In Gunmala Sales Ltd v. Navkar Infra Projects Ltd, the court dealt with the liability of directors of a company which issues cheques which are dishonoured by banks and laid down principles not quite comforting to the directors.
Apex Court while dealing with a case filed by a private company that had lent money to another said that all directors involved in the day-to-day running of a company can be made liable for a bounced cheque, but not one who resigned before the cheque was issued.
Gunmala Sales Pvt Ltd had filed cheque-bouncing cases under the Negotiable Instruments Act against Navkar Infra Projects Pvt Ltd and four of its directors. However, Calcutta High Court quashed proceedings initiated by a Magistrate on grounds that the complaint was based on a mere assertion that the directors were responsible for the day-to-day business of the accused company when the offence was committed.
The high court reasoned that the complainant had in this case not clearly stated what part was played by each director and how they were responsible for the finances of the company and the issuing of cheques. The complainant then approached the apex court which remitted the issue back to the HC to decide afresh within six months.
Apex Court however, clarified the law and directed that the directors should normally face prosecution if there is no incontrovertible evidence to show their non-involvement such as long illness, resignation, etc. Court further ruled that, the complainant only has to make a specific averment in the complaint that a person is in charge of and is responsible for the conduct of the business of the company to maintain it.
Court further ruled that, complainant does not have to elaborate on the role played by each of the directors in the transaction. “Individual role of a director is exclusively in the realm of internal management of a company and at the initial stage of a complaint, it would be unreasonable to expect a complainant to elaborate the specific role played by a director in the transactions.”
Further, Court noted that, the vicarious liability is contemplated in the Negotiable Instruments Act to ensure greater transparency in commercial transactions, the court said. This object has to be kept in mind while considering individual cases and hardship arising out of a particular case cannot be the basis for directors to try to wriggle out of prosecution.
A case can only be quashed under Section 482 of the Criminal Procedure Code by a high court if a director is wrongly arraigned, the Supreme Court said. In cheque-bouncing cases, the court said managing directors in charge of company affairs, directors or officers who sign cheques can be arraigned as accused. Any other director can also be made liable if the person was in charge of and was responsible for the conduct of business. Other officers of a company can be made liable in such a case if a specific role by way of consent, connivance or negligence is alleged against them.