Vicarious Liability of Directors And Officers on Bouncing of Cheques
1. Offences by Company
1.1 Proper and smooth functioning of all business transactions, particularly of cheques as instruments primarily depends upon the integrity and honesty of the parties. Undoubtedly, dishonour of a cheque by the bank causes incalculable loss, injury and inconvenience to the payee and the entire credibility of the business transactions within and outside the country suffers a serious setback. A company being an artificial person created by law acts through its directors and officers who are responsible for the conduct of the business of the company. A criminal liability on account of dishonour of cheque primarily falls on the drawer company and is extended to officers of the Company. The normal rule in the cases involving criminal liability is against vicarious liability, that is, no one is to be held criminally liable for an act of another. This normal rule is, however, subject to exception on account of specific provision being made in statutes extending liability to others. Section 141 of the Negotiable Instrument Act,1881 (“NI Act”) regulates offences by companies.
1.2 The Act has created a deemed offence under a legal fiction, whenever a cheque drawn by a person on an account maintained by him bounces either for insufficiency of the funds in the account or it exceeds the arrangements made. It is apparent that the person who has drawn the cheque on an account maintained by him alone is liable in the event of bouncing of the cheque later. When the company is the drawer of the cheque, such company is the principal offender, and the remaining persons are made offenders by virtue of the legal fiction created by the legislature as per the said section. The actual offence should be committed by the company and then alone the other two categories would also become liable for the offence. Penal statues provide constructive vicarious liability and should be construed much more strictly. When conditions are prescribed for extending such constructive criminal liability to others, the Courts will insist upon strict literal compliance. There is no question of inferential or implied compliance.
1.3 In this Article, with the assistance of latest decisions of the Hon’ble Supreme Court of India, we shall be examining the provisions relating to section 141(1) and shall attempt to determine who are the persons who shall be responsible and can be made liable for an offence done by a company? Who is responsible to the company for the conduct of its business, and who could be said to be in-charge thereof? How does one identify such persons? Is it that a person by virtue of being a director, manager or secretary of a Company automatically becomes liable under this section? Is it necessary to have an averment in the complaint that at the time when this offence was committed, such a person was in charge of and was responsible to the company for the conduct of business of the company?
2.1 Section 141 of the NI Act, 1881 regulates offences by Companies. It reads as follows
(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Explanation. - For the purposes of this section, -
(a) 'Company’ means any body corporate and includes a firm or other association of individuals; and
(b) 'Director’ in relation to a firm, means a partner in the firm."
2.2 When a cheque issued by a company is dishonoured.
In addition to the Company, the following persons are deemed to be guilty of the offence and shall be liable to be proceeded against and punished:
a. Every person who at the time the offence was committed, was in-charge of and was responsible to the company for the conduct of the business of the company;
b. Any Director, Manager, Secretary or other officer of the company with whose consent and connivance, the offence under section 138 had been committed; and
c. Any Director, Manager, Secretary or other officer of the company whose negligence resulted in the offence under section 138 being committed by the company
3.1 Section 141 contains conditions, which have to be satisfied before the liability can be extended to officers of a company. Since the provision creates criminal liability, the conditions have to be strictly complied with. The conditions are intended to ensure that a person who is sought to be made vicariously liable for an offence of which the principal accused is the Company, had a role to play in relation to the incriminating act and further that such a person should know what is attributed to him to make him liable.
3.2 The key words which occur in the Section are "every person". These are general words and take every person connected with a company within their sweep. Therefore, these words have been rightly qualified by use of the words " who, at the time the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence etc." What is required is that the persons who are sought to be made criminally liable under Section 141 should be at the time the offence was committed, in charge of and responsible to the company for the conduct of the business of the company.
3.3 Every person connected with the company shall not fall within the ambit of the provision. It is only those persons who were in charge of and responsible for conduct of business of the company at the time of commission of an offence, who will be liable for criminal action. It follows from this that if a director of a Company who was not in charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable under the provision. The liability arises from being in charge of and responsible for conduct of business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company. Conversely, a person not holding any office or designation in a Company may be liable if he satisfies the main requirement of being in charge of and responsible for conduct of business of a Company at the relevant time. Liability depends on the role one plays in the affairs of a Company and not on designation or status. If being a Director or Manager or Secretary was enough to cast criminal liability, the Section would have said so. Instead of "every person" the section would have said "every Director, Manager or Secretary in a Company is liable"....etc. The legislature is aware that it is a case of criminal liability which means serious consequences so far as the person sought to be made liable is concerned. Therefore, only persons who can be said to be connected with the commission of a crime at the relevant time have been subjected to action.
3.4 The Supreme Court in various cases held that the words was in-charge of, and was responsible to the company for the conduct of the business of the company refer to a person who is in overall control of the day-to-day business of the company. The Court pointed out that, though a person may be a director and, thus, belongs to the group of persons making the policy followed by the company, yet may not be in-charge of the business of the company; that a person may be a manager who is in-charge of the business but may not be in overall charge of the business; and that a person may be an officer who may be in-charge of only some part of the business It is, however, observed by the Supreme Court that the words in section 141(1) of the Act need not be incorporated in a complaint as magic words. But, at the same time, the substance of the allegations read as a whole, should answer and fulfil the requirements of the ingredients of the said provision.
3.5 If a mere reproduction of the wording of section 141 (1) in the complaint is sufficient to make a person liable to face prosecution, virtually every officer / employee of a company without exception could be impleaded as on accused by merely making an averment that at the time when the offence was committed he was in-charge of and was responsible to the company for the conduct and business of the company. This would mean that if a company had 100 branches and the cheque issued from one branch was dishonored, the officers of all the 100 branches could be made accused by simply making an allegation that they were in-charge of and were responsible to the company for the conduct of the business of the company. That would be an absurd thing and not intended under the Act. As the trauma, harassment and hardship of a criminal proceedings in such cases, can be more serious than the ultimate punishment, it is not proper to subject all and sundry to be impleaded as accused in a complaint against a company, even when the requirements of section 138, read and section 141,are not fulfilled.
3.6 There is no universal rule that a director of a company is in charge of its everyday affairs. There is no magic as such in a particular word, be it Director, Manager or Secretary. It all depends upon respective roles assigned to the officers in a company. A company may have Managers or Secretaries for different departments, which means, it may have more than one Manager or Secretary. These officers may also be authorised to issue cheques under their signatures with respect to affairs of their respective departments. Will it be possible to prosecute a Secretary of Department-B regarding a cheque issued by the Secretary of Department-A which is dishonoured? The Secretary of Department-B may not be knowing anything about issuance of the cheque in question. Therefore, mere use of a particular designation of an officer without more, may not be enough by way of an averment in a complaint.
3.7 A provision similar to Section 141 of the NI Act can be found in several enactments dealing with offences by companies i.e. section 278 B of the Income-Tax Act, 1961; section 22 C of the Minimum Wages Act, 1948; section 86 A of the Employees State Insurance Act, 1948; section 14 A of the Employees Provident Fund and the Miscellaneous Provisions act, 1952; section 29 of the Payment of Bonus Act, 1965; section 40 of the Air (Prevention and Control of Pollution) Act, 1981 and section 47 of the Water (Prevention and Control of Pollution) Act, 1974; but neither section 141 (1) nor the pari materia provisions in other enactments give any indication as to who are the persons responsible to the company, for the conduct of the business of the company.
3.8 To decipher and understand the meaning of the “persons in charge’ as defined in section 141(1) of the NI Act, we may have to examine the provisions of Companies Act, 1956, the law relating to and regulating the companies. A company, though a legal entity, yet can act only through its board of directors. Section 291 of the Companies Act, 1956 provides that subject to the provisions of this Act, the board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do. A director may be attending meetings of the Board of Directors of the Company where usually they decide policy matters and guide the course of business of a company. It may be that a Board of Directors may appoint sub-committees consisting of one or two directors out of the Board of the Company who may be made responsible for day-to-day functions of the Company. These are matters, which form part of resolutions of Board of Directors of a Company. Nothing is oral. What emerges from this is that the role of a director in a company is a question of fact depending on the peculiar facts in each case. There is no universal rule that a director of a company is in charge of its everyday affairs.
3.9 A visit to some provisions of Companies Act,1956 shall enable us to appreciate the role and functions of certain key managerial personnel as engaged by companies.
a. "Director" includes any person occupying the position of director, by whatever name called. Section 2(13)
b. "Manager" means an individual (not being the managing agent) who, subject to the superintendence, control and direction of the Board of directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called and whether under a contract of service or not. Section 2(24)
c. "Managing director" means a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or, by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called provided. Section 2(26)
d. "Officer" includes any director, manager or secretary, or any person in accordance with whose directions or instructions the Board of directors or any one or more of the directors is or are accustomed to act. Section 2 (30)
e. "Secretary" means a Company Secretary within the meaning of clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980 (56 of 1980) and includes any other individual possessing the prescribed qualifications and appointed to perform the duties which may be performed by a secretary under this Act and any other ministerial or administrative duties [Section 2(45)
3.10 A combined reading of section 5 and 291 of the Companies Act read with the definitions in clauses (24), (26), (30), (31) and (45) of section 2 of that Act would show that the following persons are considered to be the persons who are responsible to the company for the conduct of the business of the company:-
a. the managing director/s;
b. the whole-time director /s;
c. the manager
d. the secretary;
e. Any person in accordance with whose directions or instructions the board of directors of the company is accustomed to act;
f. Any person charged by the board with the responsibility of complying with the provisions (and who has given his consent in that behalf to the board); and
g. Where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the board in this behalf or where no director is so specified is so specified, all the directors.
3.11 The Supreme Court summarized the position under section 141 of the
NI Act as follows
i. If the accused is the managing director or a joint managing director, it is not necessary to make an averment in the complaint that he is in-charge of and is responsible to the company for the conduct of the business of the company. It is sufficient if an averment is made that the accused was the managing director or joint managing director at the relevant time. This is because the prefix ‘managing’ to the word ‘director’ makes it clear that they were in-charge of and were responsible to the company for the conduct of the business of the company.
ii. In the case of a director or an officer of the company who signed the cheque on behalf of the company, there is no need to make a specific averment that he was in-charge of and was responsible to the company, for the conduct of the business of the company or make any specific allegation about consent, connivance or negligence. The very fact that the dishonoured cheque was signed by him on behalf of the company, would give rise to responsibility under sub-section (2) of section 141.
iii. In the case of a director, secretary or manager (as defined in section 2 (24) of the 1956 Act) or a person referred to in clauses (e) and (f) of section 5 of 1956 Act, an averment in the complaint that he was in-charge of and was responsible to the company, for the conduct of the business of the company is necessary to bring the case under section 141 (1) of the 1881 Act. No further averment would be necessary relating to consent and connivance or negligence in the complaint to bring the matter under that sub-section.
iv. Other officers of a company cannot be made liable under sub-section (1) of section 141; they can be made liable only under sub-section (2) of section 141, by averring in the complaint their position and duties in the company and their role in regard to the issue and dishonor of the cheque, disclosing consent, connivance or negligence. 
4. To sum up, there is almost unanimous judicial opinion that necessary averments ought to be contained in a complaint before a person can be subjected to criminal process. A liability under section 141 of the Act is sought to be fastened vicariously on a person connected with a company, the principal accused being the company itself. It is a departure from the rule in criminal law against vicarious liability. A clear case should be spelled out in the complaint against the person sought to be made liable. Section141 of the Act contains the requirement for making a person liable under the said provisions. That the respondent falls within the parameters of section 141 has to be spelled out. A complaint has to be examined by the Magistrate in the first instance on the basis of averments contained therein, If the Magistrate is satisfied that there are averments which bring the case within section 141, he would issue the process. Merely being described, as a director in a company is not sufficient to satisfy the requirement of section 141. Even a non-director can be liable under section 141 of the Act. The averments in the complaint would also serve the purpose that the person sought to be made liable would know what is the case, which is alleged against him. This will enable him to meet the case at the trial.
4.1 The scheme of the Act, therefore, is that a person who is responsible to the company for the conduct of the business of the company and who is in-charge of business of the company is vicariously liable by reason only of his fulfilling the requirement of sub section (1) of section 141; but if the person responsible to the company for the conduct of business of the company, was not in-charge of the conduct of the business of the company, then he can be made liable only if the offence was committed with his consent or connivance or was as a result of his negligence.
 Anil Hada v. Indian Acrylic Ltd. (2000) 1 Comp LJ 7 (SC) : (1999) 7 Scale 209. Mohd. Isaq Gulsani v. J. Rajamouli (2001) 2 Comp LJ 341 (AP) : (2001) 105 Comp Cas 230 (AP) in Criminal Petition No. 3464 of 2000
 S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Another [(2005) 8 SCC 89]
 K. P. G. Nair v. Jindal Menthol India Ltd.  104 Comp Cas 290; 
 KK Ahuja v VK Vora (2009) 94 SCL 140 (SC)
 S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Another [(2005) 8 SCC 89]
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