Holding Chairpersons Of Large Companies Liable For Dishonour Of Cheques Would Unfairly Expand ‘Vicarious Liability’ Under NI Act: Delhi High Court

The Delhi High Court has said that holding Chairpersons of large conglomerates or companies liable for cheques issued in day-to-day affairs of the business of a company, would unfairly and unnecessarily expand the provisions of vicarious liability under the provisions of the Negotiable Instruments Act, 1881.

Justice Anish Dayal made the observation while quashing the proceedings under Section 138 of the Negotiable Instruments Act against businessman Yashovardhan Birla, who was a Non-Executive Co-Chairman/ Non-Executive Director of Birla Cotsyn (India) Ltd.

The court noted that the signatory of the cheque and the Managing Director of the company was already arrayed as an accused, and thus no prejudice was caused to the complainant.

Birla was arrayed as an accused in the complaint filed in 2016 under Section 138 read with Sections 141 & 142 of the NI Act against the company on the ground that he was one of its directors.

In the plea filed before the high court seeking quashing of the Section 138 complaint, Birla submitted that he was an independent and non-executive Director who was not managing the day-to-day affairs of the accused company and was not a signatory to the dishonoured cheque issued by the company.

He added that the other directors, who were arrayed as accused by the complainant, Cecil Webber Engineering Ltd, were later dropped from the array of accused, on the ground that they were ‘difficult to be served’. However, the petitioner, who was in a similar position as others, was continued as an accused in the array of parties, it was submitted. He further told the court that he had resigned as a non-executive Director with effect from December 29, 2012.

Justice Dayal said that it is common knowledge that very large business conglomerates spawn and sustain hundreds of companies under them which may be ultimately held by a particular business family or a group of investors, but officers and professionals are appointed to run the day-to-day affairs of such companies.

Observing that a number of non-executive Directors are present on the Board of the Companies for their expert independent advice or oversight of the functioning of the company, the court said that even the role of ‘Chairman’/ ‘Chairperson’ is not typically of an executive nature. This is because the Chairperson presides over the general meetings or of the functioning of the company and guides its business policies, and it need not interfere in the day-to-day affairs of the company, said the court.

“Chairperson of large business conglomerates are in fact even further removed from the minutiae of everyday operations of the company and distant from the micro-management which is required to be done by the executive directors and officers of the company. Needless to say, this has to be assessed in context of the peculiar facts of each case,” it added.

Referring to the facts of the case, the court noted that Birla was not a signatory to the cheque and that the Managing Director of the company was already arrayed as an accused. It further noted that Birla was a non-executive co-Chairman of the accused company. Additionally, the court noted, the Form 32 did not ascribe him as an executive director. 

“There is nothing on the records of the proceedings that there was any communication with the complainant which would have noted an active role of the petitioner in the specific transition that had taken place or the cheque which had been issued in lieu thereof,” the court said, adding that mere designation as a director cannot import vicarious liability for a dishonoured cheque.

The court further said, “It is evident from para 2 of the complaint that bald averments have been made against Accused No.3 - 8 being directors of Accused No.1 Company and in-charge of and responsible for the conduct, affairs and business of the company. There is no specific averment made that this was so at the time of the commission of the offence.”

The bench added that the signatory of the cheque, who was also the Managing Director of the Company, would be deemed to be in-charge of and responsible for the conduct of the business of the company and therefore, the complainant was not remediless. Considering that the other Directors were dropped by the complainant, there was no reason for the complainant to have continued with the proceedings against Birla, the court said.

The bench further noted that the Metropolitan Magistrate had dismissed the discharge application of Birla on the ground that the letterhead on which the promissory note and the receipt was given by the accused company, reflected that it was a “Yash Birla Group”.

“Merely the mention of the name of Accused No.3 on the letter head as being the Head of the Group, does not ipso facto or ipso jure make him in-charge of and responsible for the affairs and business of the company at the time the offence was committed,” Justice Dayal said.

The bench observed that Birla was clearly a Non-Executive Director of the company as per the Annual Report filed by him, and therefore, the monitoring of executive activities would be in the hands of the Managing Director.

“The Courts have consistently reiterated that a non-executive director may be the custodian of governance of the Company but are not involved in the day-to-day affairs of running its business and only monitor executive activities of the Company,” it added. 

The court said it is clear that the phraseology used in Section 141 of the Act of being in charge and responsible to the Company for the conduct of the business of Company is a reference to an “executive activity” which imports an element of running day-to-day affairs of the Company and would not be extended to a role which is essentially supervisory, policy oriented, of oversight or regulatory i.e. non-executive in character.

The court thus allowed the petition, quashing the complaint and the proceedings initiated against the petitioner.

Case Title: Yashovardhan Birla vs Cecil Webber Engineering Ltd & Ors.

Citation: 2023 LiveLaw (Del) 320

Counsel for the Petitioner: Mr. Sidhartha Agarwal Sr Adv. with Ms. Smriti & Mr. Jaiveer Kant, Advs.

Counsel for the Respondent: Ms. Anupama Kaul, Adv.

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