Vicarious Liability of directors of companies (in cases of alleged violations of Section 138 of the Negiotiable Instruments Act)

This case raised the issue of the vicarious liability of directors of companies in cases of alleged violations of Section 138 of the Negiotiable Instruments Act. The respondents, in this case, was a director of a company which had issued cheques that were dishonoured on the ground of insufficent funds. The dishounoured cheques were issued by the managing director of the erring company The respondent was arrayed as "Accused No. 4" in the proceeding that followed . The issue that was raised before the supreme court was whether in order to prove liability under Section 141( cases in which the offence under Section 138 was committed by a company) It was neccessay to aver that the person accused was in charge of and responsible for the conduct of business of the company.
This was answered in the affirmative by the Supreme Court. The Court, then went on to hold that there is no deemed liability of any director unless it is shown that the director was in charge of and responsible for the conduct of business of the company at relevant time. The Court stated that Section 141 of the Act does not say " a Director of a Company shall automatically be vicariously liable for commission of an offence on behalf of the Company.What is necessary is tha sufficent averments should be made to show that the person who is sought to be proceeded against on the premise of his being vicarously liable for the commission of an offence by the Company must be incharge and shall also be responsible to the Company for the conduct of its buisness."
Hence the liability of a director must be detemined on the date on which the offence is committed. The fact of the transaction ( that resulted in the issuance of the dishonoured cheques) does not lead to the inference that she was actively associated with the management of the day to day affairs of the company. The Court further went on to state that managing directors or joint managing directors of a company are in charge the company and responsible to company for the conduct of its business by virtue of the positions held. The signatory of a cheque, which is dishonored, is also clearly responsible for the incriminating act and is covered under Section 141.

SMS Pharmaceuticals vs Neeta Bhalla and Anr (2007) 4 SCC.

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