Top executives of a company, including the director or managing director in charge of the organisation, are liable for prosecution if a cheque signed by them bounces due to insufficient funds, the Supreme Court has said.
The liability can be fastened on the top executives when the complainant makes a specific averment (charge) against such individuals in his complaint, a bench of Justices Tarun Chatterjee and HS Bedi said.
The apex court passed the ruling while dismissing an appeal filed by the managing director of a company seeking to quash summons issued against him by a Maharashtra trial court in a cheque bounce case.
Tata Finance Ltd had filed cases against Paresh Rajda and Vijay Shroff, managing director and director of a company respectively, after a cheque of Rs 1 lakh (Rs 100,000) issued by the duo bounced due to insufficient funds.
The Bombay High Court dismissed Rajda's plea to quash the summons, upon which he appealed in the apex court.
Interpreting Section 141 of the Negotiable Instruments (NI) Act and its earlier rulings, the apex court said it was necessary to specify in a complaint that at the time of the commission of the offence the person accused was in charge of the organisation and responsible for the conduct of its business.
"This averment is an essential requirement of Section 141 and has to be made in a complaint. Without this averment, the requirements of Section 141 cannot be said to be satisfied," the apex court said recalling its observation in the SMS Pharmaceuticals case.
However, the apex court said, in a cheque bounce case a person is not liable for prosecution merely because he is a director in the company that issued the cheque.
A director in a company cannot be deemed to be in charge of and responsible for the conduct of the company's business, the bench said.
According to the apex court, in the present case the perusal of the complaint revealed that the accused were in charge and responsible for the conduct of the business and hence could not escape the liability for issuing a cheque that bounced due to insufficient funds.
"We are of the opinion that at a stage where the trial has not yet started, it would be inappropriate to quash the proceedings against them," the apex court observed while dismissing the appeal.