While discarding “deemed liability” concept for a ‘Director’ merely by virtue of their designation, the Calcutta High Court has held that the presence of specific factual averments linking a director to the day-to-day management of a company is not a mere procedural formality but a jurisdictional prerequisite under Section 141 of the Negotiable Instruments Act (NI Act). The Court pointed out that ‘Silence’ in a complaint regarding an individual director’s specific role constitutes a substantive failure to establish a prima facie case.
Where an underlying debt is restructured through a Settlement Agreement, the Court explained that the ‘material time’ for assessing liability shifts to the execution and implementation of said settlement. In settlement-based transactions, vicarious liability must be examined strictly against those who negotiated and executed the restructured debt, and a director who is a documented stranger to such an agreement cannot be held vicariously liable for the dishonour of cheques issued pursuant thereto.
In the exercise of inherent powers under Section 528 of the BNSS, the High Court said that it must prioritize the prevention of an illegal prosecution over procedural technicalities. The Court asserted that procedural delay is intended as a shield to prevent the abuse of the legal system, not a sword to perpetuate an illegal prosecution where the complaint is ‘facially deficient’, and an inherent illegality in a summoning order cannot be cured by the mere passage of time.
A summoning order that fails to distinguish between “Managing Directors/Signatories” and “Non-Executive Directors”, particularly in the absolute absence of specific averments regarding the latter’s role, reflects a failure of judicial application of mind. To allow such a trial to proceed would be to weaponize criminal machinery for civil recovery, amounting to a manifest abuse of the process of law, added the Court.
A Single Judge Bench of Justice Uday Kumar observed that while the law discourages the ‘mechanical parroting’ of statutory language, it absolutely mandates the presence of a factual nexus, noting that the Complainant specifically attributes the request, negotiations, and discussions to Accused Nos. 2 and 3 alone. The conspicuous omission of the Petitioner is not a mere failure of elective language, but a fundamental failure of jurisdictional fact.
The Bench examined the ‘Initial Transaction’ versus the ‘Novation of Debt’, observing that the Settlement Agreement functioned as a ‘novation’, effectively replacing the original 2013 contract with a restructured obligation. The negotiations for this settlement and the subsequent issuance of Post-Dated Cheques were handled exclusively by Accused Nos. 2 and 3, making the Petitioner a stranger to this agreement.
Further, the Bench noted that Paragraph 3 of the complaint makes a blanket statement that all directors were ‘carrying on business’, but fails to provide the specific disclosure of facts required to link the individual director to the default. The ‘total silence’ regarding the Petitioner’s overt acts breaks the chain of liability.
It is an essential requirement to specifically aver in a complaint under Section 141 of NI Act that the person accused was in charge of, and responsible for the conduct of business of the company. Further, in the case of a Director, the complaint should specifically spell out how and in what manner the Director was in charge of or was responsible to the accused company for the conduct of its business, pointed out the Bench.
Further, the Bench observed that while the Magistrate’s hands were tied from recalling the summoning order, the High Court’s inherent jurisdiction is not; if a complaint discloses no offence against a specific individual, the continuation of that proceeding becomes an exercise in futility and a manifest violation of the right to personal liberty under Article 21 of the Constitution of India.
Addressing the Complainant’s plea regarding the Petitioner’s ‘deep slumber’, the Bench observed that while delay is a relevant factor in discretionary relief, it cannot sanitize a proceeding that is fundamentally void of jurisdictional competence. The Bench concluded that it is the duty of the High Court to intervene where continuation of criminal proceedings would amount to an abuse of process of law, and procedural delay cannot outweigh the substantive injustice of an untenable prosecution.
Briefly, the complainant, Garvit Consultancy Services, extended a ‘temporary monetary accommodation’ of Rs. 40 Lakh carrying an interest rate of 12% per annum to the Accused Company, Amrit Feeds Ltd., in August 2013. Following a default in 2017, the Complainant initiated insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT), Kolkata.
During the pendency of the NCLT proceedings, a Settlement Agreement was executed by virtue of which the debt was consolidated at Rs. 37 Lakhs, and a series of Post-Dated Cheques (PDCs) were issued in discharge of the restructured liability. However, a cheque for Rs. 6 Lakhs was returned unpaid with the remark ‘Funds Insufficient’, leading to the initiation of criminal proceedings under Sections 138 and 141 of the Negotiable Instruments Act, 1881, following the failure to liquidate the sum after the statutory demand notice.
The Petitioner, Masud Tarif (4th Accused), is a Director of the Accused Company but was neither a signatory to the dishonoured instrument nor a participant in the negotiations culminating in the Settlement Agreement of 2018. The complaint specifically identifies 2nd and 3rd Accused as the individuals who requested, negotiated, and discussed the financial accommodation, conspicuously omitting the Petitioner from the entire transactional narrative.
The Petitioner moved an application for discharge before the Magistrate, asserting the complaint lacked the ‘foundational averments’ necessary to fasten vicarious liability upon a non-executive director. The Magistrate noted the Complainant’s verbal admission that the complaint was ‘silent’ regarding the Petitioner’s specific role, but held it was procedurally incapacitated from “recalling” its own summoning order.
Appearances:
Advocates Mayukh Mukherjee, Anurag Modi, and Ankita Sikdar, for the Petitioner
Advocates Dipanjan Dutt and Soumodip Ghosh, for the Respondent
