Former directors may be liable for criminal acts

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In two recent cases, Suhas Bhand v State of Maharashtra & Anr and Amul Urdhwareshe v The State of Maharashtra & Anr, the division bench of Bombay High Court addressed the issue of how criminal proceedings should be initiated against company directors following their resignation.

Man_writing_chequeThe petitioners were directors at Enbee Infrastructure, which obtained a loan from the Housing and Urban Development Corporation (HUDCO) through a loan agreement dated 29 December 1999. After obtaining the loan from HUDCO, Enbee issued several post-dated cheques through its director and authorized signatory. Some of the cheques were dishonoured. HUDCO filed several complaints in the magistrate’s court under section 138/141 of the Negotiable Instruments Act,1881, alleging that some of Enbee’s directors were responsible for the dishonoured cheques.

The petitioners filed applications to quash the complaints against them, claiming they had resigned as directors of Enbee before the cheques were found to be dishonoured, and that as a result they were not liable under section 138 read with section 141 of the Negotiable Instruments Act. The petitioners each produced a certified copy of form number 32 issued by the registrar of companies (ROC) to prove they had resigned.

HUDCO contended that the petitioners had continued to act as directors and retained managerial control of Enbee. As evidence of this, HUDCO produced a letter signed by one of the petitioners in his capacity as a director of Enbee on 3 September 2001, after the cheques had been dishonoured.

The court held that the resignation of a director is a part of his or her contract with a company, and can take place by the submission of the resignation to a company and board of directors. The resignation would come into effect as soon as it is received by the board, unless there is a specific provision otherwise in the articles of association of the company.

Under section 303(1) of the Companies Act,1956, a company must maintain a register of its directors which includes details of their tenure. Section 303(2) of the Companies Act requires that the ROC be notified of any change among a company’s directors, and of the date on which the change took place; specifically, the ROC must be informed of a director’s resignation within 30 days by the filing of form number 32 of the General Rules and Forms under the act. Documents filed with the office of the ROC are public, as set out in section 74 of the Indian Evidence Act, 1872.

After referring to the various case laws, the division bench of the high court made three findings with regard to the resignation of a director of a registered company. The court firstly found that if the accused in a criminal prosecution under section 138 of the Negotiable Instruments Act produces an ROC-certified copy of form number 32, and if the resignation is not disputed, he or she is entitled to be discharged. However, the court also found that if a director’s resignation is not accepted or admitted by the complainant, the accused is required to prove his or her resignation, and cannot be discharged simply by providing the form. Finally, the court found that if the complainant produces any evidence showing that the accused has continued to serve as a director at the company after the date of the claimed resignation, the accused cannot be discharged.

The judgment is significant for directors of companies, as it clarifies that even former directors can be held liable for the dishonour of cheques if their resignations are not genuine, or where the complainant provides evidence to show that the directors continue to be in control of the management and affairs of the company despite having resigned.

The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at [email protected] or [email protected]m. Readers should not act on the basis of this information without seeking professional legal advice.