The Supreme Court, in the case of Ashutosh Ashok Parasrampuriya and Anr. v. M/s Gharkul Industries Pvt. Ltd. & Ors¹, held that directors of a company will not be vicariously liable for dishonoured cheques of a company if there are no specific allegations meted out against them. The court further observed that the directors would be liable for offences committed by the company under Section 141 of the Negotiable Instruments Act, 1881 (“NI Act”) only in cases where there are specific allegations against the directors who are responsible for the conduct of the company’s business at the time of the offence. The Apex court was of the view that if the statutory requirements under section 141 of the NI Act are complied with, courts may not interfere in the proceedings.

The Complainant had provided financial assistance totalling up to Rs. 15,019,831/- through various cheques to the Appellants (Ameya Paper Mills Pvt. Ltd.), and a Memorandum of Understanding (“MoU”) had been entered into by the parties to that effect. One of the cheques issued by the Appellants towards making payment of outstanding dues was dishonoured on account of insufficient funds. The Complainant had contended that the directors were responsible for the affairs and conduct of the company. The Complainant had filed a complaint under Section 138 of the NI Act alleging that the Appellants had given consent to the terms of the MoU which they failed to abide by. The Ld. Trial Court had taken cognizance of the matter and summoned the Appellants to appear before the Court. The Appellants filed two criminal petitions under Section 482 of the Criminal Procedure Code (“CrPC”) with a prayer to quash the summons against them. However, the Appeal was dismissed by the Bombay High Court. The matter was then brought up before the Supreme Court.

The primary contention of the Appellants before the Hon’ble Supreme Court was that the directors of the Company has not committed any offence and therefore could not be vicariously held liable for the criminal acts of the Company. They further submitted that the directors did not bear any responsibility for the conduct of business as they were non-executive directors of the Company. As per a mandatory requirement under Section 138 of the NI Act, in order for a proceeding to be initiated against the directors, they must be responsible for the conduct of business. Therefore, the prayed that the order of summon passed by the Trial Court be set aside since it was an abuse of the process of law.

The Complainant/Respondent in their averments contended that the records of the Registrar of the Companies (“ROC”) clearly indicated that the directors were responsible for the conduct of business of the Company, hence qualifying it to be tried under Section 138. There was nothing to indicate that they were non-executive directors of the Company.

The Hon’ble Supreme Court, after perusing the documents placed on record and observing the submissions, relied on its decision in SMS Pharmaceuticals Ltd. v. Neeta Bhalla and Anr.²/, and observed that it is necessary to provide for specific allegations in a complaint under Section 141 of the NI Act alleging that the accused was in charge of the conduct of business of the company at the time of the commission of the offence. The Court further observed that the allegations in the present Complaint were made at the time when the offence was committed and the directors were responsible for the conduct of its business. Therefore, the Apex Court held that the order of the Bombay High Court, in dismissing the petitions filed under Section 482 had no scope of error. Hence, the Appeals before the Court were dismissed and the directors were held to be liable.

The Supreme Court, by virtue of their judgment have attempted to establish a distinction between cases wherein directors can be proceeded against and cases wherein directors will not be liable for criminal offences committed by a company. The decision of the Apex Court comes as a respite for several key managerial figures and directors of companies that are subjected to proceedings under the NI Act.

By - Muskaan Ahuja