The Rajasthan High Court recently reiterated that directors cannot be held liable for the dishonor of cheques issued by a company after their resignation has been accepted. The court emphasized that to establish liability under Section 141 of the Negotiable Instruments Act (NI Act), it is not enough to simply repeat the wording of the section. It must be proven in what manner the person was in charge of the company’s functioning.
Under Section 141 of the NI Act, if a company is accused under Section 138 of the NI Act, then every person who was in charge of and responsible for the conduct of the business of the company at the time of the offense shall also be deemed guilty.
In a case before the Rajasthan High Court, two former directors of a company sought to quash proceedings filed against them under Section 138 of the NI Act. The petitioners argued that they had resigned from their positions at least one year prior to the issuance of the cheques in question. They contended that, pursuant to their resignation, they were no longer responsible for the functioning of the company.
The counsel for the respondent argued that the resignation certificates of the petitioners were not enough to acquit them under Section 138. They claimed that the petitioners, along with other directors, had encouraged the complainant to invest in the company. Therefore, the petitioners could not escape liability simply because they were no longer directors at the time the cheques were issued.
After considering the arguments from both sides, the court referred to a recent Supreme Court case, Rajesh Viren Shah v Redington (India) Limited, which held that directors who have resigned from a company cannot be held liable for the company’s actions that occurred after their resignation. The court also cited the case of J.N. Bhatia & Ors. v State & Anr. of the Delhi High Court, which stated that the requirement of Section 141 is not fulfilled by mere repetition of the phraseology of the section. It must be shown how the accused was responsible for the company’s affairs.
The court observed that the resignation certificates, along with the filing of Form 32 with the Registrar of Companies, proved that the petitioners were not directors of the company when the cheques were issued. The court further noted that the petitioners were not involved in the company’s affairs when the complainant invested his money. Therefore, the court allowed the petition and quashed the complaint against the directors.
In conclusion, the Rajasthan High Court reiterated that directors cannot be held liable for the dishonor of cheques issued by a company after their resignation has been accepted. To establish liability under Section 141 of the NI Act, it is necessary to prove in what manner the person was in charge of the company’s functioning. The court’s decision was based on recent Supreme Court cases and the specific facts of the case before them.