Court Rules No Vicarious Liability for Resigned Directors Without Proof of Involvement in Company Affairs
In a significant ruling, the Karnataka High Court has quashed the criminal proceedings against Mr. Sujith Sudhakaran, the former director of M/s Dreamz Infra India Pvt. Ltd., under Section 138 of the Negotiable Instruments Act, 1881. The court's decision, delivered by Justice M. Nagaprasanna, emphasizes that a director who has resigned prior to the issuance of cheques cannot be held liable without evidence of active involvement in the company's affairs during the relevant period.
The case arose when Mr. Lalu Jacob Mammen, the respondent, initiated proceedings against Mr. Sudhakaran for two cheques dated 27th and 29th September 2014, which were dishonored. The complaint registered on 29th November 2014, led to the issuance of summons against Mr. Sudhakaran, who was accused of being responsible for the company's financial transactions at the time.
Mr. Sudhakaran's counsel argued that he was neither a director nor involved in the company's affairs on the dates the cheques were issued. He had resigned from his position as a director on 8th April 2013 and only rejoined as an additional director on 14th September 2015, well after the dates in question. The court found these claims substantiated by official records from the Ministry of Corporate Affairs.
The High Court's decision aligns with several Supreme Court judgments, including those in cases like "Ashoke Mal Bafna v. Upper India Steel Mfg. & Engg. Co. Ltd." and "Anil Khadkiwala v. State (NCT Of Delhi)," which underline the necessity of proving a director's active involvement in the company's operations to establish vicarious liability under the Negotiable Instruments Act.
Justice Nagaprasanna noted that continuing the proceedings against Mr. Sudhakaran would constitute an abuse of the legal process, as he was not involved in the company's affairs during the period when the cheques were issued. The court ordered the quashing of the criminal proceedings against him while clarifying that these observations are specific to this case and do not apply to any other pending matters involving the parties.
This judgment reinforces the legal principle that mere holding of a directorial position in the past does not automatically impose liability for company actions unless there is explicit evidence of involvement in the relevant transactions.
Bottom Line:
A Director who has resigned from the company before the date of issuance of cheques cannot be held liable for offences under Section 138 of the Negotiable Instruments Act, 1881, as there is no vicarious liability without proof of active involvement in the company's affairs during the relevant time.
Statutory provision(s): Negotiable Instruments Act, 1881 Sections 138, 141; Criminal Procedure Code, 1973 Section 482
Mr. Sujith Sudhakaran v. Mr. Lalu Jacob Mammen, (Karnataka) : Law Finder Doc Id # 2837936
