Source: Supreme Court

Why in News?

Justices CT Ravikumar and PV Sanjay Kumar emphasized upon the liability of overseer of company under Section 141 of the Negotiable Instrument Act, 1881 (NI Act) in case of cheque dishonor by the concerned company.

• Supreme Court gave this observation in the case of Siby Thomas v. Somany Ceramics Ltd.

What is the Background of Siby Thomas v. Somany Ceramics Ltd Case?

• A Partner of a Partnership firm was held liable for cheque dishonor under Section 138 of the NI Act only because he was the partner of that firm.
• He prayed before the Punjab & Haryana High Court to quash the complaint under Section 138 of the NI Act against him contending that he was not involved in the conduct of company directly, however the HC dismissed his plea.
• Hence, he appealed before the SC to quash the complaint against him.

What were the Court’s Observations?

• The SC stated that “Only that 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 alone shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished.”
• The court further said that it is not averred anywhere in the complaint that the appellant was in charge of the conduct of the business of the company at the relevant time when the offence was committed.
  • The upshot of the aforesaid discussion is that the averments in the complaint filed by the respondent are not sufficient to satisfy the mandatory requirements under Section 141(1) of the NI Act.
• Hence, the SC allowed the appeal.

What is Section 141 of NI Act?

• About:
  • Section 141 of NI Act establishes the principle of vicarious liability.
    • Vicarious liability is a legal concept that holds one party responsible for the actions of another.
• According to this section, if an offence under the NI Act is committed by a company, every person who, at the time of the offence, was in charge of and responsible for the conduct of the business of the company, as well as the company itself, shall be deemed to be guilty of the offence.
• This provision states that individuals associated with the company can be held liable for the company's actions.
• Scope:
  • Section 141 applies to various offences under the NI Act, such as dishonor of cheques.
  • It is important to note that the liability of individuals arises only if the offence is committed by a company.
  • The section does not apply to individuals who commit offences in their personal capacity.
• Proof of Liability:
  • Establishing liability under Section 141of NI Act requires proving that the individual was actively involved in the conduct of the company's business and had a role in the commission of the offence.
  • Mere designation or being a nominal head may not be sufficient.
  • The prosecution must demonstrate a direct link between the individual's role and the commission of the offence.
  • The prosecution has to prove that the offence has been committed with consent or connivance or due to the neglect of the person.

• Defences:

• • Individuals accused under Section 141 NI Act can prove that the offence was committed without their knowledge or that they exercised due diligence to prevent the commission of such an offence, they may escape liability.
  • However, the burden of proof lies on the accused to establish these defences.

What are the Landmark Cases Involved in the Case?

• Anita Malhotra v. Apparel Export Promotion Council & Anr. (2012):
  • The Supreme Court held that “The complaint should specifically spell out how and in what manner the Director was in charge of or was responsible to the accused company for conduct of its business”.
  • The court further said that mere bald statement that he or she was in charge of and was responsible to the company for conduct of its business is not sufficient.
• Ashok Shewakramani v. State Of Andhra Pradesh (2023):
  • The SC observed that “Merely because somebody is managing the affairs of the company, per se, he would not become in charge of the conduct of the business of the company or the person responsible to the company for the conduct of the business of the company”.

What is the Legal Provision Involved in the Case?

Section 141 of NI Act: Offences by companies —

• (1) 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:
• 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:
• Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.
• (2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.