The Delhi High Court, in a significant ruling on August 12, 2024, quashed the criminal proceedings against Mr. Sandip Vinodkumar Patel and other independent directors of the accused company, Sadbhav Engineering, in a case involving dishonour of cheques under Section 138 of the Negotiable Instruments Act, 1881. The court emphasized that independent directors cannot be held vicariously liable for the company’s actions unless there is clear evidence of their active involvement in the company’s day-to-day operations.
Background of the Case
The case originated from a financial transaction in which Sadbhav Engineering secured a loan of ₹50 crores from STCI Finance Ltd. on March 31, 2021. As part of the loan agreement, post-dated cheques were issued by Sadbhav Engineering towards the payment of interest and repayment of the principal amount. However, when the cheques were presented for clearance, they were returned with the remark “Funds insufficient.” Consequently, STCI Finance Ltd. filed complaints against the company and its directors under Section 138 of the Negotiable Instruments Act.
The petitioners, Mr. Sandip Vinodkumar Patel and other independent directors, sought the quashing of the summoning orders issued by the trial court and the consequential complaint cases, arguing that they were non-executive directors and had no role in the daily management of the company.
Legal Issues Involved
The primary legal issue revolved around the applicability of Section 141 of the Negotiable Instruments Act, which deals with offences by companies and the vicarious liability of individuals associated with the company. According to Section 141, for a person to be held liable, they must be in charge of and responsible for the conduct of the company’s business at the time the offence was committed.
The petitioners contended that they were independent, non-executive directors and had no responsibility for the company’s day-to-day operations. They supported their claim with evidence, including Form 32 filed with the Registrar of Companies, which clearly indicated their independent director status.
Court’s Decision
Justice Amit Mahajan, presiding over the case, referred to the Supreme Court’s judgment in Sunita Palita v. Panchami Stone Quarry (2022), which held that independent directors cannot be held liable under Section 138/141 of the NI Act unless there is specific evidence of their involvement in the offence. The court observed:
“A Director of a company who was not in charge or responsible for the conduct of the business of the company at the relevant time will not be liable under those provisions. It would be a travesty of justice to drag Directors, who may not even be connected with the issuance of a cheque or dishonour thereof, into criminal proceedings under the NI Act, only because of their designation.”
In light of this precedent and the uncontroverted evidence showing the petitioners’ status as independent directors, the court concluded that there were insufficient grounds to hold the petitioners vicariously liable. The court stated:
“Continuance of the proceedings would amount to abuse of the process of the Court. The present case is a fit case to exercise discretionary jurisdiction under Section 482 of the CrPC.”
Accordingly, the court quashed the summoning orders and the corresponding complaint cases under Section 138 of the NI Act.
Lawyers and Parties Involved
The petitioners, led by Mr. Sandip Vinodkumar Patel, were represented by Advocates Mr. Trideep Pais and Ms. Devika Mohan. The respondents, STCI Finance Ltd., were represented by Advocate Ms. Vinita Sasidharan. The case numbers involved were CRL.M.C. 3362/2024, CRL.M.C. 4859/2024, and CRL.M.C. 4862/2024.
