Vicarious Liability of Directors for Dishonored Cheques of Company in Absence of

Specific Allegations

The Supreme Court recently, in the case of Ahutosh Ashok Parasrampuriya and Anr. v. M/s
Gharkul Industries Pvt. Ltd. & Ors 1, held that directors of a company will not be vicariously
liable for dishonoured cheques of a company if there are no specific allegations meted out
against them. The court further observed that the directors would be liable for offences
committed by the company under Section 141 of the Negotiable Instruments Act, 1881 only
in cases where there are specific allegations against the directors who are responsible for the
conduct of the company’s business at the time of the offence. The complainant had provided
financial assistance totalling up to IN 15,019,831 through various cheques to the appellants.
One of the cheques issued by the appellant towards making the payment of outstanding dues
was dishonoured on account of insufficient funds. The complainant had contended that the
directors were responsible for the affairs and conduct of the company. The complainant had
filed a complaint under Section 138 of the NI Act alleging that the appellants had given
consent to the terms of the MoU which they failed to abide by. The Ld. trial court had
summoned the appellant to appear before the court. The appellants filed two criminal
petitions under Section 482 of the Cr.P.C. with a prayer to quash the summons against them.
However, the appeal was dismissed by the Bombay High Court. Hence, the matter was taken
to the Supreme Court.

The main contention of the appellants that was up for interpretation before the Hon’ble
Supreme Court was that the directors of the Company has not committed any offence. They
could not be vicariously held liable for the criminal acts of the company. They further
submitted that the directors were non-executive directors of the company; hence they did not
bear any responsibility for conduct of business which is a mandatory condition for a
proceeding under Section 138 to be initiated against someone. Therefore, the prayed that the
order of summon passed by the trial court be set aside since it was an abuse of process of law.

1
Ashutosh Ashok Parasrampuriya and Anr. v. M/s Gharkul Industries Pvt. Ltd. & Ors.,
Criminal Appeal Nos. 1206 of 2021
The respondents in their averments contended that the records of the Registrar of the
Company clearly indicated that the directors were responsible for the conduct of business of
the company, hence qualifying it to be tried under Section 138.

The Hon’ble Supreme Court, after perusing the documents placed on record and observing
the submissions, relied on its decision in SMS Pharmaceuticals Ltd. v. Neeta Bhalla and
Anr.2, and observed that it is necessary to provide for specific allegation in a complaint under
Section 141 of the NI Act that the accused was in charge of the conduct of business of the
company at the time of the commission of the offence. The Court further observed that the
allegations in the present complaint were made at the time when the offence was committed
and the directors were responsible for the conduct of its business. Therefore, the Apex Court
held that the order of the Bombay High Court in dismissing the petitions filed under Section
482 had no scope of error. Hence, the appeals before the court were dismissed and the
directors were made liable.

2
SMS Pharmaceuticals Ltd. v. Neeta Bhalla and Anr., 2005 8 SCC 89.