Introduction
In Adhiraj Singh v. Yograj Singh & Ors., decided on December 2, 2024, the Supreme Court held that a resigned director cannot be held liable under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) for cheques issued by the company after his resignation. The Court quashed the criminal proceedings against the appellant, reinforcing that liability under Section 138 NI Act requires the accused to be responsible for the company’s affairs at the time of cheque issuance.
Factual Background
The case arose from three post-dated cheques dated July 17, 2019, September 17, 2019, and September 23, 2019, issued by Respondent No. 2 (Company) on July 12, 2019.
The appellant, Adhiraj Singh, had served as a director of the company from September 28, 2016, to June 21, 2019. He submitted his resignation on June 21, 2019, which was formally filed with the Registrar of Companies (ROC) on June 26, 2019, through statutory Forms DIR-11 and DIR-12.
Despite these facts, a complaint under Section 138 NI Act was filed against him for dishonor of the cheques. The appellant approached the Himachal Pradesh High Court, seeking to quash the complaint under Section 482 CrPC, but his plea was rejected. Aggrieved, he moved the Supreme Court.
Key Issues Before the Supreme Court
- Whether a director can be held liable under Section 138 NI Act for cheques issued after his resignation.
- Whether the High Court erred in refusing to quash the complaint when the appellant was not involved in the company’s affairs at the time of cheque issuance.
- Whether the Malwa Cotton & Spinning Mills Ltd. v. Virsa Singh Sidhu (2008) 17 SCC 147 ruling applied to this case.
Arguments Advanced
Appellant (Adhiraj Singh – Former Director)
- He resigned on June 21, 2019, and the resignation was officially recorded by the ROC on June 26, 2019.
- The cheques in question were issued on July 12, 2019, nearly three weeks after his resignation.
- Since he was neither in control of the company’s affairs nor signed the cheques, he could not be held liable under Section 138 NI Act.
- He cited Aneeta Hada v. Godfather Travels & Tours (2012) 5 SCC 661, which established that liability under Section 138 NI Act applies only if the accused was in charge of the company at the time of the offense.
Respondents (Complainants – Yograj Singh & Ors.)
- They admitted that the appellant had resigned before the cheque issuance, but argued that he was a director at the time of the underlying debt.
- They relied on Malwa Cotton & Spinning Mills Ltd. v. Virsa Singh Sidhu (2008) 17 SCC 147, where the Court refused to quash a complaint when the director’s resignation status was disputed.
Supreme Court’s Reasoning
1. Resignation Before Issuance of Cheques
The Court noted that:
- The appellant’s resignation was undisputed and officially filed with the ROC before the cheques were issued.
- Section 141 of the NI Act holds a director liable only if they were in charge of the company at the time of the offense (i.e., cheque issuance).
- Since the cheques were issued after his resignation, he could not be held responsible.
2. Malwa Cotton Case Distinguished
The Court rejected reliance on Malwa Cotton, pointing out key differences:
- In Malwa Cotton, the director’s resignation was submitted after the cheques were issued.
- In the present case, the appellant resigned before the cheques were issued, making his situation fundamentally different.
3. Misuse of Criminal Proceedings
The Court reiterated that forcing a resigned director to face trial in such circumstances would amount to an abuse of the legal process. It relied on Pepsi Foods Ltd. v. Special Judicial Magistrate (1998) 5 SCC 749, which emphasized that criminal law should not be misused for civil disputes.
Conclusion
The Supreme Court set aside the High Court’s order and quashed the criminal proceedings against the appellant. This ruling reaffirms that directors cannot be held liable under Section 138 NI Act for cheques issued by a company after their resignation.
This judgment provides significant clarity for corporate directors, ensuring that liability is limited to those actively involved in the company’s affairs at the relevant time.
FAQs:
1. When is a company director held responsible for a bounced cheque?
A company director is generally held responsible for a bounced cheque if they were in charge of and responsible for the company’s business operations at the time the cheque was issued and signed.
2. Does resigning from a company remove a director’s liability for future bounced cheques?
Yes, according to recent rulings, a director is typically not liable for cheques issued by the company after their official resignation, provided the resignation was properly filed and recorded before the cheque’s issuance.
3. What if a director resigned after the debt was incurred but before the cheque was issued
Even if the underlying debt existed, if a director officially resigned before the company’s cheque was actually issued, they generally cannot be held liable for its dishonor under cheque bounce laws.
4. Can criminal proceedings be initiated against a former director for a company’s post-resignation cheque bounce?
If a director has demonstrably resigned before the cheque in question was issued, criminal proceedings initiated against them for that cheque’s dishonor may be quashed by a higher court as an abuse of the legal process.
5. Why is the date of a director’s resignation important in cheque bounce cases?
The date of a director’s official resignation is crucial because it determines whether they were in control of the company’s affairs at the exact time the cheque was issued, which is a key factor in establishing liability for cheque dishonor.
Stay informed with insights that matter. Follow us for more updates on key legal developments.
Disclaimer
The content provided here is for general information only; it does not constitute legal advice. Reading them does not create a lawyer-client relationship, and Mahendra Bhavsar & Co. disclaims all liability for actions taken or omitted based on this content. Always obtain advice from qualified counsel for your specific circumstances. © Mahendra Bhavsar & Co.