Sudeep Jain vs. ECE Industries Ltd. (Crl. M.C.1821 of 2013)
The Negotiable Instruments Act (NI Act) 1881, aimed to impose penalties on people who issued checks with insufficient funds in their bank accounts. This law reduced the number of civil lawsuits but increased the number of complaints in criminal courts, mainly targeting companies registered under the Companies Act.
Various court decisions, such as the S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Anr. 2005 (7) SCALE 397, Anita Malhotra vs. Apparel Export Promotion Council (2011) 1 SCC 520 and Laxmi Dyechem vs. State of Gujarat 2012 (11) SCALE 365, have emphasized the need for clear information to prove vicarious liability and have clarified the requirements.
These decisions laid down some important rules:
• The person filing the complaint must specify in detail how the accused is responsible.
• Not all Directors are automatically responsible; it depends on their role at the time.
• Vicarious Liability must be proved – the same cannot be assumed.
• Managing Directors and Joint Managing Directors are automatically liable due to their positions.
• Those who signed the dishonoured cheques are responsible and liable under Sub-section (2) of Section 141.
The Hon’ble Delhi High Court upon examining the above principles noticed a problem – the indiscriminate summoning of directors and employees of companies in cases filed under Section 138 r/w 141 of the NI Act. Such blanket summonses not only harass innocent directors and employees but also overload the High Courts with cases that could have been avoided with careful scrutiny at the lower court level. The legal principle established by various judgments is that the Managing Director and the Joint Managing Director can be deemed vicariously liable for the company’s offense due to their positions within the organization. However, this principle cannot be applied indiscriminately to all individuals associated with the company.
The Hon’ble High Court while taking a proactive stance to address this longstanding issue, emphasized the importance of a cautious and meticulous approach by Metropolitan Magistrates in Delhi. The objective is to ensure that summonses are directed only to those directors or employees of the accused company who are genuinely involved in the wrongdoing, as per legal precedents, and to avoid issuing summons to all persons named in the complaint mechanically, without ascertaining whether they played any actual role in the transaction or not.
The Hon’ble Court issued a directive that mandates the Magistrates to request copies of Form-32 from complainants to ascertain who held positions in the accused company at the time of the alleged offense. Additionally, the complainant must provide detailed information about the accused company, dishonoured cheques, individuals involved, reasons for dishonour, legal notices, and responses received.
This move by the Delhi High Court seeks to protect innocent individuals from unwarranted legal proceedings and alleviate the burden on the courts. It also represents a significant step toward ensuring justice while maintaining efficiency in the legal system.
Author of this article:
Adv. Ravish Bhatt,
Partner, R&D Law Chambers,
Dual Qualified Lawyer Solicitor | International Tax Affiliate
Connect with Mr. Bhatt on Linkedin: https://www.linkedin.com/in/adit-ravishbhatt/
- Readers should contact their attorney to obtain advice with respect to any particular legal matter. No reader or user should act or refrain from acting on the basis of information written above without first seeking legal advice from qualified law practitioner.