A Supreme Court bench comprising Justice J.K. Maheshwari and Justice Rajesh Bindal delivered a significant judgment, holding that a director cannot be held liable under Section 141 of the Negotiable Instruments Act, 1881, for cheques issued by a company after their resignation. Allowing the appeals filed by Adhiraj Singh, the court quashed the complaints under Section 138 of the NI Act, providing a vital clarification on the extent of liability for former directors.
Background
The case originated from a complaint under Section 138 of the NI Act filed against Adhiraj Singh and others. Three post-dated cheques, dated July 17, 2019, September 17, 2019, and September 23, 2019, were issued by Respondent No. 2 (the company) on July 12, 2019. The appellant had served as a director of the company from September 28, 2016, to June 21, 2019. Singh’s resignation was formally filed with the Registrar of Companies on June 26, 2019.
The cheques were dishonored upon presentation, and Singh was named in the complaint. He filed petitions to quash the complaint, arguing that he was no longer associated with the company when the cheques were issued. The High Court of Himachal Pradesh rejected the petitions, prompting Singh to approach the Supreme Court.
Legal Issues
The case raised key questions:
1. Can a director be held liable under Section 141 of the NI Act for cheques issued after their resignation?
2. What constitutes responsibility for the company’s affairs under Section 141?
The respondents argued that Singh was a director when the debt was created and cited the Supreme Court’s decision in Malwa Cotton and Spinning Mills Ltd. v. Virsa Singh Sidhu (2008) to support their claim. The appellant countered that he had resigned prior to the issuance of the cheques, absolving him of any liability.
Court’s Observations
The bench made several critical observations in its judgment:
– Timing of Resignation and Liability:
“Once the facts are plain and clear that when the cheques were issued by the company, the appellant had already resigned and was not a director in the company, he cannot be held responsible for the affairs of the company in view of the provisions contained in Section 141 of the NI Act.”
– Misuse of Legal Process:
The court noted that forcing the appellant to face trial for actions taken after his resignation “would amount to misuse of the process of law.”
– Distinguishing from Malwa Cotton:
The court clarified that in Malwa Cotton, the director’s resignation was disputed and occurred after the issuance of the cheques. In contrast, Singh’s resignation was undisputed and predated the cheques.
Decision
Based on these observations, the Supreme Court quashed the complaints and set aside the High Court’s order. The judgment stated: “In the present case, the appellant’s resignation dated 21.06.2019 was submitted before the Registrar of Companies on 26.06.2019, whereas the cheques in question were issued on 12.07.2019, i.e., after his resignation.”
The bench emphasized that under Section 141, liability is imposed only if the accused was involved in the company’s affairs at the time of the offense.
