LEXSTREET ADVISORS LLP
LIABILITIES OF INDEPENDENT DIRECTOR UNDER SECTION 138 OF NEGOTIABLE INSTRUMENT ACT, 1882.
LEXSTREET ADVISORS LLP JAYDEEP MEHTA 10 Jan 2018

LIABILITIES OF INDEPENDENT DIRECTOR UNDER SECTION 138 OF NEGOTIABLE INSTRUMENT ACT, 1882.


Liabilities of Independent Directors and Non-Executive Directors under Section 138 of the Negotiable Instruments Act, 1881.

            

We would like to start by examining the provisions of the Negotiable Instruments Act, 1881 (hereinafter referred to as "the act"). Per the maxim "generalia specialibus non derogant" the provisions of this act will supersede the provisions of the Code of Criminal Procedure, 1973. However, the Indian Penal Code, 1860 (hereinafter referred to as "the IPC"), being a penal statute, concurrent charges may be framed under both acts.

The   Directors  stand   in  a  fiduciary position with the company and are expected to manage the affairs of the company in a manner beneficial tothe interest of the company and its stakeholder. Director’s  liability arisesbecause of their position as agents or officers of the Company as     also for being  in  the position of trustees  or having fiduciary relation  with theCompany  or   its   shareholders.    Nonexecutive   directors    (NEDs) or independent directors (IDs) are those not charged with   the   day  to day affairs and management  of  the  company  and   are  usually involved in the planning and decision making activities.

The concept of Independent Directors has assumed great significance due to various corporate frauds which have been unveiled in the recent past.  Regulation 17 of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 mandates appointment of Independent Directors on the Board of Directors of all the listed entities. The term “Independent Director” has been defined under the Companies Act, 2013. The requirements prescribed under the Companies Act. 2013 seems to be much more stringent than that of SEBI (LODR) Regulations, 2015.

As per Section 2 (47) of the Companies Act, 2013, “Independent Director” means and independent director referred to in Sub Section (6) of Section 149 of the Companies Act, 2013.

Section 141 of the act talks about when a company commits the offence mentioned in Section 138. It very specifically deems every person who oversaw and was responsible to the company for the conduct of its business to be deemed guilty.

However, if the said act was committed without his knowledge then he will not be held under this clause. A substantial point of difference between this and the provisions of the IPC is that under Sections 34 and 149 of the IPC, an element of mens rea (being in furtherance of common intention and in furtherance of common object respectively) is present which is absent as a requirement in the provisions of the act. Section 141 only talks about knowledge and not mens rea.

Under section 141 of the N I Act, apart from   the   company   itself,   the following persons are deemed to be guilty of the offence and shall be liable to be proceeded against and punished:  

·        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;  

·        Any Director, Manager, Secretary or other officer of the company  with whose consent and connivance, the offence under section 138 had been committed;  

·        Any Director, Manager, Secretary or other officer of the company whose negligence has attributed to the offence under section 138 being committed by the company 

In Rohit Chauhan Mehta v Gujarat State Fertilizer Co.,the Gujarat High Court rejected the application made by the accusedfordropping the proceedings initiated under section 141 of NI Act.   The accused included the NEDs as well. The learned counsel  appearing for the accused submitted that the whole body of directors of a  company cannot be said to be in charge of the daytoday management

and running of the business of the company and cannot be attributed knowledge of everyday working of the company and, therefore, cannot be impleaded for prosecution. 

 

The   application was rejected on the submissions of the learned counsel

representing the complainant that in view of the admitted well‐known sickness of  the  accused  company  to  such an extent that its entire networth was wiped out and it was declared sick by the B.I.F.R. In the year 1993, it was not open for the directors to contend that the cheques to the tune   of Rs.5  crores could have been issued against supply of raw materials without  the knowledge, consent   and   connivance of the board ofdirectors.  

 

In S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and another, the question before the Supreme Court in this case  was whether  liability  under section 138 and 141 of the N I Act  arise   on  account  of holding  office  by  the  director   as such. The  Court    held     that   the conditions contained in sec 141 are intended to ensure that a person who is sought to  be made vicariously liable for an offence of which the principal accused  is the Company, had a role to play in relaltion to the incirminating  act and further that such a person should know what is attributed to him to make him liable.

 

The conclusion is inevitable that the liability arises on account of conduct,act or omission on the part of a person and not merely on  account  of   holding   an  office or a position in a company. Various HighCourts have also ruled on similar lines. 

It has been commonly used as a defence in these cases for the directors to state that they are non-executive independent directors and hence they have no say in the day to day matters of the company. (As used in Briji Gopal Daga vs State of Kerala)

It has been held by a plethora of cases that an independent director, by the very nature of his appointment, is deemed not to have any knowledge of the day to day matters of the Company.

Coming back to Section 141 of the act, a charge will also be framed by necessary implication on all persons deemed to be involved in the day to day matters of the company. Hence, a plain averment to the fact that the director is involved in the day to day matters of the company should be enough to justify accusing him.

Per the Supreme Court in K.K. Ahuja vs V.K. Vora & Another, the position under Section 141 of the act can be summarized thus:

(i) If the accused is the Managing Director or a Joint Managing Director, it is not necessary to make an averment in the complaint that he oversees, and is responsible to the company, for the conduct of the business of the company. It is sufficient if an averment is made that the accused was the Managing Director or Joint Managing Director at the relevant time. This is because the prefix “Managing” to the word “Director” makes it clear that they oversaw and are responsible to the company, for the conduct of the business of the company.

(ii) In the case of a Director or an officer of the company who signed the cheque on behalf of the company, there is no need to make a specific averment that he oversaw and was responsible to the company, for the conduct of the business of the company or make any specific allegation about consent connivance or negligence. The very fact that the dishonoured cheque was signed by him on behalf of the company, would give rise to responsibility under sub-section (2) of Section 141 of the act.

(iii) In the case of a Director, secretary or manager [as defined in Section 2(24) of the Companies Act, 1956] or a person referred to in clauses (e) and (f) of Section 5 of Companies Act, 1956, an averment in the complaint that he oversaw, and was responsible to the company, for the conduct of the business of the company is necessary to bring the case under Section 141(1) of the act. No further averment would be necessary in the complaint, though some will be desirable. They can also be made liable under Section 141(2) of the act by making necessary averments relating to consent and connivance or negligence, in the complaint, to bring the matter under that sub-section.

(iv) Other officers of a company cannot be made liable under sub-section (1) of Section 141 of the act. Other officers of a company can be made liable only under sub-section (2) of Section 141 of the act, by averring in the complaint their position and duties in the company and their role regarding the issue and dishonour of the cheque, disclosing consent, connivance or negligence.

A detailed scrutiny was also done by the Supreme Court recently in Standard Chartered Bank v Bank of Maharashtra which reflects the same. The main issue is that the averments made in the complaint should be adequate for the magistrate to issue process. This is automatically done if he is the managing director or the signing director of the cheque. Otherwise in all other cases, the accused should be said to oversee and responsible for the conduct of the business of the company.

The best defence for a person in such a case is to state that he was an independent director and had no knowledge of the said cheque.

Comparing Section 141 of the act with Sections 34 and 149 of the IPC, we can see that the vicarious liability provisions are stricter in the act and, as mentioned above, the maxim of generalia specialibus non derogant will apply here excluding the jurisdiction of sections 34 and 149 of the IPC. 

 

            Jaydeep Mehta

            Designated Partner

            Lexstreet Advisors LLP                          

            Advocates & Solicitors.

            Mumbai / Gujarat & New Delhi

 

            Email : jaydeep.mehta@outlook.com

            Cell : +91 9824099514

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