No 'Deemed Liability' For Company Directors Under Negotiable Instruments Act: Calcutta High Court

The Calcutta High Court has recently held that there is no deemed liability for a director merely by virtue of his designation, emphasising that specific factual averments in a complaint linking a director to the day-to-day management of the company are a jurisdictional prerequisite under Section 141 of the Negotiable Instruments Act.

The court said that silence in a complaint regarding a director's role constitutes a substantive failure to establish a prima facie case.

Justice Uday Kumar, while allowing a revision petition filed by Masud Tarif, a director of Amrit Feeds Ltd., set aside criminal proceedings pending before the 14th Judicial Magistrate, Calcutta in a cheque dishonour case arising out of a commercial transaction with Garvit Consultancy Services Pvt Ltd.

The court observed:

“There is no "deemed liability" for a Director merely by virtue of their designation. 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. "Silence" in a complaint regarding an individual director's specific role constitutes a substantive failure to establish a prima facie case.”

The case traces back to a financial accommodation of Rs. 40 lakh extended in August 2013. Following a default, insolvency proceedings were initiated before the National Company Law Tribunal, during the pendency of which the parties entered into a settlement agreement dated February 20, 2018, reducing the liability to Rs. 37 lakh. Post-dated cheques were issued towards repayment. One cheque dated July 1, 2018 for Rs. 6 lakh was returned unpaid with the remark “Funds Insufficient."

Process was issued against multiple accused, including Tarif. He approached the trial court seeking discharge, contending that the complaint was “fatally barren” of the jurisdictional facts required to invoke vicarious liability under Section 141 of the Negotiable Instruments Act.

The magistrate recorded the complainant's admission that the complaint was “silent” regarding Tarif's specific role in the transaction. However, the application was rejected on the ground that the court was procedurally incapacitated from recalling its summoning order.

On examining the complaint, the High Court found that Tarif was “conspicuously omitted” from the transactional narrative, with the pleadings attributing the negotiations and financial dealings to other accused. The court noted that there were no specific averments linking him to the conduct of the company's business at the relevant time.

It also noted that Tarif was neither a signatory to the dishonoured cheque nor a participant in the negotiations culminating in the settlement agreement dated February 20, 2018.

Emphasising the effect of restructuring of debt, the court observed:

“Where an underlying debt is restructured through a Settlement Agreement, 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. A director who is a documented stranger to such an agreement cannot be held vicariously liable for the dishonor of cheques issued pursuant thereto.”

In the absence of specific factual averments, the court held that it constituted a jurisdictional defect and that allowing the prosecution to continue in such circumstances would amount to an “abuse of process of law."

While noting that the magistrate was constrained from recalling the summoning order, the High Court held that it was empowered to intervene in exercise of its inherent jurisdiction “to prevent what is characterized as a classic case of corporate over-implication” and to ensure that criminal proceedings are not “weaponizing” the criminal machinery for civil recovery.

Proceedings against Tarif were accordingly quashed, while the trial against the remaining accused was directed to continue.