Directors Resigning Before Issuance of a Cheque Are Entitled to Be Discharged from Sec. 138 NI Act Prosecution | SC

Case Details: Rajesh Viren Shah v. Redington (India) Ltd. - [2024] 159 taxmann.com 397 (SC)

Judiciary and Counsel Details

• B.R. Gavai & Sanjay Karol, JJ.

Facts of the Case

In the instant case, the appellants were directors of the accused company and had resigned from their directorship on 9.12.2013 and 12.3.2014 respectively. Subsequently, on 22.3.2014, a complaint was filed under section 138 of the Negotiable Instruments Act, 1881 against the company for issuing a cheque which was dishonoured upon presentation.

The appellants were named as accused in the said complaint. They sought to quash the complaint petition before the High Court, however, their request was turned down by the High Court. Consequently, an appeal was made before the Supreme Court against the order passed by the High Court.

The question placed before the Supreme Court was whether a director of the company who has resigned from such a position could be held liable for certain negotiable instruments, failing the realization.

The Supreme Court referred to section 141 of the Negotiable Instruments Act, 1881, which states that every person who, at the time of the offence was responsible for the affairs or conduct of the business of the company shall be held liable and proceeded against u/s 138 of the Negotiable Instruments Act, 1881, except if such an act was done without his knowledge or after him having taken all the necessary precautions.

The Supreme Court noted that the complainant/respondent had not placed any materials on record indicating the complicity of the appellants in the alleged crime, particularly, when the appellants had no role in the issuance of the instrument. This was evident from statutory Form 32 issued much prior to the date on which the cheque was drawn and presented for realization.

The Supreme Court observed that the veracity of Form 32 had neither been disputed by the complainant/respondent nor had an act of resignation simpliciter been questioned. Thus, the basis on which liability was sought to be fastened upon the appellants was rendered questionable. Therefore, the appellants were entitled to be discharged from prosecution.

Supreme Court Held

The Supreme Court held that the impugned order passed by the High Court dismissing the appellants’ petition for quashing the complaint was to be set aside.