Cheque Dishonour | Vicarious Liability of Company Directors Under Section 138 NI Act : Bombay High Court

The Bombay High Court has delivered a significant judgment clarifying the scope of vicarious liability for company directors under Section 138 of the Negotiable Instruments Act. The ruling establishes that directors cannot be automatically prosecuted for cheque dishonour offences without specific evidence of their active involvement in the alleged offence, marking a crucial distinction between corporate and personal liability in financial crimes.

Background & Facts

The Dispute

The case involved multiple criminal complaints filed against Salvi Builders and Developers and its directors by various flat purchasers. The complainants had issued cheques to the builder for property purchases, which were subsequently dishonoured. While the company was the primary accused, its directors were also named in the complaints under Section 138 of the Negotiable Instruments Act, 1881, which criminalises cheque dishonour.

Procedural History

The legal proceedings followed this trajectory:

• 2007-2008: Multiple complaints filed before the Metropolitan Magistrate, Mumbai, under Section 138 NI Act
• 2008: Summons issued against both the company and its directors
• 2009: Criminal Revision Applications filed by directors challenging their prosecution
• 2018: Criminal Applications filed seeking quashing of proceedings
• 2026: Final judgment delivered by the Bombay High Court

The Parties' Positions

The directors of Salvi Builders and Developers consistently argued that:

• They were not signatories to the dishonoured cheques
• They had no personal knowledge of the transactions
• Their inclusion in the complaints was merely due to their directorial positions
• No specific allegations of active involvement were made against them

The Legal Issue

The central question before the Court was whether directors of a company can be automatically prosecuted under Section 138 NI Act merely by virtue of their position, or whether specific allegations of active involvement in the offence are required to establish their criminal liability.

Arguments Presented

For the Applicants (Directors)

The directors' counsel advanced these key arguments:

• Section 138 NI Act creates personal liability only for those who were in charge of, and responsible for, the conduct of the company's business at the time of the offence
• The complainants failed to make specific allegations against individual directors, relying instead on their mere directorial status
• Following the Supreme Court's decision in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, directors cannot be prosecuted without specific averments of their involvement
• The complaints were vague and did not meet the threshold established in National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal

For the Respondents (Complainants)

The complainants' counsel contended that:

• Directors are automatically liable for offences committed by the company under Section 141 of the NI Act
• The cheques were issued in the ordinary course of business, making all directors vicariously liable
• The directors failed to produce evidence of their non-involvement, shifting the burden to them
• The complaints contained sufficient allegations to proceed with prosecution against all directors

The Court's Analysis

The Bombay High Court conducted a meticulous examination of the statutory framework and judicial precedents governing director liability under Section 138 NI Act. The Court's analysis proceeded along these key lines:

1. Statutory Interpretation: The Court examined the interplay between Section 138 and Section 141 of the NI Act, noting that while Section 138 creates the substantive offence, Section 141 deals with offences by companies. The Court observed:

"Section 141 of the NI Act makes it clear that 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, shall be deemed to be guilty of the offence. However, this deeming provision cannot be read in isolation."

1. Judicial Precedents: The Court relied heavily on the Supreme Court's decisions in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, which established that:

• Specific allegations against directors are mandatory
• Mere directorial status is insufficient to attract criminal liability
• The complainant must allege and prove that the director was in charge of, and responsible for, the conduct of the company's business

1. Complaint Analysis: The Court scrutinised the complaints filed against the directors and found them deficient:

• No specific allegations of active involvement in the cheque transactions
• No averments regarding which director was responsible for the particular transaction
• Generic allegations that failed to meet the threshold established in Harmeet Singh Paintal

1. Burden of Proof: The Court clarified that the initial burden lies on the complainant to make specific allegations against directors. Only after such allegations are made does the burden shift to the directors to prove their non-involvement. The Court noted:

"The complainant cannot merely rely on the fact that the accused are directors of the company. There must be specific averments in the complaint about their role in the transaction and their responsibility for the conduct of the company's business."

1. Vicarious Liability Principles: The Court distinguished between civil and criminal liability, emphasising that criminal liability requires a higher threshold of proof. The Court held that vicarious liability in criminal law cannot be presumed merely based on corporate positions.

The Verdict

The Bombay High Court allowed the criminal revision applications and quashed the proceedings against the directors of Salvi Builders and Developers. The Court held that:

1. Directors cannot be automatically prosecuted under Section 138 NI Act merely by virtue of their directorial positions
2. Specific allegations of active involvement in the offence are required to establish their criminal liability
3. The complaints failed to meet the threshold established by the Supreme Court in S.M.S. Pharmaceuticals and Harmeet Singh Paintal
4. The proceedings against the directors were quashed, while those against the company were permitted to continue

What This Means For Similar Cases

Directors Cannot Be Automatically Prosecuted

This judgment reinforces the principle that directors are not automatically liable for cheque dishonour offences committed by their companies. Practitioners should note:

• Section 141 NI Act requires specific allegations of active involvement
• Generic complaints naming all directors will not survive judicial scrutiny
• The burden of proof initially lies with the complainant to establish director involvement

Complaints Must Meet Specific Thresholds

The Court's analysis establishes clear requirements for complaints under Section 138 NI Act against directors:

• Specific allegations: Complaints must detail which director was responsible for the particular transaction
• Active involvement: Mere directorial status is insufficient; there must be averments of active participation
• Business responsibility: The complainant must allege that the director was in charge of the company's business at the relevant time
• Particulars of offence: The complaint must connect the director to the specific dishonoured cheque

Strategic Considerations for Practitioners

For defence counsel:

• Challenge complaints that rely on generic allegations against directors
• Demand particulars of director involvement in pre-trial proceedings
• Argue for quashing where complaints fail to meet the Harmeet Singh Paintal threshold

For prosecution counsel:

• Ensure complaints contain specific allegations against each director
• Include particulars of each director's role in the transaction
• Be prepared to prove director involvement at trial

For corporate counsel:

• Implement internal controls to document director involvement in financial transactions
• Maintain clear records of which directors are responsible for specific business functions
• Educate directors on the legal requirements for establishing their non-involvement in potential offences