made in paragraph 2 of the complaint
petition which reads· as under:

"2. That the accused is a company doing their business in the
name and style of Mis. Rishab Alchem India Ltd., having its Registered
B office at E2, Shantinivas Apartments, Mettuguda, Secunderabad and 1
represented by Accused No. 2 in the capacity of Managing Director
t
of the first accused company and accused no. 3 to 6 are the directors
)<
of the company. All the accused persons after negotiation with the
Complainant firm had agreed to take financial assistance from the
Complainant firm. After executing comprehensive loan documenrtation
c they have taken financial assistance to the tune of Rs. I 0 lakhs from
/<-
r-

the Complainant firm. At the time of taking the loan amount accused
persons also agreed to pay interest for the principle amount of Rs. I 0
lakhs."
..
D 3. The appellant herein contends that at the relevant point of time, he ;--
was not the Director of the Company. Inter alia, on the ground that no
cognizance could be taken on the basis of the allegations made in the complaint ---.f '
petition as the same do not satisfy the requirement of the provisions of
Section 141 of the Negotiable Instruments Act, the appellant filed a petition
before the High Court of Judicature at Andhra Pradesh at Hyderabad under
E Section 482 of the Code of Criminal Procedure praying for quashing of the
proceedings initiated against him. The High Court by reason of the impugned
judgment stated as under:-

."3. The learned counsel for the petitioner contended that even if the
entire allegations in the complaint are taken as true, they do not
F make out a prima facie case against the present Petitioner, that
before issuance of the Cheques, the Petitioner herein resigned as
Director of A. I Company, hence, continuation of the proceedings
against him is nothing but abuse of process of court and so he
prayed to quash the same.
G 4. The allegation in the complaint is that the present Petitioner is
one of the directors of A. I Company. Simply because he is a
Director, he cannot be prosecuted for the offence under Section
138 of the Negotiable Instruments Act, 1881 unless his case falls r ~

under the provisions of section 141 of the Act. under Section 141
of the Act, it must be shown that every person, who at the time
H
-I'

K. SRIKANTH SINGH''· NORTH EAST SECURITIES LTD. [S.B. SINHA, J.) 455

of the offence, is responsible to the company for conduct of its A
business and day-to-day affairs. It is alleged that all the accused
persons after negotiations with the Complainant firm agreed to
take financial assistance from the Complainant and after executing
comprehensive loan documentation, they have taken financial
assistance to a tune of Rs. JO, 00 lakhs from the Complainant firm. ,
Since it is alleged that all the Directors-accused participated in liJ
the negotiations with regard to the financial help to be taken by
x' the A. I company from the Complainant firm, it can be inferred
that all the Directors were.responsible for day-to-day transactions
of A. I Company. Therefore, the allegations in the complaint make
out a prima facie case that all the directors are in-charge of, and C
responsible for, day-to-day affairs of the company.
5. The second c0ntention is that the Petitioner was not a Director
of the Company at the time of issuance of the Cheque. It is a
question of fact that has to be established before the trial court.
Exercising the powers under section 482 Cr. P.C., a question of Q
~-
fact cannot be decided and determined. Hence, there are nO'
grounds to quash the impugned proceedings."

4. It is not in dispute that for showing a vicarious liability of a Director
of a Company, upon the complaint it is incumbent to plead that the accused
was responsible to the company for the conduct of the business of the E
Company. No such allegation having been made in the complaint petition, in
our opinion, the High Court was not correct in passing the impugned judgment.
The allegation contained in the complaint petition was that all the accused
Directors participated in the neg1_?tiations for obtaining financial help for the
accused No. 1, which in our opinion, would not give rise to an inference that
the appellant was responsible for day-to-day affairs of the Company. An F
offence envisaged under Section 138 of the Negotiable Instruments Act
contains several ingredients as has been held by a Three-Judge Bench of this
Court in S.MS. Pharmaceuticals ltd v. Neeta Bhalla and Anr., [2005] 8 SGC
89, in the following terms:-

"What is required is that the persons who are sought to be made
G
criminally liable under Section 14 l should be, at the time the offence

... was committed, in charge of and responsible to the company for the
conduct of the business of the company. Every person connected
with the company shall not fall within the ambit of the provision. It
is only those persons who were in charge of and responsible for the H
456 SUPREME COURT REPORTS (2007) 8 S.C.R.

A conduct of business of the company at the time of commission of an
offence. who will be liable for criminal action. It follows from this that
if a director of a company 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 under the provision. The liability arises
from being in charge of and responsible for the conduct of business
B of the company at the relevant time when the offence was committed
and not on the basis of merely holding a designation or office in a
company. 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
c company at the relevant time. Liability depends on the role one plays
in the affairs of a company and not on designation or status. If being
a director or manager or secretary was enough to cast criminal liability,
the section would have said so. Instead of"every person" the section
would have said "every director, manager or secretary in a company ;

D
is liable" ..... , etc. The legislature is aware that it is a case of criminal t"
.
I

liability which means serious consequences so far as the person
sought to be made liable is concerned. Therefore, only persons who
..
can be said to be connected with the commission of a crime at the
relevant time have been subjected to action."

5. Negotiation for obtaining financial assistance on behalf of the
E Company by its Directors itself is not an ingredient for the purpose of
constituting an offence under Section 138 of the Negotiable Instru111ents Act.
Furthermore, a vicarious liability on the part of a person must be pleaded and
proved. It. cannot be a subject matter of mere inference.

F 6. In Sabitha Ramamurthy and Anr. v. R.S.S. Channabasavaradhya,
reported in [2006] I 0 SCC 581, this Court opined:-

"7. A bare perusal of the complaint petitions demonstrates that
the statutory requirements contained in Section 141 of the Negotiable
(-
Instrument Act had not been complied with. It may be true that it is
G not necessary for the complainant to specifically reproduce the
wordings of the section but what is required is a clear statement of
foct so as to enable the court to arrive at a prima facie opinion that
the accused are vicariously liable. Section 141 raises a legal fiction.
By reason of the said provision, a person although is not personally
liable for commission of such an offence would be vicariously liable
H
K. SRIKANTH SINGH v. NORTH EAST SECURITIES LTD. [S.B. SINHA, J.) 457

therefor. Such vicarious liability can be inferred so far as a company A
registered or incorporated under the Companies Act, 1956 is concerned
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 the offence committed by the company. Before
a person can be made vicariously liable, strict compliance with the B
statutory requirements would be insisted. Not only the averments
made in para 7 of the complaint petitions do not meet the said statutory
requirements, the sworn statement of the witness made by the son of
x' the respondent herein, does not contain any statement that the
appellants were in. charge of the business of the Company. In a case
where the court is required to issue summons which would put the <;:::
accused to some sort of harassment, the court should insist strict
compliance with the statutory requirements. In terms of Section 200
of the Code of Criminal procedure, the complainant is bound to make
statements on oath as to how the offence has been committed and
how the accused persons are responsible therefor. In the event,
ultimately, the prosecution is found to be frivolous or otherwise mala D
fide, the court may direct registration of case against the complainant
for male fide prosecution of the accused. The accused would also be
entitled to file a suit for damages. The relevant provisions of the code
of Criminal Procedure are required to be construed from the
aforementioned point of view." E
(See also: Everest Advertising Pvt. ltd v. State Govt. ofNCT of Delhi
& Ors., reported in JT (2007) 5 SC 529 and Raghu Lakshminarayanan
v. MIS. Fines Tubes reported in JT (2007) 5 SC 552.

7. For the reasons aforementioned, the impugned judgment cannot be F
sustained and the same is accordingly set aside. The order taking cognizance
is quashed. The appeal is allowed.

No costs.

S.K.S. Appeal allowed. ·