DUE DILIGENCE BY DIRECTORS

13. Mr. Manohar submitted that in the case of Nucor Wires Ltd. and others v. H.M.T.
International Ltd., 2000 DoCh. (Kart.) 582 : 1998(91) Com.Cas., page 850, the
Karnataka High Court quashed the proceedings issued against other Directors for
having committed offence under sections 138 and 143 of the Negotiable Instruments
Act, 1881, holding that the other Directors are not to be prosecuted merely because
they are Directors. Mr. Manohar submitted that in this case, there was no allegation
whatsoever with regard to the other Directors and they were merely arrayed as
accused in their capacity as Directors. The Court held that to launch a prosecution
against the Director of the Company, there must be specific allegations in the
complaint as to the part played by them in the transactions and there must be clear
and unambiguous allegations as to how all the partners are incharge of and
responsible for the conduct of the business. There should be clear description and also
allegations that the offence was committed with their knowledge and that they had
not exercised due diligence to prevent the commission of such offence. The Court
should also make attempt to find out whether on the available allegations the offence
was committed with the consent or connivance or is attributable to any negligence on
the part of the Directors or partners of or members of any Association or a group of
persons, and as there was absolutely no allegations made against them, proceedings
against them may be quashed and they be discharged.

21. A reference was also made to the judgment of the Delhi High Court reported in
MANU/DE/0015/1968 : AIR 1968 Delhi 283. The matter related to disciplinary proceedings
against a Chartered Accountant under the Chartered Accountants Act. The Delhi High Court
made a reference to a judgment of the Privy Council reported in MANU/PR/0013/1930 : AIR
1930 PC 144. The Privy Council pronounced that as a broad principle charges of professional
misconduct must be clearly proved and should not be inferred from mere ground for suspicion
however reasonable or what may be a mere error of judgment or indiscretion. The Privy Council
further held that an enquiry in a serious case of professional misconduct should proceed on
formulated charges not only in fairness to the person charged with professional misconduct but
in order that the evidence may relevantly bear on the particular issue and the evidence should be
carefully taken and judged according to the ordinary standard of proof. The Delhi High Court
also relied on other pronouncements of court and came to the conclusion that there must be
strong proof packed by evidence to hold a person guilty of misconduct as a Chartered
Accountant. No other pronouncement of any court has been brought to our notice on the
definition of "due diligence" but it can be safely said that lack of due diligence should run from
the facts of each case and ultimately there can be no hard and fast rule as to what constitutes lack
of due diligence. It depends entirely on the facts of each case. We however hold that before any
person is found to have violated the concept of "due diligence", there must be an enquiry and the
finding must be sustained by a higher degree of proof than that required in a civil suit, yet falling
short of the proof required to sustain a conviction in a criminal prosecution. There must be
convincing preponderance of evidence (see MANU/SC/0068/1983 : AIR 1984 SC 110). This we
state because a Lead Manager, if found guilty of lack of due diligence, can suffer penal
consequences, which could adversely affect his business.1

1
Imperial Corporate Finance and Services Pvt. Ltd. vs. Securities and Exchange Board of India
(30.07.2004 - SEBI / SAT) : MANU/SB/0224/2004