Director’s Liability Under Section 138 NI Act Ends with Resignation: Supreme Court Quashes Complaint Against Former Director in Cheque Dishonor Case

In a landmark judgment Supreme Court of India quashed criminal complaints filed against a former director of a company under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). The Court held that a director who had resigned prior to the issuance of cheques could not be held liable for their dishonor. The bench, comprising Justices J.K. Maheshwari and Rajesh Bindal, emphasized that holding such a person responsible would amount to a misuse of the legal process under Section 138 and 141 of the NI Act.

The appellant, Adhiraj Singh, approached the Supreme Court challenging the Himachal Pradesh High Court’s order that had dismissed his petition to quash complaints filed under Section 138 of the NI Act. These complaints arose out of three dishonored cheques issued by the respondent company after Singh had ceased to be a director. The Supreme Court allowed the appeal and set aside the High Court’s order, holding that Singh could not be held liable for acts committed by the company after his resignation.

The Court clarified that a person cannot be held liable under Section 138 of the NI Act for dishonored cheques issued by a company after their resignation as a director. The bench noted:

“When the cheques were issued by the company, the appellant had already resigned and was not connected with the company. He cannot be held responsible for the affairs of the company in view of the provisions as contained in Section 141 of the NI Act.”

It was undisputed that Adhiraj Singh had resigned from the company on June 21, 2019, and that his resignation was duly filed with the Registrar of Companies on June 26, 2019. The cheques in question were issued on July 12, 2019, well after Singh’s resignation. The Court held that once resignation is duly acknowledged and documented, the former director ceases to bear any responsibility for the company’s actions, including the issuance of cheques.

The respondents relied on the Supreme Court’s earlier decision in Malwa Cotton and Spinning Mills Ltd. v. Virsa Singh Sidhu (2008) 17 SCC 147, where a director's resignation was found to be disputed, necessitating a trial. The bench, however, distinguished the facts of the present case, noting:

“In the present case, the appellant’s resignation dated 21.06.2019 was submitted before the Registrar of Companies on 26.06.2019. The cheques in question were issued on 12.07.2019, i.e., after his resignation. The facts are plain and clear, leaving no dispute regarding the timing of resignation.”

The Court highlighted that in Malwa Cotton, the director’s resignation was claimed to have occurred before the cheques were issued but was filed with the Registrar of Companies after their issuance. Such disputed facts warranted a trial in that case. In contrast, the current case involved no such factual disputes.

The Supreme Court invoked its inherent powers under Section 482 of the Criminal Procedure Code, 1973 (Cr.P.C.), to prevent the misuse of legal processes. The bench emphasized that dragging a former director into litigation over cheques issued by a company after their resignation would result in unnecessary harassment and misuse of the judicial process. The Court observed:

“Saddling the appellant to face trial for cheques issued after his resignation would amount to misuse of process of law.”

The Court further noted that the cheques in question had been signed by another authorized signatory of the company, and no material had been presented to suggest the appellant was involved in the company’s affairs at the time of their issuance.

Allowing the appeal, the Court quashed the complaints against Adhiraj Singh and set aside the High Court’s order. Justice J.K. Maheshwari, delivering the judgment, stated:

“In the absence of any material brought before us, we are inclined to set aside the common order passed by the High Court and allow the quashing petitions as filed by the appellant before the High Court.”

The Court concluded by holding that Singh could not be prosecuted under Section 138 of the NI Act as he had no connection with the issuance of the cheques, marking a significant precedent for cases involving liability under the NI Act post-resignation.

Date of Decision: December 2, 2024