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Director who has resigned from company be held liable for cheques subsequently issued and dishonoured? – Delhi High Court Explained

Delhi HC

V. Kameswar Rao, J., while addressing the present matter observed that a retired director of the company cannot be held liable for the day to day acts of company and cheques issued and dishonoured post his retirement.

Petitioner’s Counsel V.M. Kannan contended that the proceedings by respondent 1 have been initiated before the Metropolitan Magistrate under Section 138 of the Negotiable Instruments Act, 1881.

The ground of the above-stated proceedings:

The petitioner was a Director of respondent 2. The cheques in question were issued by respondent 2 and the same was dishonoured due to insufficient funds.

Cheques in question were issued by respondent 2 to discharge its liability towards respondent 1.

Petitioner’s Counsel added that he ceased to be the director of the respondent 2 at least 8 years prior to the issuance of the cheques. The resignation of the petitioner was also notified to the Registrar of Companies by the respondent 2 by filing Form 32, which is a public document

No application of Judicial Mind

Metropolitan Magistrate in a mechanical manner only by considering Company Master Data of the period when the petitioner was Director has entertained the complaint under Section 138 of the NI Act and without applying any judicial mind and without recording any satisfactory reasons as to whether the offence is made out against the petitioner has issued the summons.

Further, the essential ingredients for maintaining a complaint under Section 138 of the NI Act are absent with respect to the petitioner. The respondent 1 failed to show in what manner and how the petitioner was responsible for the affairs of the respondent 2. The issuance of summons was contrary to the settled position of law in terms of the judgments of the Supreme Court and this Court.

The crux of the matter

The crux of the present petition is with regard to the quashing of 5 complaint cases initiated by respondent 1 against the petitioner. Complaint cases were primarily grounded on the return of 5 cheques which were issued on behalf of respondent 2 for a total amount of Rs 45 lakhs.

Analysis

It is also settled law that mere repetition of the phraseology of Section 141 of NI Act that the accused is In-charge and responsible for the conduct of the day-to-day affairs of the Company may not be sufficient and facts stating as to how the accused was so responsible must be averred.

Respondent 1 had submitted that respondent 1 was involved in the discussion and represented respondent 2 before the agreement was executed but that does not mean even after his resignation he continued to be responsible for the actions of the Company including the issuance of cheques and dishonour of same which then attracts proceedings under Section 138 of NI Act against him.

Further, the bench stated that if the Metropolitan Magistrate had called for the latest Company Master Data along with the complaint, the Metropolitan Magistrate would have issued the summons as it would have revealed that the name of the petitioner does not find mention and the petitioner was not In-charge of the Company. Hence the summons issued against the petitioner were not justified.

Court also added that the petitioner was justified in relying on the decision of the Coordinate Bench of this Court in J.N. Bhatia v. State 2006 SCC OnLine Del 1598.

Supreme Court’s decision in  Harshendra Kumar D. v. Rebatilata, (2011) 3 SCC 351was also referred with other decisions of the Supreme Court.

Decision

In cases where the accused has resigned from the Company and Form 32 has also been submitted with the Registrar of Companies then in such cases if the cheques are subsequently issued and dishonoured, it cannot be said that such an accused is in-charge of and responsible for the conduct of the day-to-day affairs of the Company, as contemplated in Section 141 of NI Act for being proceeded against.

In view of the above-stated decisions, the present petition was allowed and all proceedings pending before the Metropolitan Magistrate including summons were quashed. [Alibaba Nabibasha v. Small Farmers Agri-Business Consortium, 2020 SCC OnLine Del 1250, decided on 23-09-2020]

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Written by lawcrab

Lawcrab is the First Magazine focusing on making the law easier to understand for everyone.

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