SC Quashed The Cheating Case & Held The Company Has Vicarious Liability Only If It Is Arrayed As Accused.

Supreme Court allowed the appeal and quashed the criminal proceedings against the director of a company who is accused of offences under Section 420 IPC, the case arose from a complaint filed by R.N. Tyagi, a business partner of the company where Garg was the Managing Director, alleging cheating related to dishonoured cheques despite prior payment through demand drafts.

The case stemmed from business dealings between Ruchira Papers Ltd., where Garg was the Managing Director, and ID Packaging, a concern of R.N. Tyagi. Cheques issued by Tyagi were initially dishonoured, later partially cleared, leading to a conviction of Tyagi under Section 138 of the Negotiable Instruments Act, 1881, which was eventually settled in compromise. Subsequently, Tyagi filed a criminal complaint against Garg alleging that the amount for some of the dishonoured cheques was fraudulently realised despite earlier payment via demand drafts. The lower court took cognizance of the offence, however the High Court dismissed Garg's plea for quashing the proceedings.

Supreme Court allowed the appeal and made several important observations: the Apex Court addressed the applicability of res judicata in criminal matters, clarifying that while earlier decisions suggested its applicability based on acquittals, later decisions distinguished these at the stage of quashing petitions under Section 482 Cr.P.C..

**The Apex Court emphasized that, firstly, Tyagi's allegations formed the basis of his unsuccessful defence in the 138 NI Act proceedings, and thus, maintaining a subsequent prosecution on the same grounds was not permissible. Secondly, the Court highlighted the necessity of arraying the company as an accused when alleging offences committed by the company, especially when seeking to prosecute its directors based on vicarious liability. **

Relying on precedents like Aneeta Hada vs Godfather Travels and Tours (P) Ltd (Click to Download) , the Court reiterated that unless the company is an accused, its officers cannot be prosecuted for offences where vicarious liability is the primary basis. Conclusively, Supreme Court underscored the duty of the court to carefully scrutinize FIRs to prevent manifestly frivolous or vexatious proceedings instituted with ulterior motives. Based on these observations, the Supreme Court quashed the criminal proceedings against S.C. Garg.

Coram: Justice Pankaj Mithal & Justice Prashant Kumar Mishra