Specific Averments Linking Directors To Day-To-Day Management A Jurisdictional Prerequisite For Proceedings U/S 141 NI Act: Calcutta High Court

The Court was hearing a criminal revision petition seeking the quashing of proceedings under Sections 138 and 141 of the Negotiable Instruments Act, arising from dishonour of a cheque issued pursuant to a settlement agreement.

A Bench of Justice Uday Kumar observed: “There is no 'deemed liability' for a Director merely by virtue of their designation. The presence of specific factual averments linking a director to the day-to-day management of a company is not a mere procedural formality but a jurisdictional prerequisite under Section 141 of the Negotiable Instruments Act. "Silence" in a complaint regarding an individual director’s specific role constitutes a substantive failure to establish a prima facie case”.

“Specific factual averments linking a director to day-to-day management are a jurisdictional prerequisite”, the Bench added.

Advocate Mayukh Mukherjee appeared for the petitioner, while Advocate Dipanjan Dutt appeared for the respondents.

Background

The dispute arose from a commercial transaction wherein the complainant extended financial accommodation to a company, which later defaulted in repayment. Insolvency proceedings were initiated before the National Company Law Tribunal, following which a settlement agreement was entered into, restructuring the debt.

Pursuant to the settlement, post-dated cheques were issued towards the discharge of liability. One such cheque was dishonoured for insufficiency of funds, leading to the initiation of proceedings under Sections 138 and 141 of the Negotiable Instruments Act against the company and its directors.

The petitioner, who was arrayed as one of the directors, sought quashing of the proceedings, contending that he was a non-executive director, not a signatory to the cheque, and had no role in the negotiation or execution of the settlement agreement.

It was argued that the complaint was devoid of any specific averments linking the petitioner to the conduct of the company’s business and that his implication was solely based on his designation as a director.

The complainant opposed the petition, contending that the complaint contained sufficient averments to proceed against all directors and that the issue of responsibility was a matter of trial.

Court’s Observation

The High Court undertook an extensive examination of the law governing vicarious liability under Section 141 of the Negotiable Instruments Act and the requirement of specific pleadings in complaints.

At the outset, the Court reiterated that criminal liability under Section 141 is not automatic and cannot be imposed merely based on designation. It emphasised that a director can be held liable only if the complaint discloses specific facts showing that such a person was in charge of and responsible for the conduct of the business of the company at the relevant time.

The Court relied on the authoritative decision in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005) and reiterated: “It is necessary to specifically aver in a complaint under Section 141 that… the person accused was in charge of, and responsible for, the conduct of business of the company… Without this, the requirements of Section 141 cannot be said to be satisfied.”

The Court further examined the nature of averments in the complaint and found that while general statements were made regarding directors being responsible for the business of the company, there was a complete absence of specific allegations against the petitioner. It held that such “silence” is not a curable defect but a fundamental jurisdictional flaw.

The Court clarified that the law does not require mechanical reproduction of statutory language, but it mandates disclosure of factual nexus. In this regard, the Court observed that “the ‘total silence’ regarding the Petitioner’s overt acts breaks the chain of liability.”

The Court then examined the effect of the settlement agreement and the concept of novation. It held that where the original liability is restructured, the relevant point for determining liability shifts to the execution of the settlement and issuance of cheques. In such circumstances, liability is confined to those who participated in the negotiation and execution of the settlement.

The Court found that the petitioner was neither a signatory to the dishonoured cheque nor a participant in the settlement process, and therefore lacked any transactional nexus with the offence.

The Court also addressed the argument regarding delay in approaching the High Court and held that procedural delay cannot cure a fundamental jurisdictional defect. It was observed that specific factual averments linking a director to day-to-day management are a jurisdictional prerequisite.

The Court further held that continuation of proceedings in the absence of such foundational facts would amount to an abuse of the process of law and an infringement of personal liberty.

It emphasised that the power of the High Court under Section 482 CrPC (now Section 528 BNSS) is meant to prevent such abuse and to ensure that criminal proceedings are not used as a tool for coercive recovery in civil disputes.

The Court also distinguished between different categories of directors, noting that while managing directors or signatories may attract liability by virtue of their role, non-executive directors require specific factual linkage to be implicated.

Upon a cumulative assessment, the Court concluded that the complaint failed to disclose any prima facie case against the petitioner and that the continuation of proceedings would be unjustified.

Conclusion

The Court allowed the criminal revision petition and quashed the proceedings against the petitioner, while directing that the trial against the remaining accused shall continue in accordance with law.

Cause Title: Masud Tarif v. State of West Bengal & Anr.

Appearances

Petitioner: Mayukh Mukherjee, Anurag Modi, Ankita Sikdar, Advocates

Respondent: Dipanjan Dutt, Soumodip Ghosh, Advocates

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