Holding

A director is vicariously liable under Section 141 only if, at the time of the offence, he was in charge of and responsible for the conduct of the company's business; mere directorship or resignation without specific allegation does not satisfy this requirement.

Summary

Elkay International supplied chemicals to VHEL Industries Ltd., which issued three cheques that were later dishonoured. A complaint was filed against the company, its managing director, and other directors, including the appellant who had resigned from the board before the cheques were issued. The appellant sought to quash the cognizance taken against him, arguing that Section 141 of the Negotiable Instruments Act does not apply to him. The Supreme Court held that liability under Section 141 arises only when the person was in charge of and responsible for the conduct of the company's business at the time of the offence, and the complaint failed to allege any such responsibility for the appellant. Consequently, the conditions precedent for vicarious liability were not satisfied, and the proceedings against the appellant were quashed. The appeal was allowed and the High Court's judgment set aside.

Issues considered

Whether a director who resigned before the issuance of a cheque can be held vicariously liable under Section 141 of the Negotiable Instruments Act for the company's offence under Section 138.
What conditions precedent under Section 141 must be satisfied to impose liability on a director for an offence committed by the company.
Whether the complaint petition contained sufficient specific allegations to bring the director within the ambit of Section 141.

Legislation cited

Negotiable Instruments Acts. 138, s. 141

Subjects

Negotiable Instruments ActSection 138Section 141vicarious liabilitydirector liabilitycheque dishonourcriminal procedurecompany offenceresignationcomplaint petitionstrict construction

Judgment

SAROJKUMARPODDAR A
v.
STATE (NCT OF DELHI) & ANR.

JANUARY 16,2007

[S.B. SINHA AND MARKANDEY KA TJU, JJ.] B
Negotiable Instruments Act; ss. 138 and I 4 I:

Dishonour of Cheque-Vicarious liability of director for commission
of offences on the part of a Company-Held: Director liable only in the
event condition precedent therefor in s. I 41 of the Act satisfied-Cheques C
in question not issued by appellant/director-No averments made in the
complaint petition as to the manner, he was responsible for the conduct
of business of company-Specific allegation requires to be made against
the Director to make him vicariously liable in terms of provisions of law
-Al/egationlaverments in the petition do not disclose any offence as
against the appellant, Director-Proceedings against him, therefore, should D
have been quashed by High Court-Hence impugned judgment cannot be
sustained and set aside.

Respondent no. 2, a manufacturer supplied its product to a Company.
Allegedly, a sum of Rs. 13,36,923 was due and payable to respondent no.2
by the Company. The Company issued three cheques in favour of the E
complainant. The cheques were dishonoured. A complaint petition came to
be filed by respondent no.2 against the Company, Managing Director and
other directors, including the appellant. Cognizance was taken against the
appellant and other accused persons. Applications for quashing the orders
, taking cognizance of the offence in the complaint petitions were filed by the F
appellant before the High Court, which were dismissed by it. Hence the
present appeal.

.. Appellant contended that the averments made in complaint petitions
even if given face value and taken to be correct in their entirety they do
not constitute an offence as against the appellant in terms of Section 141 G
of the Negotiable Instruments Act; and that in any event, the appellant
having resigned from the directorship of the Company, the complaint
t J petitions as against him were not maintainable.

Respondents submitted that the appellant had not disclosed as to when
H
907
908 SUPREME COURT REPORTS [2007) 1 S.C.R

A the resignation purported to have been submitted by him was accepted by
the Company and in that view of the matter the complaint petitions were
maintainable.

Allowing the appeal, the Court

B HELD: 1.1. A person would be vicariously liable for commission of an
offence on the part of a Company only in the event the conditions precedent
laid down therefor in Section 141 of the Act stand satisfied.
[Para 10) [912-D)

1.2. Apart from the Company and the appellant, the Managing Director
c and all other Directors were also made accused. The appellant did not issue
any cheque. He had resigned from the directorship of the Company. It may
be true that as to exactly on what date the resignation was accepted by the
Company is not known, but, even otherwise, there is no averment in the
complaint petitions as to how and in what manner the appellant was
responsible for the conduct of the business of the Company or otherwise
D responsible to it in regard to its functioning. He had not issued any cheque.
How he is responsible for dishonour of the cheque has not been stated. The
allegations so made, thus, do not satisfy the requirements of Section 141
of the Act. [Para 12) [912-G-H, 913-A-B)

1.3. Allegations to satisfy the requirements of Section 138 of the Act
E might have been made in the complaint petition but the same principally
relate to the purported offence made by the Company. With a view to make
a Director of a Company vicariously liable for the acts of the Company, it
was obligatory on the part of the complainant to make specific allegatio~s
as are required in law. [Para 13) [913-C)
F
2. The alJegations made in the complaint petitions even if are taken
to be correct in their entirety do not disclose any offence as against the
appellant. The proceedings against him, thus, should have been quashed by
the High Court. The impugned judgment, therefore, cannot be sustained
which is set aside accordingly. [Para 16) [915-GJ
G
S.MS. Pharmaceuticals Ltd. v. Neeta Bhalla and Another, [2005) 8
SCC 89 and Sabitha Ramamurthy & Anr. v. R.B.S. Channabasavaradhya,
(2006) 9 SCALE 212, relied on. ' '

CRIMINAL APPELLATE JURISDICTION : Criminal Appeal No. 70 of
H 2001.
SAROJ KUMAR PODDAR v. STATE (NCT OF DELHI) [SINHA, J.] 909

From the common final Judgment and Order dated 27-7-2006 of A
the High Court of Delhi at New Delhi in Crl. M.C. Nos. 4583, 4580 and 4575/
2003.

Sidharth Luthra, Susmit Puskar and Vanita Bhargava (for Mis. Khaitan
& Co.) for the Appellant.
B
B.L. Wali, V.N. Raghupathy and D.S. Mahra for the Respondents.

The Judgment of the Court· was delivered by

S.B. SINHA, J. : Leave granted.
c
1. Appellant herein was a Director of a public limited company,
incorporated and registered under the Indian Companies Act, known as
VHEL Industries Limited (hereinafter referred to as "the Company"). The
Company issued three cheques bearing Nos. 138015, 138016 and 138017 for
a sum of Rs. 2,50,000, Rs. 2,50,000 and Rs. 3,03,952.60, respectively in favour
of Elkay International Private Limited, Respondent No. 2 herein.
D

2. The complainant Respondent No. 2 is manufacturer and supplier of
chemical compounds of different kinds. It supplied its product to the
Company. Allegedly, a sum of Rs. 13,36,923 was due and payable to the
complainant by the Company. The Company issued three cheques, as E
noticed hereinbefore, in favour of the complainant. The said cheques were
deposited in a bank but were dishonoured. A complaint petition came to be
filed by the complainant in the Court of Chief Metropolitan Magistrate, Delhi
against the appellant as also the said Company. The Managing Director of
the said Company as also the other Directors were also arrayed as accused
therein. It was alleged that Shri K.K. Pilania Accused No. 3 and Shri N.K. F
Munjal - Accused No. 8 signed the said cheques for and on behalf of the
Company.

3. Cognizance was taken against the appellant and other accused
persons. Inter alia on the premise that the appellant had resigned from the
G
Directorship of the Company before the date of issuance of the cheques and
much before the deposit thereof by the drawee with its bank, and thus, he
was not liable for the action of the Company, applications for quashing of
the orders taking cognizance of the offence in the. said complaint petitions
were filed by the appellant before the High Court of Delhi which were marked
H
910 SUPREME COURT REPORTS [2007] I S.C.R

A as Crl. M.C. Nos. 4583, 4580 and 4575 of2003. By reason of the impugned
judgment, the said petitions have been dismissed by the High Court stating:

"The learned trial judge while dealing with the recalling order of the
petitioner made specific mention of the fact that the cheque in
question was post dated cheque issued through letter dated 10th
B May, 1997. If that be so the matter needs further probe by way of
trial and the petitioner cannot claim complete innocence at this
stage in view of the letter dated I 0th May, 1997 prima facie
indicating that the cheque in question was issued on this date and
the petitioner was the Director of the Company on 10th May, 1997
c as he himseif admitted that he resigned from the company with
effect from 19th June, 1997."

The appellant is, thus, before us.

4. Ms. Vanita Bhargava, learned counsel appearing on behalf of the
D appellant, would contend that the averments made in complaint petitions
even if given face value and taken to be correct in their entirety do not
constitute an offence as against the appellant in terms of Section 141 of the
Negotiable Instruments Act (for short "the Act").

5. It was further submitted that in any event, the appellant having
E resigned from the Directorship of the said Company, the complaint petitions
as against him were not maintainable.

6. Mr. B.L. Wali, learned counsel appearing on behalf of the respondents,
on the other hand, would submit that the appellant had not disclosed as to
when the resignation purported to have been submitted by him was
F accepted by the Company and in that view of the matter the complaint
petitions were maintainable.

7. Section 138 of the Act reads as under:

"138. Dishonour of cheque for insufficiency, etc., of funds in the
G
account -

Where any cheque drawn by a persons on an account maintained
by him with a banker for payment of any amount of money to
another persons from out of that account for the discharge, in
H whole or in part, of any debt or other liability, is returned by the
~-

SAROJKUMARPODDARv. STATE(NCTOFDELHI) [SINHA,J.] 911
... ..J bank unpaid, either because of the amount of money standing to A
the credit of that account is insufficient to honour the cheque or
that it exceeds the amount arranged to be paid from that account
by an agreement made with that bank, such person shall be deemed
to have committed an offence and shall, without prejudice to any
other provisions of this Act, be punished with imprisonment for a
term which may be extended to two years, or with fine which may B
'
extend to twice the amount of the cheque, or with both:"
...
8. For creating a criminal liability in terms of the said Section, the
complainant must show:

·- (i) that a cheque was issued;
c
(ii) the same was presented;

(iii) but, it was dishonoured;

(iv) a notice in terms of the said provision was served on the
D
.;.
person sought to be made liable; and
1
(v) despite service of notice, neither any payment was made nor
other obligations, if any, were complied with within fifteen
days from the date of receipt of the notice. E
9. Section 141 of the Act postulates constructive liability on the part
of the Directors of the Company or other persons responsible for its conduct
of the business of the company. It reads as under:

~
"141. Offences by companies - (1) If the person committing an F
offence under section 138 is a company, 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 liable to be proceeded against and
G
punished accordingly:

., Provided that nothing contained in this sub-section shall render
/ any person liable to punishment if he proves that the offence was
committed without his knowledge, or that he had exercised all due
diligence to prevent the commission of such offence. H
"·
--\
912 SUPREME COURT REPORTS [2007] 1 S.CR.
,.,,
I,..
A Provided further that where a person is nominated as a Director of
a company by virtue of his holding any office or employment in the
Central Government or State Government or a financial corporation
owned or controlled by the Central Government or the State
Government, as the case may be, he shall not be liable for-
prosecution under this Chapter.
B
(2) Notwithstanding anything contained in Sub-section (1), where
~

any offence under this Act has been committed by a company and
it is proved that the offence has been committed with the consent
or connivance of, or is attributable to, any neglect on the part of,
c any director, manager, secretary or other officer of the company,
such director, manager, secretary or other officer shall also he
,...,,

deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly."

l 0. A person would be vicariously liable for commission of an offence
D on the part of a Company only in the event the conditions precedent laid ._..
down therefor in Section 141 of the Act stand satisfied. For the aforementioned
purpose, a strict construction would be necessary.
<:

11. The purported avennents which have been made in the complaint
petitions so as to mttke the appellant vicariously liable for the offence
E committed by the Company read as under:

"That the accused No. I is a public limited company incorporated
and registered under the Companies Act, 1956, and the accused 2
to 8 are/were its Directors at the relevant time and the said company
is managed by the Board of Directors and they are responsible for
F
the incharge of the conduct and business of the company-Accused t=
No. I. However, cheques referred to in the complaint have been
signed by the Accused Nos. 3 & 8 i.e. Shri K.K. Pilania and Shri
N.K. Munjal for and on behalf of the Accused Company No. l." ..
~
G 12. Apart from the Company and the appellant, as noticed hereinbefore,
the Managing Director and all other Directors were also made accused. The ~
appellant did not issue any cheque. He, .as noticed hereinbefore, had )
resigned from the Directorship of the Company. It may be true that as to \

exactly on what date the said resignation was accepted by the Company is
not known, but, even otherwise, there is no avennent in the complaint
H j
SAROJ KUMARPODDAR v. STATE (NCT OF DELHI) [SINHA, J.] 913

petitions as to how and in what manner the appellant was responsible for A
the conduct of the business of the Company or otherwise responsible to it
in regard to its functioning. He had not issued any cheque. How he is
responsible for dishonour of the cheque has not been stated. The allegations
made in paragraph 3, thus, in our opinion do not satisfy the requirements
of Section 141 of the Act.
B
13. Our attention, however, has been drawn to the averments made in
paragraphs 7 and 10 of the complaint petition, but on a perusal thereof, it
would appear that therein merely allegations have been made that the
cheques in question were presented before the bank and they have been
dishonoured. Allegations to satisfy the requirements of Section 138 of the
Act might have been made in the complaint petition but the same principally
c
relate to the purported offence made by the Company. With a view to make
a Director of a Company vicariously liable for the acts of the Company, it
was obligatory on the part of the complainant to make specific allegations
as are required in law.
D
14. The question came up for consideration before a 3-Judge Bench of
this Court in S.MS. Pharmaceuticals Ltd. v. Neeta Bhalla and Another,
[2005] 8 sec 89 wherein upon consideration of a large number of decisions
this Court opined:

"While analysing Section 141 of the Act, it will be seen that it E
operates in· cases where an offence under Section 138 is committed
by a company. The key words which occur in the Section are
"every person". These are general words and take every person
connected with a company within their sweep. Therefore, these
words have been rightly qualified by use of the words "who, at the F
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 etc." What is required is that the persons who are
sought to be made criminally liable under Section 141 should be at
the time the offence was committed, in charge of and responsible G
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
I
of and responsible for conduct of business of the company at the
time of commission of an offence, who will be liable for criminal H
A'
914 SUPREME COURT REPORTS [2007] 1 S.C.R.

A 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 conduct of business of the company at the relevant
time when the offence was committed and not on the basis of
B 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 conduct of business of a Company at the
relevant time. Liability depends on the role one plays in the affairs
c 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
is liable" .... etc. The legislature is aware that it is a case of criminal
liability which means serious consequences so far as the person
D 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.

A reference to Sub-section (2) of Section 141 fortifies the above
reasoning because Sub-section (2) envisages direct involvement of
E
any Director, Manager, Secretary or other officer of a company in
commission of an offence. This section operates when in a trial it
is proved that the offence has been committed with the consent or
connivance or is attributable to neglect on the part of any of the
holders of these offices in a company. In such a case, such persons
F are to be held liable. Provision has been made for Directors,
Managers, Secretaries and other officers of a company to cover
them in cases of their proved involvement."

It was further opined:

G "To sum up, there is almost unanimous judicial opinion that
necessary averments ought to be contained in a complaint before
a persons can be subjected to criminal process. A liability under
Section 141 of the Act is sought to be fastened vicariously on a
person connected with a Company, the principal accused being the
H company itself. It is a departure from the rule in criminal law against
f-

SAROJKUMARPODDARv. STATE(NCTOFDELHI) [SINHA,J.] 915
...,
vicarious liability. A clear case should be spelled out in the A
complaint against the person sought to be made liable. Section 141
of the Act contains the requirements for making a person liable
under the said provision. That respondent tails within parameters
of Section 141 has to be spelled out. A complaint has to be
examined by the Magistrate in the first instance on the basis of
averments contained therein. If the Magistrate is satisfied that there B
- are averments which bring the case within Section 141 he would
~
...
issue the process. We have seen that merely being described as a
director in a company is not sufficient to satisfy the requirement of
Section 141. Even a non director can be liable under Section 141 of
the Act. The averments in the complaint would also serve the c
purpose that the person sought to be made liable would know what
is the case which is alleged against him. This will enable him to
meet the case at the trial."

15. This aspect of the matter has also been considered recently by this
Court in Sabitha Ramamurthy & Anr. v. R.B.S. Channabasavaradhya, , D
(2006) 9 SCALE 212 stating:
~

" ... 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 therefor. Such vicarious
liability can be inferred so far as a company registered or
E
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 of the F
statutory requirements would be insisted ... "

16. For the reasons aforementioned, we have no other option but to
hold that the allegations made in the complaint petitions even if are taken
to be correct in their entirety do not disclose any offence as against the
appellant herein. The proceedings against him, thus, should have bee~ G
quashed by the High Court. The impugned judgment, therefore, cannot be
;
sustained which is set aside accordingly. The appeal is allowed.
~

S.K.S. Appeal allowed.