ALIBABA NABIBASHA v. SMALL FARMERS AGRI-BUSINESS CONSORTIUM & ORS, Delhi High Court Dissects Liability of a Former Director in Negotiable Instruments Proceedings

Case Name	Alibaba Nabibasha v. Small Farmers Agri Business Consortium & Ors.
Citation	CRL. M.C. 1602/2020, CRL. M.A. 9935/2020AIR ONLINE 2020 DEL 1296
Court	High Court of Delhi.
Decided On.	23rd September 2020
Petitioners	Alibaba Nabibasha
Respondents	Small Farmers agri Business Consortium

INTRODUCTION

This case revolves around the issue of criminal liability of a former director of a company under Section 138 of the NI Act, 1881. The petitioner Alibaba Nabibasha challenged the maintainability of the complaints filed against him alleging dishonor of cheques drawn on the company’s account, the petitioner contended that he ceased to the directors several years prior to the issuance of the cheque and thus cannot be held liable for the alleged offence, this case critically examines whether a former director can be subjected to proceedings under section 138 read with section 141 of the act when the cheques were issued after his resignation and when there is no sufficient averment that he was responsible for the company’s business affairs at the relevant time period.

IMPORTANT PROVISIONS 

• Section 138, NI Act, 1881: This provision deals with the offence of dishonor of a cheque for insufficiency of funds in the account when the cheque was presented. 
• Section 141, NI Act, 1881, prescribes vicarious liability for the prosecution of directors or a person in charge of the company if the offence under section 138 is committed.
• Section 48, Code of Criminal Procedure, 1973: it deals with the inherent powers of the HC to intervene to prevent abuse of the process of law and to secure the ends of justice, including quashing of FIRs or complaints in appropriate cases. 

BRIEF FACTS – 

The case of Alibaba Nabasha v. Small Farmers Agri-Business Consortium & Ors. concerns a petition contesting the maintainability of five criminal complaints filed against the petitioner, Alibaba Nabasha, and other defendants under Section 138 of the Negotiable Instruments Act, 1881.

The complaints started because the respondent company, Small Farmers Agri-Business Consortium, allegedly issued five checks totaling ₹45 lakhs as repayment under an agreement with the complainant, a government-backed organization that provides venture capital funding to agribusiness projects.

By filing Form 32 with the Registrar of Companies (ROC), the petitioner argued that he had resigned from his position as a director of the respondent company on October 27, 2010, having duly informed and accepted his resignation in accordance with the law and the key point was that the disputed checks and the purported agreement with the complainant were issued long after the petitioner resigned, so he shouldn’t be held accountable for any debts or financial transactions that happened after his official cessation.

The complainant filed criminal charges against the petitioner despite his resignation, claiming that he was liable for the company’s affairs as a director under Section 141 of the Negotiable Instruments Act, the petitioner’s defense was based on the established facts that he was not an office-bearer at the time the checks were issued or returned, and that the complainant had not offered any precise and unambiguous statements proving that he was in charge of the company’s operations at the time of the offense.

The petitioner further asserted that the legal notices issued in compliance with the statute were neither received by him nor proven to be served. 

Even though the respondent acknowledged that the petitioner’s resignation had been filed and that he had been listed as a director on company and project-related documents, as well as having taken part in previous corporate activities and meetings that led to the funding agreement, they insisted the matter was triable and should go before the magistrate.

The main issues were whether a director’s liability for subsequent company acts under the Negotiable Instruments Act was eliminated by a formal resignation that was duly filed and notified, as well as the necessity of making specific accusations of responsibility in order to prosecute directors in cases involving bounced checks.

Resignation proofs, company master data, check details, statutory notices, and foundational rulings elucidating director liability were among the pertinent documents the court reviewed and it was noted that at the time the checks were issued, the petitioner’s name was missing from the current director records, and that general accusations based only on prior directorship without specific proof of involvement in business affairs were insufficient to hold him accountable.

Therefore, the factual matrix clearly demonstrated that the petitioner lacked legal viability and had no authority or control over the company’s operations at the time the offending checks were issued or dishonored.

ISSUES INVOLVED – 

1. Whether a former director who has duly resigned and whose resignation is properly recorded with the Registrar of Companies can be held vicariously liable under section 141 of the NI Act? 
2. Whether mere repetition of statutory language alleging that a person was in charge of or responsible for the conduct of the business of the company is sufficient for summoning under section 138, read with section 141 of the NI Act? 
3. Whether the summoning order and continuing criminal proceedings amount to an abuse of process when unambiguous documentary evidence shows the accused had ceased to be a director? 

ARGUMENTS ADVANCED BY PETITIONERS – 

• According to the counsels representing the petitioners claimed that on October 27, 2010, he resigned as a director of the company (Respondent No. 2) and that he had properly notified the Registrar of Companies of his resignation via Form 32, a publicly available document and he maintained that the disputed checks, the agreements with the complainant, and all other actions that gave rise to alleged liability under Section 138 of the Negotiable Instruments Act took place a number of years after he resigned. Since he was not in charge of the company’s affairs at the time, he could not be held accountable for the checks’ issuance or dishonor.
• Additionally, he argued that the complaints against him only reiterated the statutory language of Section 141 of the NI Act, which states that he was in charge of and accountable for the conduct of the company’s business, without offering any concrete evidence of his involvement or accountability for the company’s operations at the time of the offense. 
• They underlined that once a former director’s resignation is duly documented and there is no proof of continued involvement, the Supreme Court has upheld the established legal position that a former director cannot be held vicariously liable for crimes committed by a company.
• Additionally, the petitioner claimed that the complainant had abused the legal system by failing to disclose his resignation and by continuing to prosecute him in spite of the existence of uncontested public records, and he emphasized that the statutory legal notice purportedly sent as part of proceedings under Section 138 NI Act was not delivered to him and that its delivery was not even established.
• In order to establish that proceedings against former directors are subject to being quashed at the threshold in order to prevent injustice and abuse of the legal system, he also cited a number of Supreme Court and High Court decisions, such as Harshendra Kumar D. v. Rebatilata Koley and Anita Malhotra v. Apparel Export Promotion Council, among others.

ARGUMENTS ADVANCED BY DEFENDANT’S – 

• The counsel for the defendant argued that while serving as a director, the defendant had been heavily involved in the company’s operations (Respondent No. 2), actively taking part in the talks and meetings that resulted in the complainant providing venture capital funding. 
• They maintained that the petitioner’s involvement was evidenced through his participation in business meetings, his inclusion in company documentation and project reports, and the submission of his bio-data with the funding proposal and according to the defendants, this history of representation and involvement was enough to support his inclusion as an accused party and his summons to the proceedings under Sections 138 and 141 of the Negotiable Instruments Act.
• The defendants stressed that all accused parties, including the petitioner, had received the legal notices about the dishonored checks, and that failure to receive the notice was not a valid defense at this point, they claimed that even if a claim of cessation of directorship was legitimately filed with the Registrar of Companies, it was still a triable matter that needed to be proven and decided before the Metropolitan Magistrate rather than being dismissed at the threshold.
• The defendants argued that a person’s resignation as a director does not absolve them of responsibility for the actions of the company, particularly in cases where there is proof of their meaningful participation in business matters or the benefit they received from the arrangement that led to the issuance of checks.
• Furthermore, the defendants argued that since the case was still in the preliminary stage and the trial court could properly address all factual and legal issues following a full hearing of both sides, the High Court should not consider the petition under Section 482 CrPC to halt proceedings.
• They maintained that, given the intricate, cooperative nature of business dealings demonstrated in the project and funding process, prosecution should not be barred by the lack of specific allegations or by reliance only on Form 32.

JUDGEMENT  – 

• The Hon’ble Court conducted a thorough investigation into whether a former director could be held criminally liable under Section 138 read with Section 141 of the Negotiable Instruments Act, given that the petitioner resigned long before the disputed checks were issued and issued in a dishonorable manner. 
• The court determined that the petitioner had, in fact, ceased to be a director years prior to the company issuing the disputed checks, based on the uncontested documentary evidence of Form 32 and updated company master data and it was specifically mentioned that the complainant did not contest the validity or impact of the resignation, and that there was no agreement between the parties or check liability at the time the petitioner was in office.
• The court underlined the well-established legal rule that in order to bring charges against a director under Section 138 of the NI Act, the complaint must include particular allegations outlining how and in what way the accused director was in charge of and accountable for the operation of the business at the relevant time and it is not enough to simply replicate the statutory language without providing evidence of accountability or involvement.
• The court cited well-known cases, such as Ashoke Mal Bafna v. Upper India Steel and Harshendra Kumar D. v. Rebatilata Koley, which have repeatedly maintained that granting directors vicarious liability after their resignation is against the law and justice principles.
• The court further stated that it was an abuse of process for the proceedings against the petitioner to continue despite unquestionable, transparent public records that demonstrated his disassociation from the company.
• The magistrate’s order summoning the petitioner was found to be erroneous as it did not account for these records and wrongly proceeded on the basis of outdated company materials.
• In conclusion, the court held that a former director cannot be held criminally liable for the company’s default under Section 138 of the NI Act if it is demonstrated that they resigned as a director before the cheque was issued and dishonored, and there are no factual claims or evidence to the contrary, and consequently, the petitioner’s complaints and proceedings were dismissed.

CONCLUSION – 

The Delhi High Court concluded that a director cannot be held vicariously liable under Section 138 read with Section 141 of the Negotiable Instruments Act if they have formally resigned from a company and their resignation has been duly recorded with the Registrar of Companies before a check is issued and dishonored, the Court determined that, in the absence of specific allegations or proof of responsibility at the relevant time, neither a reference to statutory language nor proof of prior directorship was adequate to support criminal prosecution.

In light of this, the Court dismissed the criminal case and summons against the petitioner, emphasizing that the NI Act’s liability requirements necessitate specific legal and factual evidence linking the accused to the business’s operations at the time of the offense and the ruling ensures that the process is not misused to harass people who are no longer associated with the company by reaffirming the protections granted to former directors against unjustified criminal liability for corporate acts committed after they leave office.

This article has been written by Mayur Shrestha (Presidency University Bengaluru School of Law).