Former directors are not vicariously liable under Section 141 absent responsibility when the offence occurred.

Medi World Pharma Pvt. Ltd. filed a private complaint under Section 138 of the Negotiable Instruments Act, 1881, against Jyotsnareddy Hospital Pvt. Ltd. and its directors, alleging that the hospital failed to repay an amount of ₹3 crore and that a cheque issued on the hospital’s behalf was dishonoured for insufficient funds

The petitioners, arrayed as accused Nos. 2 to 4, sought to quash the proceedings under Section 482 of the Code of Criminal Procedure, contending that they were not involved in the transaction or responsible for the hospital’s day-to-day affairs and had resigned before the cheque was issued

The respondent opposed the petition, asserting that the petitioners had participated in the arrangement and in obtaining the deposit

The High Court considered whether the proceedings against the petitioners should continue

1. Whether the petitioners could be held vicariously liable under Section 141 of the Negotiable Instruments Act when they were not signatories to the cheque and the record did not show that they were in charge of, and responsible for, the company’s business when the offence was committed

2. Whether continuation of the proceedings against the petitioners amounted to an abuse of process warranting quashing under Section 482 CrPC

Section 138 of the Negotiable Instruments Act provides for an offence relating to the dishonour of a cheque, while Section 141 extends liability to persons who, at the time of the offence, were in charge of and responsible to the company for the conduct of its business.

In S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89, the Supreme Court held that designation as a director, by itself, is insufficient to establish liability under Section 141; liability depends on the person’s role and responsibility at the relevant time.

Section 482 CrPC empowers the High Court to quash proceedings where their continuation would amount to an abuse of the process of the court.

The Court found that the petitioners were not signatories to the dishonoured cheque, which had been issued on behalf of the hospital by another director. It also noted that the agreement with the complainant was signed by the hospital, not by the petitioners, and treated the allegation that the petitioners had previously been directors as insufficient to establish their responsibility for the company’s business at the time of the offence.

Applying S.M.S. Pharmaceuticals, the Court concluded that the material did not support imposing vicarious criminal liability on the petitioners merely because of their former directorship.

It expressly directed that the proceedings against accused No. 1, Jyotsnareddy Hospital Pvt. Ltd., should continue.