M J Antony: The angst of the honchos

OUT OF COURT

If cheques are dishonoured, the burden is on the board of directors or the officers in charge of the company to show that they are not liable to be convicted.

The personal liability of top managers of a company when its cheques are dishonoured for want of sufficient funds in the bank could be a matter of anxiety if they read the Negotiable Instruments Act and recent judgements of the Supreme Court.

Though the court had laid down the cardinal principles on this subject in its decision in SMS Pharmaceuticals vs Neeta Bhalla two years ago, the phenomenon of bounced cheques issued by firms seems to be too common. In recent weeks, at least three judgements were delivered by the Supreme Court on the same topic.

Section 138 of the Act makes the issuance of cheques without sufficient funds a criminal offence. Section 141 deals elaborately with the offence committed by companies. If a company commits such an offence, according to the provision, "every person who, at the time the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be punished accordingly."

In the recent case of N Rangachari vs BSNL, a private company issued cheques to BSNL which bounced. Therefore, criminal complaints were filed against the company and two of its directors. Rangachari was one of them. He moved the high court to quash the complaint pleading that he was nominated as an honorary chairman without any remuneration, sitting fee or other financial benefits. He was never assigned any business responsibilities. In fact, there were two managing directors at the time of the issuance of the cheques and they were the ones who were invested with substantial powers, he argued.

However, such contentions were not sufficient to save him from criminal proceedings. A director or any person who is deemed to be in charge of the affairs of the company cannot seek the quashing of the proceedings. It is for him to prove during the trial that he was not directly responsible for the offence. The Supreme Court therefore dismissed his appeal, observing 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." The legal fiction that they would be "deemed" to be responsible would come as a rude shock to many sleeping partners and directors.

The position of the chairman or the managing director of a company is also tenuous in such situations, as shown by another recent judgement of the Supreme Court (Everest Advertising vs State). In this case, both were hauled up by the payee company when the cheques were dishonoured. The judgement said: "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 managing director or a deputy managing director would be deemed to be aware thereof. A chairman of a director of a company need not be."

In this case, evidence showed that they were aware of the transactions as huge amounts were involved. Therefore, the court let them face the criminal proceedings where they can prove that they were not responsible for the offence.

However, the top executives can escape such vicarious liability in certain circumstances. The law itself states that they would not be liable if they can prove that the offence was committed without their knowledge or that they had exercised all due diligence to prevent the commission of the offence.

The Supreme Court has also insisted that the complaint must contain sufficient evidence to show that the accused persons were in charge of the affairs of the company. They cannot be hauled up merely because they were directors of the company or connected with its activities.

This rule was applied to save a director in Saroj Kumar Poddar v State. The Supreme Court emphasised that the complaint did not indicate how that person was responsible for the conduct of the business of the company or otherwise responsible to it in regard to its functioning. He had not issued the cheque either. Such averments are necessary to fulfil the conditions set by Section 141, the Supreme Court said.

However, this would not free the directors entirely from responsibility. In the Rangachari decision, the court said that it could be presumed that the directors were in charge of the affairs of the company. The allegation in the complaint that the accused are directors of the company "itself would usher in the element of their acting for and on behalf of the company and of their being in charge of the company." These remarks give little respite for the top managers of a company.