Circumstances in which Directors of a company can be summoned or held vicariously liable for cases initiated under Section 138 of the Negotiable Instruments Act (NI Act)

While deciding the matter of Ashutosh Ashok Parasrampuriya v. M/s Gharrkul Industries Pvt. Ltd., on 08.10.2021, the Supreme Court explained the circumstances in which Directors of a company can be summoned or held vicariously liable for cases initiated under Section 138 of the NI Act,1881 i.e. cheque bounce cases.

Factual matrix

This was an appeal filed against a 2014 High Court order which had dismissed petitions challenging a 2012 trial court order summoning the Directors of a company in a cheque bouncing case. The appellant-Directors were not signatories to the cheques and the appellants also contended that they were non-executive Directors.

The Court overruled the appellants’ arguments and concluded that there was no error on the part of the High Court in declining to interfere with the summons. It was observed that it would be open to the appellant-Directors to justify their claims in trial and the appeal was dismissed.

Analysis of the Judgement

The court held that merely being the Director of the company that has issued the bounced cheque is not sufficient to make the person liable. Rather, the person sought to be made liable should have been in charge of and responsible for the conduct of the company’s business at the relevant point of time.

The Court went on to explain that in order for the process to be initiated against a company director “it is necessary to aver in the complaint filed under Section 138 read with Section 141 of the NI Act that at the relevant time when the offence was committed, the Directors were in charge of and were responsible for the conduct of the business of the company.” The Court added that such an averment assumes importance because it is “the basic and essential averment which persuades the Magistrate to issue process against the Director.” If this basic averment is missing, the Magistrate would be legally justified in not issuing process.

The Court further ruled that it may not be open to the High Court to interfere with an order of summons issued in such a case to the Directors unless it comes across “some unimpeachable incontrovertible evidence which is beyond suspicion or doubt or totally acceptable circumstances which may clearly indicate that the Director could not have been concerned with the issuance of cheques and asking him to stand the trial would be abuse of process of Court.” The apex court, however, added that even if such basic averment is there in the complaint, the court concerned may later come to a conclusion that no case is made out against the accused Director for various reasons.