The Hon’ble Supreme Court of India (“Supreme Court”) vide its judgment dated February 14, 2024, in the case titled Rajesh Viren Shah v. Redington (India) Limited (2024 INSC 111) has held that a Director who has resigned from such post cannot be held liable for failure in realization of cheques issued by the Company as they cannot be held responsible for the conduct of business at the relevant time post their resignation.

BRIEF FACTS:

1. The present Appeals before the Supreme Court arose out of the judgment and Order dated 06.04.2022 in CRLOP No. 34923 of 2019 and Judgment and Order dated 08.04.2022 in connected matter CRLOP No. 34248 of 2019 passed by the Hon’ble High Court of Judicature at Madras.
2. The Appellants i.e., Rajesh Viren Shah and Sanjay Babulal Bhutada in both the above stated Appeals were the Directors in the Respondent Company i.e., Redington (India) Limited and they had resigned from the Directorship on 09.12013 and 12.03.2014 respectively. 
3. The relevant Form 32 in accordance with Sections 303(2), 264(2), 266(1)(a), and 266(1)(b)(iii) of the Companies Act, 1956, in respect thereof stood accepted on 09.12.2013 and 20.02013 respectively. Further, accordingly, the relevant records stood rectified, incorporating the said changes. 
4. The Appellants were arrayed as accused in a Complaint filed under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) in relation to three cheques bearing nos. 002535 for Rs.7,10,085/-; 002777 for Rs.1,85,09,054; and 002791 for Rs.10,00,000/-, all dated 22.03.2014, by the Respondent Company herein against one M/s MIEL e-Security Private Limited, its Managing Director and its Directors, including the Appellants who were arrayed as A-4 and A-6 respectively. 
5. Following the dishonoring of the cheque due to insufficient funds, the Complainant/ Respondent herein, after serving statutory notice dated 11.04.2014 preferred a Complaint under the relevant provisions of the Code of Criminal Procedure, 1973 (“CrPC”). The Appellant(s) then filed a Petition under Section 482 of the Criminal Procedure Code, seeking quashing of the action initiated by the Complainant/ Respondent herein. The said Petiton under Section 482 of CrPC was dismissed by the impugned Order under challenge.

POSITION OF LAW AS TO THE LIABILITY OF A DIRECTOR OF A COMPANY FOR DISHONOR OF CHEQUE: 

1. The Supreme Court observed that the position of law as to the liability that can be fastened upon a Director for non-realization of a cheque is no longer res integra. Further, the Supreme Court noted the relevant statutory provision i.e.,  Section 141 of the NI Act, which states that every person who at the time of the offence was responsible for the affairs/conduct of the business of the company, shall be held liable and proceeded against under Section 138 of the NI Act, with exception thereto being that such an act, if done without his knowledge or after him having taken all necessary precautions, would not be held liable. 
2. Further, the Supreme Court also noted that if it is proved that any act of a company is proved to have been done with the connivance or consent or may be attributable to (i) a director; (ii) a manager; (iii) a secretary; or (iv) any other officer – they shall be deemed to be guilty of that offence and shall be proceeded against accordingly.

JUDICIAL POSITION ON THE ISSUE:  

1. While discussing the judicial position on the liability of a director, the Supreme Court noted judgment of the Supreme Court in case titled Monaben Ketanbhai Shah v. State of Gujarat (2004) 7 SCC 15 wherein it was observed as under:  

“…The primary responsibility is on the complainant to make necessary averments in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no presumption that every partner knows about the transaction. The obligation of the appellants to prove that at the time the offence was committed they were not in charge of and were not responsible to the firm for the conduct of the business of the firm, would arise only when the complainant makes necessary averments in the complaint and establishes that fact…”                            

2. In furtherance to the above, the Supreme Court also noted the judgment passed by a three Judge Bench of the Hon’ble Supreme Court in the case titled ‘S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Anr. (2005) 8 SCC 89’ wherein it was observed as under:  

“18. To sum up, there is almost unanimous judicial opinion that necessary averments ought to be contained in a complaint before a person can be subjected to criminal process. …A clear case should be spelled out in the complaint made against the person sought to be made liable. Section 141 of the Act contains the requirements for making a person liable under the said provision. That the respondent falls within the parameters of Section 141 has to be spelled out…” 

3. The Supreme Court, as regards to the exercise of the inherent powers under Section 482, CrPC, in cases involving negotiable instruments further also noted the principle held in the S.M.S Pharmaceuticals case (supra) which was subsequently followed in ‘Ashutosh Ashok Parasrampuriya and Anr. v. Gharrkul Industries Pvt. Ltd. and Others’ 2021 SCCOnline SC 915 which stated that interference would not be called for, in the absence of “some unimpeachable, incontrovertible evidence which is beyond suspicion or doubt or totally acceptable circumstances which may clearly indicate that the Director could not have been concerned with the issuance of cheques and asking him to stand the trial would be abuse of process of Court.”

 FINDINGS AND ANALYSIS BY THE SUPREME COURT: 

1. The Supreme Court found that the Hon’ble High Court, in the impugned order elaborately discussed the principles of law in regard to the quashing of such proceedings, however, the High Court failed in dealing with the factual matrix of the case. 
2. The Supreme Court further found that ex facie, the complainant has not placed any materials on record indicating complicity of the present Appellant(s) in the alleged crime. Particularly, when the Appellant(s) had no role in the issuance of the instrument, which is evident from Form 32  issued much prior to the date on which the cheque was drawn and presented for realisation.  

3. The Supreme Court further also observed that the veracity of Form-32 has neither been disputed by the Respondent nor has the act of resignation simpliciter been questioned. As such, the basis on which liability is sought to be fastened upon the instant appellant(s) is rendered questionable. 
4. It was further observed that the record reveals the resignations to have taken place on 09.12.2013 and 12.03.201 Moreover, it was noted that the cheques regarding which the disputes have arisen have been issued on 22.03.2014. The Supreme Court noted that the same was clearly latter and after the Appellant(s) severed their ties with the Respondent/Company. The Supreme Court further found that the Appellants, therefore, can in no way be responsible for the conduct of business at the relevant time.

DECISION OF THE SUPREME COURT:

The Supreme Court, in view of the aforesaid facts and circumstances, held that the Appellants are entitled to be discharged from prosecution. Accordingly, the Supreme Court allowed the Appeal and set aside the judgements of the High Court of Judicature at Madras and quashed all criminal proceedings pertaining to Complaint filed by the Respondent.

CONCLUSION AND ANALYSIS: 

The Supreme Court has made it categorically clear that directors who have resigned from their posts cannot be held liable for the dishonor of cheques issued by the company. This decision sets a precedent that directors cannot be held responsible for the company's actions after they have resigned, as they are no longer actively involved in its operations. 

In the facts of the present case, the Supreme Court noted that neither the veracity of Form-32 nor the act of resignation itself was disputed by the Respondent Company. This indicates that the resignation was legitimate and accepted, therefore raising questions about the basis for attempting to hold the Appellant(s) liable for the company's actions post their resignation. 

The Supreme Court further observed that the resignations of the Appellants occurred well before the issuance of the disputed cheques. The Supreme Court noted that the chronological sequence of events, with resignations taking place before the issuance of cheques underscores the Appellants' lack of involvement in the company's affairs at the time of the alleged offence. 

The present judgment provides clarity on the extent of directors' liability after resignation and emphasizes the importance of evidence in establishing culpability. It underscores the principle that directors cannot be held responsible for the company's actions once they have formally resigned and severed ties with the organization. The judgment serves to protect individuals from unjustified legal proceedings based on events that occurred after their disassociation from the company.

Please find attached a copy of the judgement.

This update has been contributed by Namitha Mathews (Partner) and Pragalbh Bhardwaj (Principal Associate).

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