Director Other Than MD Isn’t Vicariously Criminally Liable u/s 50 of NHB Act Unless Responsible for Co.’s Operation

Case Details: National Housing Bank v. Bherudan Dugar Housing Finance Ltd. - [2024] 165 taxmann.com 125 (SC)

Judiciary and Counsel Details

• Abhay S. Oka & Augustine George Masih, JJ.
• Abhay s. Oka, J.

Facts of the Case

In the instant case, the appellant/complainant filed a complaint under Section 200 of the Code of Criminal Procedure, 1973, alleging the commission of an offence violating the provisions of Section 29A of the National Housing Bank (NHB) Act, 1987. The learned Magistrate took cognizance of the complaint for the offence under Section 29A (i) read with Section 50 and punishable under Section 49 (2A) of the NHB Act.

The first accused/respondent was a company, the second accused was the Managing Director of the first accused company, and the other five were its directors. The complaint led the learned Magistrate to take cognizance of the alleged offences under Section 29A(i), read with Section 50 and punishable under Section 49 (2A) of the NHB Act, which prescribes a minimum sentence of one year, extendable to 5 years.

Section 29A(i) of the National Housing Bank Act, 1987, provides that no housing finance institution that is a company must commence or carry on the business of housing finance as its principal business without obtaining a certificate of registration and having a net-owned fund of Rs 10 crore or such other higher amount as the RBI may, by notification, specify.

By the impugned judgment, the High Court quashed the complaint in its entirety. The High Court held that the requirements of Section 50(1) of the NHB Act, 1987, are similar to those incorporated in Section 141 of the Negotiable Instruments Act, 1881, which the complainant did not comply with. Then, an appeal was made before the Supreme Court.

The appellant’s counsel argued that the complaint sufficiently demonstrated a violation of Section 29A(i) of the Act. The counsel emphasized that the second accused was identified as the Managing Director, implying he was in charge of and responsible for the company’s business. The appellant asserted that the complaint contained sufficient allegations to implicate the other accused.

The Counsel for the accused supported the High Court’s judgement, arguing that the complaint failed to include necessary averments as required by Section 50(1) of the Act.

Supreme Court Held

The Supreme Court noted that Section 50 of the NHB Act, 1987 states that where an offence has been committed by 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. Section 50(1) of the NHB Act is pari materia with Section 141 of the NI Act.

The Supreme Court relied on a previous ruling ‘S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Anr. [2005] 8 SCC 89’, whereby the Court held that specific averments were necessary to establish a director’s responsibility under Section 141 of the NI Act. Further, the Court held that simply being a director is insufficient, the complaint must explicitly state the director’s involvement in the company’s business conduct at the relevant time.

The Supreme Court held that the second accused, as Managing Director, was deemed to be in charge of and responsible for the company’s business. Therefore, there was no justification for quashing the complaint against the second accused. The first accused was a company. No reasons had been assigned to quash the complaint against the first accused.

Accordingly, the Supreme Court modified the impugned order, quashing the complaint against the third to seventh accused. However, the Court directed that the complaint must proceed according to the law against the first and second accused.