M J Antony: Director's liability in dishonoured cheques

OUT OF COURT

The frequency with which the issue is raised in the Supreme Court points to the need for more clarity on the law.

Though the Supreme Court has delivered quite a few judgements recently dealing with the vicarious liability of directors of a company for issuing cheques which get dishonoured for want of sufficient funds, the issue crops up over and over again. Several directors who do not participate in the day-to-day affairs of the firm are caught unawares by the transactions of the company. In a case decided by the Supreme Court last week, all directors participated in the negotiations for a loan from a finance company and the Andhra Pradesh high court held all of them liable for the bounced cheques. However, the Supreme Court reversed the decision to save the directors and once again explained the law in this regard in K Srikanth Singh vs M/s North East Securities.

When the cheques were dishonoured, the finance company made a criminal complaint under Section 138 of the Negotiable Instruments Act against the managing director and four directors. According to the complaint, all the directors participated in the negotiations for the loan. Therefore, under Section 141 of the Act, all of them were responsible for the offence. According to this provision, every person, who at the time of the offence, is responsible for the conduct of the business of the company and its day-to-day affairs is liable for the fault. One of the directors maintained that he was not even a director of the company at the relevant time and, therefore, the charges against him should be quashed.

The high court did not agree. It stated that since all the directors participated in the talks, it could be inferred that all of them were responsible for the day-to-day transactions of the company. The complaint made out a prima facie case that all the directors were in charge of and responsible for the day-to-day affairs of the company. Moreover, whether a particular director was functioning as one or whether he was in charge of the transaction was a question of fact, which should be proved at the time of the trial of the offence, according to the high court.

The Supreme Court disagreed with this view. It stated that even if all the directors participated in the negotiations, it would not lead to the conclusion that a particular director was in charge of the day-to-day affairs of the company. "Negotiation for obtaining financial assistance on behalf of the company by its directors itself is not an ingredient for the purpose of constituting an offence under Section 138 of the Act. Moreover, the vicarious liability of the director must be pleaded and proved," the judgement said.

The attitude of the court was not so generous in another case decided a few months ago (N Rangachari vs BSNL). In this case, a private company issued cheques to the telecom undertaking which were dishonoured. A criminal complaint was filed against the company and two of its directors. One of them moved the high court stating that he was an honorary chairman without any remuneration and, therefore, he should be exonerated from the liability. There were two managing directors at the time and they should be held responsible. The high court and, on appeal, the Supreme Court rejected his argument. In a stand which apparently goes contrary to the latest decision, the Supreme Court said that "the burden is on the board of directors or the officers in charge of the affairs of the company to show that they were not liable to be convicted." This should be proved at the stage of the trial.

In yet another judgement delivered recently, another twist was given to the interpretation of Section 141 of the Act. It dealt with the liability of the chairman or managing director of a company in such situations. The Supreme Court said, in Everest Advertising Pvt Ltd vs State of Delhi: "The chairman of a large company may or may not be aware of the actual transaction. If in a given situation, cheques are issued in the ordinary course of business, the MD would be deemed to be aware thereof. A chairman or a director of a company need not be."

One of the leading judgements on this issue is SMS Pharmaceuticals Ltd vs Neeta Bhalla, delivered two years ago. In that detailed judgement, the court had laid down the principles to be followed. However, even after that, the Supreme Court had to deliver four long judgements in recent months, discussing the same issue. There seems to be something amiss in the interpretation of the law by the high courts or the law laid down by the Supreme Court is not clear to them. Or still, it could be the ingenuity of the lawyers which brings the issue time after time before the appellate courts.