A check-bouncing complaint against a company must show individual’s role to create vicarious liability

Asmita Kuvalekar | Government Law College, Mumbai | 28^th April 2020. 

STANDARD CHARTERED BANK V STATE OF MAHARASHTRA AND ORS ETC (CRIMINAL APPEAL NOS 271-273 OF 2016 ARISING OUT OF S.L.P (CRL) NOS 484-486 OF 2016) 

FACTS OF THE CASE: 

This case challenged the Hon’ble Bombay High Court’s order dismissing issue of summons against some of the respondents (management of a Company), in a complaint under Section 138 of the Negotiable Instruments Act, 1881 (hereinafter ‘the Act’). The High Court justified its stance on the ground that such a complaint requires specific averment of the role played by the accused at the alleged time of offence. In its view, the same was not brought out sufficiently in the complaint, rendering the summons order redundant. The Respondents’ managerial connection to the Company was not adequately made out to make them vicariously liable. 

In this appeal, the Bank alleged grave error in the High Court judgement, saying that the decision ignored claims clearly making out involvement of the Respondents (then accused) in the offence. The accused were Executive Director and whole-time Director at the time of the offence and this fact should have been enough to proceed with trial. 

The Supreme Court decided the matter after a detailed analysis of the requisites of a complaint under Section 138 of the Act read with Section 141 where the accused is a Company.

ISSUE: 

1. What are the essential averments to be made in a check-bouncing complaint against a company so as to make its management vicariously liable? 

JUDGEMENT: 

Counsel for appellants brought out the High Court’s error in wrongfully utilizing its power under Section 482 CrPC as it is undeniable that the Executive Director and the whole-time Director would be responsible for cheques issued in the Company’s name. To determine the issue, the judges studied Section 138 and 141 of the Act thoroughly. Thereby, they highlighted the elements that a Section 138 complaint must include if the accused is a Company. It was held that read together, it is evident that when a Company-issued cheque bounces, the persons responsible for the business of the Company at the time of offence are also said to have committed the offence. In the words of the Court, a “constructive liability” is effectuated when the two sections are brought together in similar facts and circumstances. 

With reference to its decision in S.M.S Pharmaceuticals Ltd. v Neeta Bhalla and another¹, it was pointed out that such constructive liability can be created only when there is enough material on record to show that an offence has been committed and that a particular person/persons were in charge of the Company’s affairs at the time the offence was committed. Every possible individual connected in some way or other to the Company should not be made a co-accused but only the management that truly deals with the day-to-day functioning of the Company should be examined. 

It is the role an individual plays in the business and not his position in the hierarchy that should determine his vicarious liability. Thus, a Director may not be responsible if his role is not sufficiently made out in the complaint as against a lower-level employee whose involvement can be proved. Top management, lower level employees or any other person can be made liable not on the basis of status in the Company but rather his being in charge of the business or day to day work of the Company at the time the offence was committed. The wording in Section 141 provides for the liability of “every person” who fulfils the above criteria, not just Directors, Managers etc. Thus, the intention of the Legislature is to pin vicarious liability based on acts committed in fact, not mere hierarchical position. It was concluded that “It is necessary to specifically aver in a complaint under Section 141 that at the time the offence was committed, the person accused was in charge of, and responsible for the conduct of business of the Company. This averment is an essential requirement…without this…Section 141 cannot be said to be satisfied.” 

However, the Court clarified that details of how and in what manner the person was running the business are not required. Only the fact that such was the case at the time of offence largely suffices the purposes of Section 141. Accordingly, in K.K Ahuja v V.K Vora and Anr², it was held that the mere mention of an individual being Managing Director when the cheque was issued by the Company is more than enough. The words ‘Managing Director’ by themselves imply a working authority over the Company’s business affairs. 

As such, a Section 138 complaint seeking vicarious liability against someone when the accused is a Company does not have a very complex averment requirement. It is indispensable to the complaint but not overtly controverted. It follows therefore that in the contrary procedure of invoking High Court’s powers under Section 482 CrPC to quash proceedings, the Director/ any other person would have to show exceptional and indelible evidence proving his non-involvement in the business at the time of offence. He has to be able to prove that the criminal proceeding against him would be nothing less than abuse of the Court’s power. A simple argument of absence of details in the Complaint cannot be accepted by the High Court. As seen above, the complaint doesn’t require intrinsic details of the role of a person to successfully create vicarious liability. This rule was solidified in Gunmala Sales Pvt Ltd v Anu Mehta and Ors³ when it laid down that a basic averment is sufficient to send such a person to trial.

In the present case therefore, it was seen that the complaint met the test of basic averment of the role played by the accused at the time of offence. All accused were clearly shown to be acting mischievously and intentionally, being in the posts of Chairman, Managing Director, signatories of the bounced cheques as well as whole-time Directors. All accused were sufficiently shown to be in charge of everyday business of the Company. In light of these facts, the Apex Court promptly set aside the High Court judgement pointing out that the test of Gunmala Sales had been met square and fair. The Magistrate was directed to proceed with a criminal trial against the accused. 

1. (2005) 8 SCC 89
2. (2009) 10 SCC 48
3. (2015) 1 SCC 103