ADHIRAJ SINGH VS YOGRAJ SINGH AND OTHERS CRIMINAL APPEAL ARISING OUT OF S.L.P. (Crl.) No(s). 16051-16052 of 2023

BENCH: JUSTICE J.K. MAHESHWARI & JUSTICE RAJESH BINDAL

FACTS: 

Adhiraj Singh, the appellant, held the position of director in the respondent company from September 28, 2016, until June 21, 2019. During his tenure, the company accrued liabilities and issued multiple cheques to its creditors. On June 21, 2019, the appellant tendered his resignation, which was duly accepted by the company. Subsequently, Form DIR-11 was filed with the Registrar of Companies on June 26, 2019, formally recording his disassociation from the company. On July 12, 2019, the company issued three post-dated cheques, dated July 17, 2019, September 17, 2019, and September 23, 2019, to its creditors, including the respondents, as payment for a legally enforceable debt. However, when presented for payment, these cheques were dishonoured, prompting the initiation of proceedings under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”).

The respondents named the appellant as one of the accused in their complaints, asserting that, as a director at the time the debt was incurred, the appellant held vicarious liability under Section 141 of the NI Act. They further contended that his resignation did not exempt him from responsibility for the company's financial obligations, including the dishonoured cheques. The appellant challenged this claim, asserting that he had resigned from the company before the cheques were issued and was not in charge of or responsible for the company’s affairs at that time. He subsequently filed a petition with the Himachal Pradesh High Court, seeking to have the proceedings against him quashed. However, the High Court dismissed his petition, prompting the appellant to appeal to the Supreme Court.

ISSUES:

The question arises whether a director who has resigned from a company prior to the issuance of dishonoured cheques can be held vicariously liable under Section 141 of the NI Act. Additionally, it is important to consider whether the existence of a debt during a director’s tenure creates continuing liability even after their resignation. While Section 141 of the NI Act holds directors vicariously liable for dishonoured cheques issued by the company, the key issue in such cases is whether the director’s resignation absolves them of liability for financial obligations incurred during their tenure.

JUDGEMENT WITH REASONING:

The Supreme Court annulled the proceedings against the appellant, overturning the judgment of the Himachal Pradesh High Court. The Court ruled that the appellant could not be held vicariously liable under Section 141 of the NI Act for cheques issued by the company following his resignation. The Court stated: "Directors cannot be held liable for offenses under Section 138 of the NI Act unless they were in charge of the company’s affairs at the time of the offense. Holding individuals accountable without clear evidence amounts to misuse of the legal process."

The Supreme Court examined the vicarious liability framework under Section 141, which holds individuals responsible for the company’s affairs at the time the offense occurred. The Court emphasized that liability under Section 141 applies only to those in charge of the company when the offense is committed. It clarified that the offense under Section 138 arises from the dishonour of a cheque, not the creation of the debt. Since the appellant had resigned before the cheques were issued, he could not be held liable for their dishonour.

The Court noted that the appellant's resignation, submitted on June 21, 2019, was effective immediately and acknowledged by the Registrar of Companies on June 26, 2019. It was undisputed that the cheques were issued on July 12, 2019, after the appellant’s resignation. Rejecting the respondents’ arguments, the Court stated: "Once a director’s resignation is effective, their involvement in the company’s affairs ends. The issuance of cheques post-resignation eliminates any possibility of vicarious liability under Section 141."

The Court reiterated that liability under Section 141 requires clear allegations and evidence of the accused’s involvement in the company’s affairs at the relevant time. Simply stating that the appellant was a director when the debt arose was insufficient to establish vicarious liability for cheques issued after his resignation. The judgment emphasized: "The NI Act does not impose continuing liability on directors for cheques issued after their tenure unless there is evidence of their involvement in the transaction.

ANALYSIS:

The Supreme Court's decision provides important clarification on the vicarious liability of directors under Section 141 of the Negotiable Instruments Act, 1881. The Court emphasized that for a director to be held liable for dishonoured cheques, there must be specific allegations and evidence of their involvement in the company’s affairs at the time the offense occurred. Since the appellant resigned before the cheques were issued, the Court ruled that he could not be held vicariously liable for their dishonour, clarifying that liability under Section 138 arises only when the cheque is dishonoured, not when the debt is incurred.

This judgment is significant as it sets clear boundaries for director liability, protecting those who have resigned from responsibility for actions taken after their departure. It reinforces the need for material evidence to support vicarious liability claims and ensures that directors are not unfairly held accountable for events beyond their control. The decision provides crucial guidance on the scope of directors' responsibilities, particularly in cases involving financial transactions and negotiable instruments.