Managing Director Liable For Dishonoured Company Cheques Where He Ran Its Day-to-Day Affairs: Kerala High Court

A Managing Director who was in charge of a company's day-to-day affairs and who signed its cheques can be held vicariously liable for cheque dishonour, the Kerala High Court has held, dismissing a revision plea by a company's former head.

Justice M.B. Snehalatha upheld the conviction of V.J. Joseph, the former Managing Director of J and A Foundations Pvt. Ltd., in a cheque dishonour case under Section 138 of the Negotiable Instruments Act. It involved three cheques issued by the company.

The case arose from a complaint filed by The India Cements Limited, which had supplied cement to J and A Foundations Pvt. Ltd. on credit.

Towards partial discharge of its liability, the company issued three cheques of Rs 2 lakh each. When presented for encashment, the cheques were returned unpaid with the endorsement “funds insufficient”.

Following the dishonour, India Cements issued a statutory legal notice to both the company and its Managing Director. In a reply notice, the accused admitted the transaction and liability and sought time to make payment. As the amount was not paid within the statutory period, the complainant initiated proceedings under Section 138 of the Negotiable Instruments Act.

The Managing Director was arrayed as an accused on the ground that he was in charge of the company's day-to-day affairs and was the signatory to the dishonoured cheques. The trial court convicted the accused and sentenced the Managing Director to one year's simple imprisonment, while directing payment of Rs 6 lakh as compensation.

On appeal, the Sessions Court upheld the conviction but reduced the sentence to imprisonment till the rising of the court. The compensation was however, left untouched.

Aggrieved, Joseph then approached the High Court in revision.The Court examined Section 141 of the Negotiable Instruments Act, which deals with offences by companies, and relied on the Supreme Court's ruling in Hitesh Verma v. Health Care at Home India Pvt. Ltd. to outline when vicarious liability can be fastened.

Rejecting the revision plea, the court found that the complainant had met this legal requirement by specifically stating that the Managing Director was in charge of and responsible for the company's business at the relevant time.

Reiterating the legal position under Section 141 of the Negotiable Instruments Act before applying it to the facts of the case, the Court observed

“The primary responsibility is on the complainant to make specific averments as are required under the law in the complaint so as to make the accused vicariously liable. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company. The person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases.”

Since the complaint clearly stated that Joseph was managing the company's affairs and he was the signatory to the cheques, the High Court found no reason to interfere with the concurrent findings of the trial court and the appellate court.

Accordingly, the revision petition was dismissed, and the conviction and sentence passed against the Managing Director were upheld.