Recently, the Delhi High Court dealt with a complaint under Section 138 of the Negotiable Instruments Act, where the petitioner sought to quash proceedings, claiming he had resigned from the firm before the dishonoured cheque was issued. The Court held that vicarious liability under Section 138 and Section 141 applies only to individuals in charge of the firm at the time of the offence. It emphasised that the complainant must specify the accused’s role, and the accused must provide solid evidence to challenge the allegations. The Court noted that criminal liability applies only to those responsible at the time of the offence, with vicarious liability inferred from the complaint but not leading to automatic conviction.
Brief Facts:
The respondent filed a complaint under Section 138 of the Negotiable Instruments Act, alleging that the petitioner, along with others from M/s Bell Enterprises, entered into a Distributorship Agreement with the respondent. The firm issued a blank cheque and a ₹3 crore bank guarantee as security. After supplying goods worth ₹6,37,11,865/-, the firm issued a ₹3 crore cheque on 17.07.2016, which was dishonoured. The complainant invoked the bank guarantee, but ₹3,02,00,330/- remained unpaid. The cheque was re-presented after three months and dishonoured again. The petitioner seeks quashing of the proceedings, claiming he retired from the firm on 14.06.2016, prior to the cheque issuance, supported by a Modified Partnership Deed and other documents notifying the change.
Contentions of the Petitioner:
The petitioner’s senior counsel argued that the petitioner had resigned from the accused firm on 14.06.2016, and was not a partner at the time of the cheque issuance on 17.07.2016 or its dishonour on 12.10.2016. Since he wasn’t in charge of the firm’s affairs, no liability could arise under Section 138 read with Section 141 of the NI Act. The complaint and demand notice failed to specify the petitioner’s role, and the complainant was aware of his resignation and the induction of new partners, as reflected in the acceptance of the fresh cheque by the new partners, who were co-accused.
Relying on Katta Sujatha v. FACT and Dashrath Rupsingh Rathod v. State of Maharashtra, it was argued that only those responsible at the time of the offence can be prosecuted. Counsel also cited S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla to stress that mere partnership designation is insufficient for vicarious liability under Section 141 without specific pleadings showing control over the firm’s business. Referring to Siby Thomas v. Somany Ceramics Ltd. and Ashok Shewakramani v. State of A.P., it was argued that both conditions under Section 141 must be met. The trial court’s order was criticized as mechanical and lacking proper application of mind, contrary to Pepsi Foods Ltd. v. Special Judicial Magistrate.
Contentions of the Respondent:
The counsel for the Respondent opposed the petition, asserting that the petitioner was involved in the day-to-day affairs of the firm. Referring to S.P. Mani & Mohan Dairy and Monaben Ketanbhai Shah, it was argued that complaints under Sections 138/141 NI Act must be viewed as a whole, and proceedings should not be quashed on technical grounds. He claimed the petitioner, as majority partner, was involved in key actions like executing agreements and accepting goods. The petitioner’s retirement was not communicated to the respondent, violating Section 32 of the Indian Partnership Act.
The authenticity of the petitioner’s retirement documents was disputed, with the counsel arguing these issues should be decided at trial, not under Section 482 CrPC, citing Ashutosh Ashok Parasrampuriya (2023). Counsel further alleged the petitioner obtained signatures fraudulently, leading to FIR No. 133/2021 and a pending civil suit in Chandigarh regarding the partnership deed’s validity.
Observations of the Court:
The Court primarily examined the applicability of Section 138 and Section 141 of the Negotiable Instruments Act (NI Act) concerning the vicarious liability of individuals involved in the offence committed by a company. According to Section 141 of the NI Act, when an offence under Section 138 is committed by a company, every person responsible for managing and conducting the business of the company at the time of the offence is deemed to be guilty of the offence. This includes directors or any other responsible officers of the company. The Court noted, "If the person committing an 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 punished accordingly.”
The court emphasised that to avoid vicarious liability, the individual accused under Section 141 can claim that they were not aware of the offence or that they exercised due diligence to prevent it. The relevant part of the law reads the Court stated that, “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.”
The court also pointed out that if someone is a director nominated by the government or a government-controlled financial body, they would not be liable for prosecution under Section 141, as per the law's provision. The court addressed the possibility of quashing summons orders under Section 482 of the CrPC in NI Act cases if the accused can prove they were not involved in the cheque issuance. Citing S.P. Mani & Mohan Dairy v. Snehalatha Elangovan, the court clarified that the complainant must make specific averments about the accused's role. If the accused fails to contest these facts, the complaint is considered valid. The court stated, “Once the necessary averments are made in the statutory notice issued by the complainant regarding the vicarious liability of the partners, and if the partner keeps quiet without replying, the complainant has reasons to believe the notice has been accepted.”
Regarding directors or partners, the court emphasised that vicarious liability applies if the complaint specifies their role in the company or firm's affairs at the time of the offence. Directors or partners contesting their involvement must provide undeniable evidence. The Court stated, “If a Director or Partner wishes to quash the process under Section 482 on the ground that only a bald averment is made in the complaint, they must present incontrovertible evidence to substantiate their claim.”
Finally, the court reiterated that criminal liability under Section 138 and Section 141 of the NI Act applies to those responsible for the company's affairs during the offence. Vicarious liability can be inferred from the complaint, but it does not automatically lead to conviction, as clarified, “Criminal liability is attracted only to those in charge at the time of the offence, and vicarious liability can be inferred when the complaint specifies the partners’ role. This makes them liable for prosecution, but not for automatic conviction.”
The Court stressed that the complainant must present detailed evidence of the accused's role, and the accused must provide solid proof to challenge the allegations.
The decision of the Court:
The Court reinforced that the vicarious liability provisions under Section 138 and Section 141 of the NI Act make individuals responsible for the actions of a company or firm, provided they were in charge of the company at the time the offence occurred. The onus is on the accused to prove that they were not responsible for the offence if they wish to have the charges quashed. In conclusion, the court decided that, “If any Director wants the process to be quashed by filing a petition under Section 482 of the Code on the ground that only a bald averment is made in the complaint and that he is really not concerned with the issuance of the cheque, he must in order to persuade the High Court to quash the process either furnish some sterling incontrovertible material or acceptable circumstances to substantiate his contention.”
Case Title: Arvind Singhla vs. M/s Beetel Teletech Limited
Case No: Crl. M.C. 6741/2019 & Crl. M.A. 43621/ 2019
Coram: Justice Amit Mahajan
Advocate for Petitioner: Adv. Viraj Dattar (Sr. Adv.), Deepesh Aneja
Advocate for Respondent: Adv. K.P. Singh, Anil K. Batra, K.K. Tiwari, Shashi Bhalla, Madan Pal Singh, Amish Tiwari
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