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Introduction
The Delhi HC in Fadi El Jaouni v. Gian Chand Garg, while applying section 141 of the Negotiable Instruments Act, 1881 (“NI Act”), had held that the Chief Financial Officer of the company was not vicariously liable under section 141 of the NI Act. The reasoning however, given by the court while arriving at its decision appears to go against some of the very basic tenants of liability which is established by the courts under section 141 of the NI Act. Section 138 of the NI Act deals with cheque bounce cases wherein the cheque bounces for want of insufficient funds. Section 141 of the act deals with cases wherein the accused, in the case of cheque bounce, is a company or a firm and seeks to impose vicarious liability on the individuals who were in control of the company when the said offense was committed. The present article seeks to critically analyse the case by pointing out the anomalies in the decision and by pointing out how the decision can have damaging effects on application of other laws.
Background Facts of the Case
In the present case, several criminal complaints were filed against a company named M/s Bush Foods Overseas Pvt. Ltd. because of failure to make payment. The directors of the company were arrayed as accused in the complaints, and among those arrayed as accused, one was Mr. Nicholas Fortune (“Accused 4”), who was also the Chief Financial Officer (“CFO”) of the company.
The complaint made by the aggrieved party stated that “That the accused No. 1 is a Pvt. Ltd. company which is run and managed by accused No. 2 to 6, being its directors and authorized signatory/M.C./C.F.O. in the name and style of Ms. Bush Foods Overseas Pvt. Ltd.
That the accused No. 2 to 6, are also the in-charge of day-to-day affairs & conduct of their business. Further all the accused persons No. 2 to 6 are regularly in touch with each other and no cheque can be issued without their consultation amongst them and consenting for the cheque to be issued after a green signal by the chief financial officer (A-4), who always keeps an eye upon the financial matters of the company apart from being responsible for the financial health of the company”.
The primary issue before the high court was whether in the facts of the present case, are the accused liable for the commission of the crime under section 138 and hence does vicarious liability apply on the accused and hence, is a case made for quashing of the criminal complaint or not. After discussing in detail, the settled law as it has been evolved by the apex court, the HC held that, “It is clear from the bare perusal of the above-quoted averments that they are deficient to the effect that there is not even a whisper of allegation that the petitioners are persons who were in charge of or responsible to the company accused for the conduct of its business “at the time the offense was committed.” Subsequently, the decision of the sessions court was reversed, and the criminal cases were dropped against the accused.
The Law on vicarious liability under NI Act
The general rule of criminal jurisprudence does not encompass within itself the principle of vicarious liability. However, in certain instances, by way of a deeming fiction, the principle of vicarious liability is inserted so as to make sure that the real perpetrators of the crime are punished. The courts while recognising the principle of vicarious liability in criminal jurisprudence have time and again laid down some guidelines so as to prevent the misuse of the principle. The Supreme Court of India has also well recognised the existence of vicarious liability under section 141 of the NI Act and has laid down specific guidelines to prevent misuse of the section. One of the foremost requirements for a successful application of section 141 is the presence of a specific averment.
In the decision of the SMS Pharmaceuticals v. Neeta Bhalla and Ors., the SC had held that “with a view to make the 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 and in the absence of the same the complaint should not be entertained”. This was again reiterated and affirmed by the apex court in National Small Industries Corp. Ltd. vs. Harmeet Singh Paintal and Ors. Merely stating mechanically that the accused was in charge of the business and was responsible for the day-to-day conduct will not suffice the requirement of section 141 of the act. To launch a prosecution against an accused, it has to be very specifically showcased so as to how they were involved and this has to be done in a clear and unambiguous manner. Again in Ashok Kumar Tyagi v. State of Himachal Pradesh, the HC had held that “the complaint should specifically spell out how and in what manner the partner was in charge of or was responsible to the firm for the conduct of its business and mere bald and cursory statement that he was the in charge of and was responsible to the firm for the conduct of its business is not sufficient”. Additionally, the apex court in the case of DCM Financial Services Ltd. v. J.N.Sareen & Anr., has held that, “not only it has to be averred specifically that the person was liable, it also has to be averred that he was in charge at the time of the commission of the offence.”
Thus, the genesis of the foremost requirement is that while making a complaint under section 138 read with 141 of the NI Act, the complainant has to specifically aver that the accused was liable and was in-charge of the affairs of the company, at the time of the commission of the crime.
The second major requirement that the courts have read into section 141 is the test of “factual and legal requirement”. In the case of KK Ahuja v. V.K.Arora and Ors., the SC had explained this requirement. Section 141 uses the words “was in charge of, and was responsible to the company for the conduct of the business of the company”. The court went onto say that to impose vicarious liability on an individual under section 141(1), the “person should fulfil the ‘legal requirement’ of being a person in law (under the statute governing companies) responsible to the company for the conduct of the business of the company and also fulfil the ‘factual requirement’ of being a person in charge of the business of the company”. In the same case, while referring to sub-clause 2 of the same section, the apex court had iterated that to impose liability under the said sub-clause, it has to be showcased that there is some “consent, connivance or negligence”on part of the accused which led to the commission of the offence.
Analysis of the Present case
While reversing the decision of the revisional court, the single bench of the HC was of the opinion that since the accused in question are not stated to be the signatories of the cheque, the criminal complaint filed cannot be sustained. Additionally, the court had also observed that the complaint is general in nature and does not pass the muster of specific averment and hence the criminal complaint ought to be quashed. At the outset the decision rendered by the HC has failed to apply the position of the law in a correct manner.
At the very beginning, the essential element to consider when it comes to a complaint made under section 138 read with section 141 of the act is whether or not, there exists a specific averment in the complaint against the individuals, who are arrayed as an accused. The apex court has in a plethora of decisions recognised that a specific averment is not to be made against all the accused when it comes to section 141 cases. Certain individuals like the Managing director or the signatory are presumed to be liable for the commission of the offence, hence the requirement of specific averment has to be necessarily followed only in certain specific instances, wherein the person cannot be assumed to be liable for the offence.
In the present case, a close perusal of the complaint itself showcases that the complaint made a very specific averment against Mr. Nicholas Fortune (CFO) that it was only after his “consent” that the cheques in question. Incidentally, in KK Ahuja’s case, the apex court had observed that in cases of Directors or managers who are not the signatory of cheque, only an averment is to be made in the complaint that they were in-charge and responsible for the conduct of the company. the court also said that “no further averment is necessary, though some particulars are desirable”. In the present case, not only did the complaint make a specific averment as to the CFO, but also highlighted the role played by him and thus squarely fell in the ratio laid down by the apex court.
The second requirement needed for section 141 is that the accused should fall within the factual and the legal requirement. As far as the legal requirements are concerned, the apex court has noted in KK Ahuja’s case a list of individuals who would fall within the category of persons responsible to the company for the conduct of the business of the company. A bare perusal of the list given by the court would make it clear that Mr. Nicholas was falling within the said list of individuals who fulfil the “legal requirement”. Having fulfilled the legal requirement, Mr. Nicholas also fulfilled the “factual requirement”, since he was the primary authority who was accustomed with the finances of the company and would pass all the cheques issued by the company. Hence, the CFO was in charge of the business of the company and hence fulfilled both the requirements as given by the apex court.
Conclusion
The decision rendered by the Delhi HC in the present is incorrect when it comes to the application of the settled law. The complaint in the present case not only was specific in nature, it also pointed out in details the role played by the CFO and hence it fulfilled the requirements laid down by the apex court. In Dhananjay Datar v. State of Maharashtra, the complaint only mentioned that the accused were the whole-time director and were involved in the day-to-day affairs of the company. The Bombay HC quashed the criminal complaint on the ground of want of specific averment, however, the apex court overruled the decision in Standard Chatered Bank v. State of Maharashtra and had noted that the complaint made did the meet the requirement as laid down by the apex court. In comparison, the complaint in the present case was extremely specific in respect to the CFO, however the denial of the court to consider it effectively goes against the decision of the apex court. The HC also erred in not looking into the factual and legal requirement test as laid down by the apex court. Lastly, the HC’s reasoning that since the accused were not signatory and hence not liable is incorrect as the entire purpose for section 141 is to hold all those individuals liable who are responsible for the affairs of the company.
The decision rendered by the Delhi HC has the potential to have particular ramifying effects when it comes the corporate setup. In the corporate setting, not all directors or individuals holding position of responsibility can be expected to sign on a cheque which is issued by the company. The very purpose behind section 141 of the NI Act is to hold those individuals accountable who misuse the veil of the company for their own ulterior motives. This decision, however, incorrectly interprets the existing law and additionally, frustrates the very purpose behind inserting such a provision under NI Act. In this process, it also has the potential to substantially restrict the overall application of the NI Act.
