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R/SCR.A/4377/2015 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CRIMINAL APPLICATION (QUASHING) NO. 4377 of 2015
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE J.B.PARDIWALA
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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MADHUSUDAN MOHANLAL SOMANI....Applicant(s)
Versus
STATE OF GUJARAT & 1....Respondent(s)
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Appearance:
MR ANUJ K TRIVEDI, ADVOCATE for the Applicant(s) No. 1
MR SIDDHARTHA SAMAL, ADVOCATE for the Respondent(s) No. 2
MRS NISHA M PARIKH, ADVOCATE for the Respondent(s) No. 2
MS. THAKORE, ADDL. PUBLIC PROSECUTOR for the Respondent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA
Date : 25/04/2017
ORAL JUDGMENT
1. Rule returnable forthwith. Ms. Thakore, the learned APP, waives service of notice of rule for and on behalf of the Page 1 of 45 HC-NIC Page 1 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT respondent No.1. Mr. Siddhartha Samal, the learned counsel, waives service of notice of rule for and on behalf of the respondent No.2.
2. By this writ application under Article 226 of the Constitution of India, the writ applicant-original accused No.6 has prayed for the following reliefs;
"(A) Your Lordships may be pleased to issue appropriate writ, order or direction quashing and setting aside the impugned complaint dated 14th December, 2011/12th January, 2012, registered as Criminal Case No.259 of 2012 (Annexure A) and also quash all consequential or other proceedings arising out of the said complaint qua the petitioner.
(B) Your Lordships may be pleased to issue appropriate writ, order or direction quashing and setting aside the impugned verification order dated 12th January, 2012, of the Metropolitan Magistrate issuing summons to the petitioner in Criminal Case No.259 of 2012, (Annexure A).
(C ) Your Lordships may be pleased to issue appropriate writ, order or direction, quashing and setting aside the impugned order dated 26th November, 2013, passed by the Sessions Court in Criminal Revision Application No.109 of 2012, (Annexure B) qua the petitioner (D) Pending hearing and final disposal of present petition, Your Lordships may be pleased to stay further proceedings in connection with or pursuant to impugned complaint dated 14th December, 2011/12th January, 2012, registered as Criminal Case No.259 of 2012.
(E) Your Lordships may be pleased to grant ad interim relief in terms of para 7(D) above.
(F) Any other and further reliefs as may be deemed just and proper in the facts and circumstances of the present case may kindly be granted."Page 2 of 45
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3. The writ applicant herein is one of the accused persons in a complaint filed by the respondent No.2 for the offence punishable under section 138 of the N.I. Act. The complaint filed in the court of the learned Metropolitan Magistrate, Court No.36, Ahmedabad came to be registered as the Criminal Case No.259 of 2012. The writ applicant herein is one of the independent directors of the accused No.1 company, namely, Electrotherm (India) Ltd. It appears from the materials on record that the cheque in question was signed by the accused Nos.4 and 12. The accused No.4 in the complaint is the Managing Director and CEO of the Company, and the accused No.12 is the authorized signatory.
4. The short point that falls for my consideration is whether the applicant herein, who is one of the Directors of the Company is responsible for the dishonour of the cheque issued by the original accused No.4 and 12 on behalf of the company.
5. Mr. Trivedi, the learned advocate appearing for the applicant submitted that his client may be a Director of the company, but is noway responsible for the day to day affairs of the management of the company. He submitted that mere reproduction of the provision of Section 141 in the complaint is not sufficient. The complainant must show something prima facie as to how a particular accused is responsible for the day to day affairs of the management of the company.
6. On the other hand, this application has been vehemently opposed by Mr. Siddhartha Samal, the learned advocate appearing for the respondent No.2-Bank. Mr. Siddhartha has drawn my attention to the averments made in para 2 of the Page 3 of 45 HC-NIC Page 3 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT complaint which reads thus:
That accused No.1 is a Company incorporated under the Companies Act 1956. Accused No.2 is the Chairman and CTO, Accused No.3 is the Managing Director, Accused No.4 is the Joint Managing Director And CEO, Accused No.5 is the whole time Director, Accused Nos.6 to 9 are Directors, Accused No.10 is the Chief Financial Officer, Accused No.11 is the Company Secretary and Accused No.12 is the Authorized Signatory of Accused No.1 and hence, all accused are jointly and severally liable.
7. He has also drawn my attention to the averments made in the complaint as contained in para 6, page 33. He submits that these averments are sufficient to fasten the liability on the accused herein by virtue of Section 141 of the Act. He submits that there is no merit in the application and therefore, the same is required to be rejected.
8. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the only question that falls for my consideration is whether the complaint deserves to be quashed so far as the applicant- accused herein is concerned. The law so far as the liability of a Director of a Company under Section 141 of the Act is concerned, is no longer res integra. The Supreme Court in the case of National Small Industries Corporation Limited v. Harmeet Singh Paintal and another (2010) 3 SCC 330 has explained, the law very succinctly:
1) Leave granted in all the above special leave petitions.The appeals arising out of S.L.P. (Criminal) Nos. 445- 461 of 2008 have been filed by the appellant-National Small Industries Corporation Limited against the common judgment and order dated 24.10.2007 passed by the High Court of Delhi at New Delhi in a batch of cases Page 4 of 45 HC-NIC Page 4 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT whereby the High Court quashed the summoning orders passed by the trial Court against respondent No.1 - Harmeet Singh Paintal, under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (for short the Act)
2) The connected criminal appeal arising out of S.L.P. Crl. No. 1079 of 2008 is filed against the judgment and order dated 24.05.2007 passed by the High Court of Delhi in Criminal Revision Petition No. 163 of 2005, whereby the High Court quashed the summoning order passed by the trial Court against respondent No.1 - Dev Sarin under Section 138 read with Section 141 of the Act.
3) Since all these appeals are identical and same legal issues arise, they are being disposed of by this common judgment.
4) The appellant - National Small Industries Corporation Ltd. had filed 12 criminal complaints under Section 138 read with Sections 141 and 142 of the Act against M/s Jay Rapid Roller Limited, a Company incorporated under the Companies Act, its Managing Director - Shri Sukhbir Singh Paintal, and its Director - Shri Harmeet Singh Paintal.
5) It is the claim of the appellant that so as to make the Managing Director and Director of the Company liable to be prosecuted under the provisions of the Act, they had specifically averred in the complaint that all the accused persons approached it for financing of bill integrated market support programme. It was also stated that the accused persons had issued cheques which were dishonoured on presentation against which the appellant had filed criminal complaints under the provisions of the Act against all the respondents herein. It is their further case that all the accused persons accepted their liability and delivered various cheques, which are the subject matter of the present appeals.
6) In the connected appeal, the appellant - DCM Financial Services Ltd., entered into a hire purchase agreement on 25.02.1996 with M/s International Agro Allied Products Ltd. At the time of entering into contract, the Company handed over post-dated cheques to the appellant towards payment of monthly hire/rental charges.
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Respondent No.1 Dev Sarin was one of the Directors of the said Company. The cheque issued by International Agro and Allied Products Ltd. in favour of the appellant was duly presented for payment on 28.10.1998 and the same was returned unpaid for the reason that the Company had issued instructions to the bankers stopping payment of the cheque.
7) The appellant issued a legal notice on 05.12.1998 to the Company, Respondent No.1 and other Directors under Section 138 of the Act informing them about the dis-honouring of the cheque in question. Despite the service of the notice, the Company did not make the payment to the appellant. The appellant, on 11.01.1999, filed a complaint before the Metropolitan Magistrate, New Delhi against respondent No.1 and others under Section 138 read with Section 141 of the Act. By order dated 04.02.1999, the Metropolitan Magistrate, New Delhi, after recording evidence summoned the accused persons including respondent No.1 herein.
8) Respondent No.1 filed an application before the Additional Sessions Judge, Delhi for dropping of proceedings against him. By order dated 08.09.2004, the Metropolitan Magistrate dismissed the said application. Aggrieved by the said order, the respondent filed a petition under Section 482 of the Criminal Procedure Code before the High Court for quashing of the complaint. The High Court, after finding that the averments against respondent No.1 are unspecific and general and no particular role is assigned to the appellant, quashed the summoning order insofar as it concerned to him.
9) In this factual matrix, the issue which arises for determination before this Court is whether the order of the High Court quashing the summoning orders insofar as the respondents are concerned is sustainable and what should be the averments in the complaint under Section 138 read with Section 141 of the Act against the Director of a Company before he can be subjected to criminal proceedings.
10) Heard learned counsel for the appellants as well as the learned ASG and senior counsel for the respondents.
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11) Section 138 of the Act refers about penalty in case of dishonour of cheque for insufficiency of funds in the account. We are more concerned about Section 141 dealing with offences by Companies which reads as under:-
141. Offences by companies.(1) If the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence:
Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.
(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Explanation. For the purposes of this section,
(a) company means any body corporate and includes a firm or other association of individuals; and
(b) director, in relation to a firm, means a partner in the Page 7 of 45 HC-NIC Page 7 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT firm.
12) It is very clear from the above provision that what is required is that the persons who are sought to be made vicariously liable for a criminal offence under Section 141 should be, at the time the offence was committed, was in-charge of, and was responsible to the company for the conduct of the business of the company. Every person connected with the company shall not fall within the ambit of the provision. Only those persons who were in- charge of and responsible for the conduct of the business of the company at the time of commission of an offence will be liable for criminal action. It follows from the fact that if a Director of a Company who was not incharge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable for a criminal offence under the provisions. The liability arises from being in-charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company.
13) Section 141 is a penal provision creating vicarious liability, and which, as per settled law, must be strictly construed. It is therefore, not sufficient to make a bald cursory statement in a complaint that the Director (arrayed as an accused) is in charge of and responsible to the company for the conduct of the business of the company without anything more as to the role of the Director. But the complaint should spell out as to how and in what manner Respondent No.1 was in-charge of or was responsible to the accused company for the conduct of its business. This is in consonance with strict interpretation of penal statutes, especially, where such statutes create vicarious liability.
14) A company may have a number of Directors and to make any or all the Directors as accused in a complaint merely on the basis of a statement that they are in- charge of and responsible for the conduct of the business of the company without anything more is not a sufficient or adequate fulfillment of the requirements under Section
141.
15) In a catena of decisions, this Court has held that for Page 8 of 45 HC-NIC Page 8 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT making Directors liable for the offences committed by the company under Section 141 of the Act, there must be specific averments against the Directors, showing as to how and in what manner the Directors were responsible for the conduct of the business of the company.
16) In the light of the above provision and the language used therein, let us, at the foremost, examine the complainta filed by National Small Industries Corporation Limited and the DCM Financial Services Ltd.
17) In the case of National Small Industries Corpn. Ltd., the High Court has reproduced the entire complaint in the impugned order and among other clauses, clause 8 is relevant for our consideration which reads as under:
8. That the accused No. 2 is the Managing Director and accused No. 3 is the Director of the accused company. The accused No. 2 and 3 are the in-charge and responsible for the conduct of the business of the company accused No. 1 and hence are liable for the offences.
18) In the case of DCM Financial Services Ltd., in complaint- Annexure-P2 the relevant clause is 13 which reads as under:
13. That the accused No. 1 is a Company/Firm and the accused Nos. 2 to 9 were in charge and were responsible to the accused No. 1 for the conduct of the business to the accused No. 1 at the time when offence was committed. Hence, the accused Nos. 2 to 9 in addition to the accused No. 1, are liable to be prosecuted and punished in accordance with law by this Honble Court as provided by section 141 of the N.I. Act, 1881. Further the offence has been committed by the accused No. 1 with the consent and connivance of the accused Nos. 2 to 9.
19) Now, let us consider whether the abovementioned complaint in both cases has satisfied the necessary ingredients to attract Section 141 insofar as the respondents, namely, Directors of the company are concerned.
20) Section 141 of the Act has been interpreted by this Court in various decisions. As to the scope of Section 141 Page 9 of 45 HC-NIC Page 9 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT of the Act, a three-Judge Bench of this Court considered the following questions which had been referred to it by a two-Judge Bench of this Court in SMS Pharmaceuticals vs. Neeta Bhalla and Anr. (2005) 8 SCC 89:
(a) Whether for purposes of Section 141 of the Negotiable Instruments Act, 1881, it is sufficient if the substance of the allegation read as a whole fulfil the requirements of the said section and it is not necessary to specifically state in the complaint that the person accused was in charge of, or responsible for, the conduct of the business of the company.
(b) Whether a director of a company would be deemed to be in charge of, and responsible to, the company for conduct of the business of the company and, therefore, deemed to be guilty of the offence unless he proves to the contrary.
(c) Even if it is held that specific averments are necessary, whether in the absence of such averments the signatory of the cheque and or the managing directors or joint managing director who admittedly would be in charge of the company and responsible to the company for conduct of its business could be proceeded against.
21) While considering the above questions, this Court held as under:
18. To sum up, there is almost unanimous judicial opinion that necessary averments ought to be contained in a complaint before a person can be subjected to criminal process. A liability under Section 141 of the Act is sought to be fastened vicariously on a person connected with a company, the principal accused being the company itself. It is a departure from the rule in criminal law against vicarious liability. A clear case should be spelled out in the complaint against the person sought to be made liable. Section 141 of the Act contains the requirements for making a person liable under the said provision. That the respondent falls within the parameters of Section 141 has to be spelled out. A complaint has to be examined by the Magistrate in the first instance on the basis of averments contained therein. If the Magistrate is satisfied that there are averments which bring the case within Section 141, he would issue the process. We have seen Page 10 of 45 HC-NIC Page 10 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT that merely being described as a director in a company is not sufficient to satisfy the requirement of Section 141. Even a non-director can be liable under Section 141 of the Act. The averments in the complaint would also serve the purpose that the person sought to be made liable would know what is the case which is alleged against him. This will enable him to meet the case at the trial.
19. In view of the above discussion, our answers to the questions posed in the reference are as under:
(a) It is necessary to specifically aver in a complaint under Section 141 that at the time the offence was committed, the person accused was in charge of, and responsible for the conduct of business of the company. This averment is an essential requirement of Section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of Section 141 cannot be said to be satisfied.
(b) The answer to the question posed in sub-para (b) has to be in the negative. Merely being a director of a company is not sufficient to make the person liable under Section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for the conduct of its business. The requirement of Section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a director in such cases.
(c) The answer to Question (c) has to be in the affirmative. The question notes that the managing director or joint managing director would be admittedly in charge of the company and responsible to the company for the conduct of its business. When that is so, holders of such positions in a company become liable under Section 141 of the Act. By virtue of the office they hold as managing director or joint managing director, these persons are in charge of and responsible for the conduct of business of the company. Therefore, they get covered under Section 141. So far as the signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under sub-section (2) of Section 141.
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22) Therefore, this Court has distinguished the case of persons who are in-charge of and responsible for the conduct of the business of the company at the time of the offence and the persons who are merely holding the post in a company and are not in-charge of and responsible for the conduct of the business of the company. Further, in order to fasten the vicarious liability in accordance with Section 141, the averment as to the role of the concerned Directors should be specific. The description should be clear and there should be some unambiguous allegations as to how the concerned Directors were alleged to be incharge of and was responsible for the conduct and affairs of the company.
23) In Sabitha Ramamurthy vs. R.B.S.
Channabasavaradhya, (2006) 10 SCC 581, this Court while dealing with the same issue observed as under: &&It may be true that it is not necessary for the complainant to specifically reproduce the wordings of the section but what is required is a clear statement of fact so as to enable the court to arrive at a prima facie opinion that the accused are vicariously liable. Section 141 raises a legal fiction. By reason of the said provision, a person although is not personally liable for commission of such an offence would be vicariously liable therefor. Such vicarious liability can be inferred so far as a company registered or incorporated under the Companies Act, 1956 is concerned only if the requisite statements, which are required to be averred in the complaint petition, are made so as to make the accused therein vicariously liable for the offence committed by the company. Before a person can be made vicariously liable, strict compliance with the statutory requirements would be insisted. Not only the averments made in para 7 of the complaint petitions do not meet the said statutory requirements, the sworn statement of the witness made by the son of the respondent herein, does not contain any statement that the appellants were in charge of the business of the Company. In a case where the court is required to issue summons which would put the accused to some sort of harassment, the court should insist strict compliance with the statutory requirements. In terms of Section 200 of the Code of Criminal Procedure, the complainant is bound to make statements on oath as to how the offence has been committed and how the Page 12 of 45 HC-NIC Page 12 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT accused persons are responsible therefor. In the event, ultimately, the prosecution is found to be frivolous or otherwise mala fide, the court may direct registration of case against the complainant for mala fide prosecution of the accused. The accused would also be entitled to file a suit for damages. The relevant provisions of the Code of Criminal Procedure are required to be construed from the aforementioned point of view.
24) In Saroj Kumar Poddar vs. State (NCT of Delhi) (2007) 3 SCC 693, while following SMS Pharmaceuticals case (supra) and Sabhita Ramamurthy case (supra), this Court held that with a view to make the Director of a company vicariously liable for the acts of the company, it was obligatory on the part of the complainant to make specific allegations as are required under the law and under Section 141 of the Act and further held that in the absence of such specific averments in the complaint showing as to how and in what manner the Director is liable, the complaint should not be entertained.
25) The relevant portion of the judgment is reproduced hereinbelow:-
12. A person would be vicariously liable for commission of an offence on the part of a company only in the event the conditions precedent laid down therefor in Section 141 of the Act stand satisfied. For the aforementioned purpose, a strict construction would be necessary.
13. The purported averments which have been made in the complaint petitions so as to make the appellant vicariously liable for the offence committed by the Company read as under:
That Accused 1 is a public limited company incorporated and registered under the Companies Act, 1956, and Accused 2 to 8 are/were its Directors at the relevant time and the said Company is managed by the Board of Directors and they are responsible for and in charge of the conduct and business of the Company, Accused 1. However, cheques referred to in the complaint have been signed by Accused 3 and 8 i.e. Shri K.K. Pilania and Shri N.K. Munjal for and on behalf of Accused 1 Company.
14. Apart from the Company and the appellant, as Page 13 of 45 HC-NIC Page 13 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT noticed hereinbefore, the Managing Director and all other Directors were also made accused. The appellant did not issue any cheque. He, as noticed hereinbefore, had resigned from the directorship of the Company. It may be true that as to exactly on what date the said resignation was accepted by the Company is not known, but, even otherwise, there is no averment in the complaint petitions as to how and in what manner the appellant was responsible for the conduct of the business of the Company or otherwise responsible to it in regard to its functioning. He had not issued any cheque. How he is responsible for dishonour of the cheque has not been stated. The allegations made in para 3, thus, in our opinion do not satisfy the requirements of Section 141 of the Act.
26) In a subsequent decision in N.K. Wahi vs. Shekhar Singh & Ors., (2007) 9 SCC 481 while following the precedents of SMS Pharmaceuticalss case (supra), Sabhita Ramamurthys case (supra) and Saroj Kumar Poddars case (supra), this Court reiterated that for launching a prosecution against the alleged Directors, there must be a specific allegation in the complaint as to the part played by them in the transaction. The relevant portion of the judgment is as under:
7. This provision clearly shows that so far as the companies are concerned if any offence is committed by it then every person who is a Director or employee of the company is not liable. Only such person would be held liable if at the time when offence is committed he was in charge and was responsible to the company for the conduct of the business of the company as well as the company. Merely being a Director of the company in the absence of above factors will not make him liable.
8. To launch a prosecution, therefore, against the alleged Directors there must be a specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegation as to how the Directors are in-charge and responsible for the conduct of the business of the company. The description should be clear. It is true that precise words from the provisions of the Act need not be reproduced and the court can always come to a conclusion in facts of each case. But still, in the absence Page 14 of 45 HC-NIC Page 14 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT of any averment or specific evidence the net result would be that complaint would not be entertainable.
27) The said issue again came up for consideration before a three-Judge Bench of this Court recently in Ramraj Singh vs. State of M.P. & Anr. (2009) 6 SCC 729. In this case, the earlier decisions were also considered in detail. Following the decisions of SMS Pharmaceuticals case (supra), Sabhita Ramamurthys case (supra), Saroj Kumar Poddars case (supra) and N.K. Wahis case (supra) this Court held that it is necessary to specifically aver in a complaint under Section 141 that at the time when the offence was committed, the person accused was in- charge of, and responsible for the conduct of the business of the company. Furthermore, it held that vicarious liability can be attributed only if the requisite statements, which are required to be averred in the complaint petition, are made so as to make the accused/Director therein vicariously liable for the offence committed by the company. It was further held that before a person can be made vicariously liable, strict compliance of the statutory requirements would be insisted. Thus, the issue in the present case is no more res integra and has been squarely covered by the decisions of this Court referred above. It is submitted that the aforesaid decisions of this Court have become binding precedents.
28) In the case of second SMS Pharmaceuticals vs. Neeta Bhalla, (2007) 4 SCC 70, this Court has categorically held that there may be a large number of Directors but some of them may not assign themselves in the management of the day-to-day affairs of the company and thus are not responsible for the conduct of the business of the company. Para 20 of the said judgment is relevant which is reproduced hereunder:-
20. The liability of a Director must be determined on the date on `which the offence is committed. Only because Respondent 1 herein was a party to a purported resolution dated 15-2-1995 by itself does not lead to an inference that she was actively associated with the management of the affairs of the Company. This Court in this case has categorically held that there may be a large number of Directors but some of them may not associate Page 15 of 45 HC-NIC Page 15 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT themselves in the management of the day-to-day affairs of the Company and, thus, are not responsible for the conduct of the business of the Company. The averments must state that the person who is vicariously liable for commission of the offence of the Company both was in charge of and was responsible for the conduct of the business of the Company. Requirements laid down therein must be read conjointly and not disjunctively. When a legal fiction is raised, the ingredients therefor must be satisfied.
29) Relying on the judgment of this Court in Everest Advertising Pvt. Ltd. vs. State Govt. of NCT of Delhi & Ors., (2007) 5 SCC 54, learned counsel for the appellants argued that this Court has not allowed the recalling of summons in a criminal complaint filed under sections 138 and 141. However, a perusal of the judgment would reveal that this case was of recalling of summons by the Magistrate for which the Magistrate had no jurisdiction. Further, para 22 of the judgment would reveal that in the complaint
23...allegations have not only been made in terms of the wordings of section but also at more than one place, it has categorically been averred that the payments were made after the meetings held by and between the representative of the Company and accused nos. 1 to 5 which would include Respondent Nos. 2 and 3.
30) In para 24, this Court concluded that:
it is therefore, not a case where having regard to the position held by the said respondents in the Company, they could plead ignorance of the entire transaction.
Furthermore, this Court has relied upon S.M.S. Pharamaceuticals case (three-Judge Bench) (supra), Saroj Kumar Poddars case (supra) and N.K. Wahis case (supra).
31) Relying on the judgment of this Court in N. Rangachari vs. Bharat Sanchar Nigam Ltd., (2007) 5 SCC 108, learned counsel for the appellants further contended that a payee of cheque that is dishonoured can be expected to allege is that the persons named in the complaint are in-charge of its affairs and the Directors Page 16 of 45 HC-NIC Page 16 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT are prima facie in that position. However, it is pertinent to note that in this case it was specifically mentioned in the complaint that (i) accused no. 2 was a director and in charge of and responsible to the accused Company for the conduct of its business; and (ii) the response of accused no. 2 to the notice issued by BSNL that the said accused is no longer the Chairman or Director of the accused Company was false and by not keeping sufficient funds in their account and failing to pay the cheque amount on service of the notice, all the accused committed an offence. Therefore, this decision is clearly distinguishable on facts as in the said case necessary averments were made out in the complaint itself. Furthermore, this decision does not and could not have overruled the decisions in S.M.S. Pharmaceuticals case (three-Judge Bench)(supra), Ramraj Singhs case (three- Judge Bench)(supra), Saroj Kumar Poddars case (supra) and N.K. Wahis case (supra) wherein it is clearly held that specific averments have to be made against the accused Director.
32) Learned counsel for the appellants after elaborately arguing the matter, by inviting our attention to Paresh P. Rajda vs. State of Maharashtra & Anr., (2008) 7 SCC 442 contended that a departure/digression has been made by the Court in the case of N. Rangachari vs. BSNL (supra). However, in this case also the Court has observed in para 4 that the High Court had noted that:
an overall reading of the complaint showed that specific allegations had been leveled against the accused as being a responsible officer of the accused Company and therefore, equally liable...
In fact, the Court recorded the allegations in the complaint that the Complainant knew all the accused and that accused no. 1 was the Chairman of the accused Company and was responsible for day to day affairs of the Company. This Court though has only noted the decision in N. Rangacharis case (supra) and observed that an observation therein showed a slight departure vis-?nbsp;-vis the other judgments (i.e. S.M.S. Pharmaceuticals first case and S.M.S. Pharmaceuticals second case), but then Court went on to record that in N.K. Wahis case (supra) this Court had reiterated the view in S.M.S. Pharmaceuticals case (supra). The Court Page 17 of 45 HC-NIC Page 17 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT then concluded in para 11 that:
it was clear from the aforequoted judgments that the entire matter would boiled down to an examination of the nature of averments made in the complaint.... On facts, the Court found necessary averments had been made in the complaint....
33) Though, the learned counsel for the appellants relying on a recent decision in K.K. Ahuja vs. V.K. Vora & Anr., (2009) 10 SCC 48, it is clearly recorded that in the complaint it was alleged that the accused were in-charge of and was responsible for the conduct of the day-to-day business of the accused Company and further all the accused were directly and actively involved in the financial dealings of the Company and the same was also reiterated in the pre-summoning evidence. Furthermore, this decision also notes that it is necessary to specifically aver in a complaint that the person accused was in- charge of and responsible for the conduct of the business of the Company.
34) After noting Saroj Kumar Poddars case (supra) and N.K. Wahis case (supra), this Court further noted in para 9 that:
&&the prevailing trend appear to require the Complainant to state how a Director who is sought to be made an accused, was in-charge of the business of the Company, as every Director need not be and is not in- charge of the business of the Company&...
35) In Para 11, this Court has further recorded that:
&..When conditions are prescribed for extending such constructive criminal liability to others, courts will insist upon strict literal compliance. There is no question of inferential or implied compliance. Therefore, a specific averment complying with the requirements of Section 141 is imperative& Though the Court then said that an averment in the complaint that the accused is a Director and in-charge of and responsible for the conduct of the business may be sufficient but this would not take away from the requirement that an overall reading of the complaint has Page 18 of 45 HC-NIC Page 18 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT to be made to see whether the requirements of Section 141 have been made out against the accused Director or not. Furthermore, this decision cannot be said to have overruled the various decisions of this Court.
36) Section 291 of the Companies Act provides that:
291. General powers of Board.- (1)subject to the provisions of that Act, the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do.
A company, though a legal entity, can act only through its Board of Directors. The settled position is that a Managing Director is prima facie in-charge of and responsible for the companys business and affairs and can be prosecuted for offences by the company. But insofar as other Directors are concerned, they can be prosecuted only if they were in-charge of and responsible for the conduct of the business of the company.
37) A combined reading of Sections 5 and 291 of Companies Act, 1956 with the definitions in clauses 24, 26, 30, 31 and 45 of Section 2 of that Act would show that the following persons are considered to be the persons who are responsible to the company for the conduct of the business of the company:
(a) the Managing Director/s;
(b) the whole-time Director/s;
(c) the Manager;
(d) the Secretary;
(e) any person in accordance with whose directions or instructions the Board of Directors of the company is accustomed to act;
(f) any person charged by the Board of Directors with the responsibility of complying with that provision; Provided that the person so charged has given his consent in this behalf to the Board;
(g) where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors:
Provided that where the Board exercises any power Page 19 of 45 HC-NIC Page 19 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form.
38) But if the accused is not one of the persons who falls under the category of persons who are responsible to the company for the conduct of the business of the company then merely by stating that he was in-charge of the business of the company or by stating that he was incharge of the day-to-day management of the company or by stating that he was in-charge of, and was responsible to the company for the conduct of the business of the company, he cannot be made vicariously liable under Section 141(1) of the Act. To put it clear that for making a person liable under Section 141(2), the mechanical repetition of the requirements under Section 141(1) will be of no assistance, but there should be necessary averments in the complaint as to how and in what manner the accused was guilty of consent and connivance or negligence and therefore, responsible under sub-section (2) of Section 141 of the Act.
39) From the above discussion, the following principles emerge :
(i) The primary responsibility is on the complainant to make specific averments as are required under the law in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no presumption that every Director knows about the transaction.
(ii) Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company.
(iii) Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make accused therein vicariously liable for offence committed by company along with averments in the petition containing that accused were in-charge of and Page 20 of 45 HC-NIC Page 20 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT responsible for the business of the company and by virtue of their position they are liable to be proceeded with.
(iv) Vicarious liability on the part of a person must be pleaded and proved and not inferred.
(v) If accused is Managing Director or Joint Managing Director then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with.
(vi) If accused is a Director or an Officer of a company who signed the cheques on behalf of the company then also it is not necessary to make specific averment in complaint.
(vii) The person sought to be made liable should be incharge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases."
9. This Court had an occasion to consider the principle of vicarious liability in the case of Nikhil P. Gandhi vs. State of Gujarat & Ors., (2016) 4 GLR 2838. I may quote the relevant observations as under;
"78 Before I proceed to consider the case of the other applicants, who have been arrayed as accused, by virtue of their vicarious liability, I propose to take note of the relevant portion of the complaint, which reads thus:
4) For and on behalf of accused No.1 Company, the accused No.2 had given cheque as security. In the year 2000 some cheques had arisen between the complainant firm and the accused No.2 and the accused No.1 Company did not pay legitimate amount of the complainant firm, therefore, the complainant has filed SPL. Civil Suit No.35 of 2000, 36/2000 and 37/2000 in the Civil Court at Amreli for recovery of dues, wherein the Court granted exparte interim injunction below Ex. 5 in SPL. Civil Suit No.36 of 2000...Page 21 of 45
HC-NIC Page 21 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT xxx xxx xxx
17) ...The accused No.3 to 13 and 17 and 17 to 19 are the directors of accused No.1 company, and they are in charge of day-to-day management of affairs of accused No.1 company hence, they are also responsible persons for the management of accused No.1 company...
...Moreover, the accused No.3 to 13 and 17 to 19 did not take proper care and caution to prevent occurrence of offence of dishonour of cheque nor did they make arrangement of money. The aforesaid cheque issued by accused No.1 company has returned/dishonoured, hence, the accused No.3 to 13 and 17 to 19 in their capacity as directors of accused No.1 have abated the commission of offence. The accused No.3 to 13 and 17 to 19 are in charge of day-to-day management of affairs of accused No.1 company. These accused persons had also attended various meetings on behalf of accused No.1 company. If the minutes of meeting Board of Directors dated 18-1- 2010 are considered, then it is clear that there is mention therein about the dues of complainant and the cheque given for payment thereof. Therefore, it is clear that the accused No.3 to 13 and 17 to 19 were aware about the issuance of cheque by accused No.1.
79 Two classes of persons are liable to be prosecuted under Section 138. First, those persons who are in charge of and responsible to the company for the conduct of its business. They are per se responsible. In the second category comes those persons with whose consent or connivance the offence can be attributed.
When the offence under Section 138 of the Negotiable Instruments Act has been committed by a company every person who, at the time the offence was committed, was in-charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. (vide Section 141 of the Negotiable Instruments Act).
In Anil Hada v. Indian Acrylic Ltd [2000 Cri. LJ 373 Page 22 of 45 HC-NIC Page 22 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT (SC) : (2001) 1 SCC 1, it has been pointed out that three categories of persons can be discerned as brought within the purview of the penal liability, through the legal fiction envisaged in Section 141 of the Negotiable Instruments Act. They are: (1) The company which committed the offence. (2) Every person who was in- charge of and responsible to the company for the conduct of the business of the company. (3) Any other person who is a director or a manager or a secretary or any officer of the company with whose connivance or with whose neglect the company has committed the offence. [Followed in M/s. B.S.I. Ltd v. Gift Holdings Pvt Ltd, 2000 Cr. LJ 1424 : AIR 2000 SC 926] The Apex Court in the said case of Anil Hada further explaining the law as to the liability of the company and its directors, for committing offence of dishonour of cheque, has held that normally an offence can be committed by human beings who are natural persons. Such offence can be tried according to the procedure established by law. But there are offences which could be attributed to the juristic persons also. If the drawer of a cheque happens to be a juristic person like a body corporate it can be prosecuted for the offence under Section 138 of the Act. Now there is no scope for doubt regarding that aspect in view of the clear language employed in Section 141 of the Act. In the expanded ambit of the word company even firms or any other associations of persons are included and as a necessary adjunct thereof a partner of the firm is treated as a director of that company.
Thus when the drawer of the cheque who falls within the ambit of Section 138 of the Act is a human being or a body corporate or even a firm, prosecution proceedings can be initiated against such drawer. In this context the phrase as well as used in sub-section (1) of Section 141 of the Act has some importance. The said phrase would embroil the persons mentioned in the first category within the tentacles of the offence on a par with the offending company. Similarly the words shall also in sub- section (2) are capable of bringing the third category persons additionally within the dragnet of the offence on an equal par. The effect of reading Section 141 is that when the company is the drawer of the cheque such company is the principal offender under Section 138 of Page 23 of 45 HC-NIC Page 23 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT the Act and the remaining persons are made offenders by virtue of the legal fiction created by the Legislature as per the section. Hence the actual offence should have been committed by the company, and then alone the other two categories of persons would become liable for the offence.
Section 141 (1) of the Negotiable Instruments Act would provide that if the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence. Section 141(2) provides, where any offence has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager secretary or other officer shall also be deemed to be guilty of that offence. So, the joint reading of the sub-sections (i)a(2) of Section 141 would make it clear that both the company as well as other persons who are connected and responsible for the conduct of the business of the company are liable to be proceeded.
Where offence under Section 138 of Negotiable Instruments Act is committed by a company, the complaint must prima facie disclose the act committed by the Directors from which a reasonable inference of their vicarious liability cane be drawn. [Ashok Muthanna v. Exports Finance Ltd (2001) 2 Crimes 602 (Mad)] Vicarious liability in legal parlance means the liability of the master for the acts of the servant or agent done in the course of employment. Section 141 makes a natural person vicariously liable for the contravention committed by a company provided such person has some nexus with the crime either because of his connivance with it or due to by criminal negligence which had resulted in its commission. No doubt the law makes the principal liable for the acts of his agent, but unless there is some absolute duty cast upon the principal, he cannot be held responsible for the acts of his agent. [State of Shewprasad, AIR 1956 All. 610 : 1956 Cr.L.J. 1156] Page 24 of 45 HC-NIC Page 24 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT 80 In K.K. Ahuja (supra), the Supreme Court while explaining the vicarious liability of persons of the company observed as under:
16. Having regard to section 141, when a cheque issued by a company (incorporated under the Companies Act, 1956) is dishonoured, in addition to the company, the following persons are deemed to be guilty of the offence and shall be liable to be proceeded against and punished :
(i) every person who at the time the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company;
(ii) any Director, Manager, Secretary or other officer of the company with whose consent and connivance, the offence under Section 138 has been committed; and
(iii) any Director, Manager, Secretary or other officer of the company whose negligence resulted in the offence under Section 138 of the Act, being committed by the company.
While liability of persons in the first category arises under sub-section (1) of Section 141, the liability of persons mentioned in categories (ii) and (iii) arises under sub-section (2). The scheme of the Act, therefore is, that a person who is responsible to the company for the conduct of the business of the company and who is in charge of business of the company is vicariously liable by reason only of his fulfilling the requirements of sub- section (1). But if the person responsible to the company for the conduct of business of the company, was not in charge of the conduct of the business of 11 the company, then he can be made liable only if the offence was committed with his consent or connivance or as a result of his negligence.
17. The criminal liability for the offence by a company under Section 138, is fastened vicariously on the persons referred to in sub-section (1) of Section 141 by virtue of a legal fiction. Penal Page 25 of 45 HC-NIC Page 25 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT statutes are to be construed strictly. Penal statutes providing constructive vicarious liability should be construed much more strictly. When conditions are prescribed for extending such constructive criminal liability to others, courts will insist upon strict literal compliance. There is no question of inferential or implied compliance. Therefore, a specific averment complying with the requirements of Section 141 is imperative. As pointed out in K. Srikanth Singh vs. North East Securities Ltd - 2007 (12) SCC 788, the mere fact that at some point of time, an officer of a company had played some role in the financial affairs of the company, will not be sufficient to attract the constructive liability under Section 141 of the Act.
18 Sub-section (2) of section 141 provides that a Director, Manager, Secretary or other officer, though not in charge of the conduct of the business of the company will be liable if the offence had been committed with his consent or connivance or if the offence was a result of any 12 negligence on his part. The liability of persons mentioned in sub- section (2) is not on account of any legal fiction but on account of the specific part played - consent and connivance or negligence. If a person is to be made liable under sub-section (2) of section 141, then it is necessary to aver consent and connivance, or negligence on his part.
19 This takes us to the next question under sub- section (1) of section 141, as to (i) who are the persons who are responsible to the company for the conduct of the business of the company, and (ii) who could be said to be in charge and was responsible to the company for the conduct of the business of the company. The words "every person who, at the time of the offence was committed, was in charge of, and was responsible for the conduct of the business of the company" occurs not only in section 141(1) of the Act but in several enactments dealing with offences by companies, to mention a few section 278 B of the Income Tax Act, 1961, Section 22C of Minimum Wages Act, 1948, Section Page 26 of 45 HC-NIC Page 26 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT 86A of the Employees State Insurance Act, 1948, Section 14A of Employees Provident Fund and Miscellaneous Provisions Act, 1952, Section 29 of Payment of Bonus Act, 1965, Section 40 of The Air 13 (Prevention and Control of Pollution) Act, 1981 and Section 47 of Water (Prevention and Control of Pollution) Act, 1974. But neither section 141(1) of the Act, nor the pari materia provisions in other enactments give any indication as to who are the persons responsible to the company, for the conduct of the business of the company. Therefore, we will have to fall back upon the provisions of Companies Act, 1956 which is the law relating to and regulating companies.
20 Section 291 of the said Act provides that subject to the provisions of that Act, the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do. A company though a legal entity can act only through its Board of Directors. The settled position is that a Managing Director is prima facie in charge of and responsible for the company's business and affairs and can be prosecuted for offences by the company. But insofar as other directors are concerned, they can be prosecuted only if they were in charge of and responsible for the conduct of the company's business.
21 A combined reading of Section 5 and 291 of Companies Act, 1956 with the definitions in clauses (24), (26), (30), (31), (45) of section 2 of that Act would show that the following persons are considered to be the persons who are responsible to the company for the conduct of the business of the company : --
(a) the managing director(s);
(b) the whole-time director(s);
(c) the manager;
(d) the secretary;
(e) any person in accordance with whose directions Page 27 of 45 HC-NIC Page 27 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT or instructions the Board of directors of the company is accustomed to act;
(f) any person charged by the Board with the responsibility of complying with that provision (and who has given his consent in that behalf to the Board); and
(g) where any company does not have any of the officers specified in clauses
(a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors. It follows that other employees of the company, cannot be said to be persons who are responsible to the company, for the conduct of the business of the company.
22 Section 141 uses the words "was in charge of, and was responsible to the company for the conduct of the business of the company". It is evident that a person who can be made vicariously liable under sub-section (1) of Section 141 is a person who is responsible to the company for the conduct of the business of the company and in addition is also in charge of the business of the company. There may be many directors and secretaries who are not in charge of the business of the company at all. The meaning of the words "person in charge of the business of the company" was considered by this Court in Girdhari Lal Gupta v. D.N. Mehta [1971 (3) SCC 189] followed in State of Karnataka v. Pratap Chand [1981 (2) SCC 335] and Katta Sujatha vs. Fertiliser & Chemicals Travancore Ltd. [2002 (7) SCC 655]. This Court held that the words refer to a person who is in overall control of the day to day business of the company. This Court pointed out that a person may be a director and thus belongs to the group of persons making the policy followed by the company, but yet may not be in charge of the business of the company; that a person may be a Manager who is in charge of the business but may not be in overall charge of the business; and that a person may be an officer who may be in charge of only some part of the business.
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23 Therefore, if a person does not meet the first requirement, that is being a person who is responsible to the company for the conduct of the business of the company, neither the question of his meeting the second requirement (being a person in charge of the business of the company), nor the question of such person being liable under sub-section (1) of section 141 does not arise. To put it differently, to be vicariously liable under sub- section (1) of Section 141, a person should fulfill the 'legal requirement' of being a person in law (under the statute governing companies) responsible to the company for the conduct of the business of the company and also fulfill the 'factual requirement' of being a person in charge of the business of the company.
24 Therefore, the averment in a complaint that an accused is a director and that he is in charge of and is responsible to the company for the conduct of the business of the company, duly affirmed in the sworn statement, may be sufficient for the purpose of issuing summons to him. But if the accused is not one of the persons who falls under the category of 'persons who are responsible to the company for the conduct of the business of the company' (listed in para 14 above), then merely by stating that 'he was in charge of the business of the company' or by stating that 'he was in charge of the day to day management of the company' or by stating that he was in charge of, and was responsible to the company for the conduct of the business of the company', he cannot be made vicariously liable under section 141(1) of the Act.
25 It should, however, be kept in view that even an officer who was not in charge of and was responsible to the company for the conduct of the business of the company can be made liable under sub-section (2) of Section 141. For making a person liable under Section 141(2), the mechanical repetition of the requirements under Section 141(1) will be of no assistance, but there should be Page 29 of 45 HC-NIC Page 29 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT necessary averments in the complaint as to how and in what manner the accused was guilty of consent and connivance or negligence and therefore, responsible under sub-section (2) of Section 141 of the Act.
26 Another aspect that requires to be noticed is that only a Director, Manager, Secretary or other officer can be made liable under sub-section (2) of section 141. But under sub-section (1) of section 141, it is theoretically possible to make even a person who is not a director or officer, liable, as for example, a person falling under category (e) and (f) of section 5 of Companies Act, 1956. When in SMS Pharma (I), this Court observed that 'conversely, a person not holding any office or designation in a company may be liable if he satisfies the requirement of being in charge of and responsible for conduct of the business of the company', this Court obviously had in mind, persons described in clauses (e) and (f) of section 5 of Companies Act. Be that as it may.
27 The position under section 141 of the Act can be summarized thus :
(i) If the accused is the Managing Director or a Joint Managing Director, it is not necessary to make an averment in the complaint that he is in charge of, and is responsible to the company, for the conduct of the business of the company. It is sufficient if an averment is made that the accused was the Managing Director or Joint Managing Director at the relevant time. This is because the prefix `Managing' to the word `Director' makes it clear that they were in charge of and are responsible to the company, for the conduct of the business of the company.
(ii) In the case of a director or an officer of the company who signed the cheque on behalf of the company, there is no need to make a specific averment that he was in charge of and was Page 30 of 45 HC-NIC Page 30 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT responsible to the company, for the conduct of the business of the company or make any specific allegation about consent, connivance or negligence. The very fact that the dishonoured cheque was signed by him on behalf of the company, would give rise to responsibility under sub-section (2) of section 141.
(iii) In the case of a Director, Secretary or Manager (as defined in Sec. 2(24) of the Companies Act) or a person referred to in clauses (e) and (f) of section 5 of Companies Act, an averment in the complaint that he was in charge of, and was responsible to the company, for the conduct of the business of the company is necessary to bring the case under section 141(1). No further averment would be necessary in the complaint, though some particulars will be desirable. They can also be made liable under section 141(2) by making necessary averments relating to consent and connivance or negligence, in the complaint, to bring the matter under that sub-section.
(iv)Other Officers of a company can not be made liable under sub-section (1) of section 141. Other officers of a company can be made liable only under sub-section (2) of Section 141, be averring in the complaint their position and duties in the company and their role in regard to the issue and dishonour of the cheque, disclosing consent, connivance or negligence.
28 If a mere reproduction of the wording of section 141(1) in the complaint is sufficient to make a person liable to face prosecution, virtually every officer/employee of a company without exception could be impleaded as accused by merely making an averment that at the time when the offence was committed they were in charge of and were responsible to the company for the conduct and business of the company. This would mean that if a company had 100 branches and the cheque issued from one branch was dishonoured, the officers of all Page 31 of 45 HC-NIC Page 31 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT the 100 branches could be made accused by simply making an allegation that they were in charge of and were responsible to the company for the conduct of the business of the company. That would be absurd and not intended under the Act.
29 As the trauma, harassment and hardship of a criminal proceedings in such cases, may be more serious than the ultimate punishment, it is not proper to subject all and sundry to be impleaded as accused in a complaint against a company, even when the requirements of section 138 read and section 141 of the Act are not fulfilled.
81 In view of the aforesaid dictum of law explained by the Supreme Court, the other accused who have been arrayed as accused by virtue of Section 141 of the N.I. Act could not be held liable. I take notice of the fact that some of the accused are Office Bearers, like the Chief Operating Officer, Chief Financial Officer, Financial Controller. Some of the Directors are nominated Directors and also Non-Executive.
82 I am also not impressed by the argument of Mr. Ponda that as the inherent powers of this Court under Section 482 of the Cr.P.C. are circumscribed, and should be exercised only in cases where the Court finds an abuse of the process of law, all the applications deserve to be outright rejected, leaving all the legal contentions open to be canvassed before the trial Court.
83 In Harshendra Kumar D. v. Rebatilata Koley etc [2011 Criminal Law Journal 1626], the Supreme Court held as under:
21 In our judgment, the above observations cannot be read to mean that in a criminal case where trial is yet to take place and the matter is at the stage of issuance of summons or taking cognizance, materials relied upon by the accused which are in the nature of public documents or the materials which are beyond suspicion or doubt, in no circumstance, can be looked into by the High Court Page 32 of 45 HC-NIC Page 32 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT in exercise of its jurisdiction under Section 482 or for that matter in exercise of revisional jurisdiction under Section 397 of the Code. It is fairly settled now that while exercising inherent jurisdiction under Section 482 or revisional jurisdiction under Section 397 of the Code in a case where complaint is sought to be quashed, it is not proper for the High Court to consider the defence of the accused or embark upon an enquiry in respect of merits of the accusations. However, in an appropriate case, if on the face of the documents - which are beyond suspicion or doubt - placed by accused, the accusations against him cannot stand, it would be travesty of justice if accused is relegated to trial and he is asked to prove his defence before the trial court. In such a matter, for promotion of justice or to prevent injustice or abuse of process, the High Court may look into the materials which have significant bearing on the matter at prima facie stage.
22. Criminal prosecution is a serious matter; it affects the liberty of a person. No greater damage can be done to the reputation of a person than dragging him in a criminal case.
84 I take notice of the fact that in complaints filed for the offence under Section 138 of the N.I. Act, all the Directors of the company and even the Office Bearers are routinely being proceeded against by invoking the provisions under Section 141 of the N.I. Act by glibly repeating the words in the section that certain Director was incharge of and responsible to the company for the conduct of business of the company. It is necessary to emphasis that Section 141 of the N.I. Act where an offence under Section 138 of the N.I. Act has been committed by a company, the complainant is required to give a serious thought and make enquiries and ascertain the fact as to whether a particular Director was incharge of and responsible to the affairs and conduct of the business of the company. Routinely roping in all the Directors by merely repeating the words used in Section 141 of the N.I. Act without ascertaining the facts is a serious matter which has to be deprecated.
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85 Some of the applicants before me are indisputably non-executive Directors of the company. A non-executive Director is no doubt a custodian of the governance of the company, but does not involve in the day-to-day affairs of the running of its business and only monitors the executive activity. [See: Pooja Ravinder Devidasani v. State of Maharastra, AIR 2015 SC 675] 86 In Pooja Ravinder Devidasani (supra), the Supreme Court made the following observations in para 30, which I deem fit to refer and rely upon :
30. Putting the criminal law into motion is not a matter of course. To settle the scores between the parties which are more in the nature of a civil dispute, the parties cannot be permitted to put the criminal law into motion and Courts cannot be a mere spectator to it. Before a Magistrate taking cognizance of an offence under Section 138/141 of the N.I. Act, making a person vicariously liable has to ensure strict compliance of the statutory requirements. The Superior Courts should maintain purity in the administration of justice and should not allow abuse of the process of the Court. The High Court ought to have quashed the complaint against the appellant which is nothing but a pure abuse of process of law.
87 A Division Bench of this Court (to which I was a party) in the case of Ionic Metalliks and others [Special Civil Application No.645 of 2014 decided on 9th September 2014], while examining the challenge to the legality and validity of a master circular dated 2nd July 2012 issued by the Reserve Bank of India in respect of willful defaulters had an occasion to consider the categories of Directors as classified under the Companies Act. I may quote the following from the judgment referred to above:
The circular speaks about director and independent and nominee director. The classification of the directors under the Companies Act is as under :Page 34 of 45
HC-NIC Page 34 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT A. Classification under the Companies Act Categories of Directors The Companies Act refers to the following two specific categories of Directors:
1. Managing Directors; and
2. Whole-time Directors.
A Managing Director is a Director who has substantial powers of management of the affairs of the company subject to the superintendence, control and direction of the Board in question. A Whole-time Director includes a Director who is in the whole-time employment of the company, devotes his whole-time of working hours to the company in question and has a significant personal interest in the company as his source of income.
Every public company and private company, which is a subsidiary of a public company, having a share capital of more than Five Crore rupees (Rs. 5,00,00,000/-) must have a Managing or Whole-time Director or a Manager.
Further classification of Directors Based on the circumstances surrounding their appointment, the Companies Act recognizes the following further types of Directors:
1. First Directors: Subject to any regulations in the Articles of a company, the subscribers to the Memorandum of Association, or the company's charter or constitution ("Memorandum"), shall be deemed to be the Directors of the company, until such time when Directors are duly appointed in the annual general meeting ("AGM").
2. Casual vacancies: Where a Director appointed at the AGM vacates office before his or her term of office expires in the normal course, the resulting Page 35 of 45 HC-NIC Page 35 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT vacancy may, subject to the Articles, be filled by the Board. Such person so appointed shall hold office up to the time which the Director who vacated office would have held office if he or she had not so vacated such office.
3. Additional Directors: If the Articles specifically so provide or enable, the Board has the discretion, where it feels it necessary and expedient, to appoint Additional Directors who will hold office until the next AGM. However, the number of Directors and Additional Directors together shall not exceed the maximum strength fixed in the Articles for the Board.
4. Alternate Director: If so authorized by the Articles or by a resolution passed by the company in general meeting, the Board may appoint an Alternate Director to act for a Director ("Original Director"), who is absent for whatever reason for a minimum period of three months from the State in which the meetings of the Board are ordinarily held. Such Alternate Director will hold office until such period that the Original Director would have held his or her office. However, any provision for automatic re-appointment of retiring Directors applies to the Original Director and not to the Alternate Director.
5. 'Shadow' Director: A person, who is not appointed to the Board, but on whose directions the Board is accustomed to act, is liable as a Director of the company, unless he or she is giving advice in his or her professional capacity. Thus, such a 'shadow' Director may be treated as an 'officer in default' under the Companies Act.
6. De facto Director: Where a person who is not actually appointed as a Director, but acts as a Director and is held out by the company as such, such person is considered as a de facto Director. Unlike a 'shadow' Director, a de facto Director Page 36 of 45 HC-NIC Page 36 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT purports to act, and is seen to the outside world as acting, as a Director of the company. Such a de facto Director is liable as a Director under the Companies Act.
7. Rotational Directors: At least two-thirds of the Directors of a public company or of a private company subsidiary of a public company have to retire by rotation and the term "rotational Director" refers to such Directors who have to retire (and may, subject to the Articles, be eligible for re- appointment) at the end of his or her tenure.
8. Nominee Directors: They can be appointed by certain shareholders, third parties through contracts, lending public financial institutions or banks, or by the Central Government in case of oppression or mismanagement. The extent of a nominee Director's rights and the scope of supervision by the shareholders, is contained in the contract that enables such appointments, or (as appropriate) the relevant statutes applicable to such public financial institution or bank. However, nominee Directors must be particularly careful not to act only in the interests of their nominators, but must act in the best interests of the company and its shareholders as a whole.The fixing of liabilities on nominee Directors in India does not turn on the circumstances of their appointment or, indeed, who nominated them as Directors. Chapter 4 and Chapter 5 that follow set out certain duties and liabilities that apply to, or can be affixed on, Directors in general. Whether nominee Directors are required by law to discharge such duties or bear such liabilities will depend on the application of the legal provisions in question, the fiduciary duties involved and whether such nominee Director is to be regarded as being in control or in charge of the company and its activities. This determination ultimately turns on the specific facts and circumstances involved in each case.
B. Classification under the Listing Agreement Page 37 of 45 HC-NIC Page 37 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT The Securities Contracts (Regulation) Act, 1956, read with the rules and regulations made thereunder, requires every company desirous of listing its shares on a recognized Indian stock exchange, to execute a listing agreement ("Agreement") with such Indian stock exchange. This Agreement is in a standard format (prescribed by the Securities Exchange Board of India ("SEBI")), as amended by SEBI from time to time. The Agreement provides for the following further categories of Directors:
Categories under Listing Agreement
1. Executive Director;
2. Non-executive Director; and
3. Independent Director.
Executive and non-executive Directors An Executive Director can be either a Whole-time Director of the company (i.e., one who devotes his whole time of working hours to the company and has a significant personal interest in the company as his source of income), or a Managing Director (i.e., one who is employed by the company as such and has substantial powers of management over the affairs of the company subject to the superintendence, direction and control of the Board). In contrast, a non-executive Director is a Director who is neither a Whole-time Director nor a Managing Director. Clause 49 of the Agreement prescribes that the Board shall have an optimum combination of executive and non-executive Directors, with not less than fifty percent (50%) of the Board comprising non-executive Directors. Where the Chairman of the Board is a non- executive Director, at least one-third of the Board should comprise independent Directors and in case he is an executive Director, at least half of the Board should comprise independent Directors. Where the non-executive Chairman is a promoter of the company or is related to any promoter or Page 38 of 45 HC-NIC Page 38 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent Directors.
Independent Directors The Agreement defines an "Independent Director" as a non-executive Director of the company who:
a. apart from receiving Director's remuneration, does not have material pecuniary relationships or transactions with the company, its promoters, its Directors, its senior management, or its holding company, its subsidiaries, and associates which may affect independence of the Director;
b. is not related to promoters or persons occupying management positions at the board level or at one level below the board;
c. has not been an executive of the company in the immediately preceding three (3) financial years;
d. is not a partner or an executive or was not a partner or an executive during the preceding three (3) years, of any of the following:
i. the statutory audit firm or the internal audit firm that is associated with the company, and ii. the legal firms and consulting firms that have a material association with the company;
e. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect the independence of the Director; or f. he is not a substantial shareholder of the Page 39 of 45 HC-NIC Page 39 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT company, i.e., owning two percent (2%) or more of the block of voting shares; and g. he is not less than twenty-one (21) years of age.
Nominee directors appointed by an institution that has invested in, or lent money to, the company are also treated as independent Directors.
88 The following observations of the Supreme Court, made in the case of M/s. Pepsi Foods Ltd v. Special J.M. [1998 Cri. L.J. 1 : AIR 1998 SC 128] should be kept in mind by the Magistrates, when they decide to summon a director or partner of a company or firm to face trial under Section 138 of the Negotiable Instruments Act.
Summoning of an accused in a criminal case is a serious matter. Criminal law cannot be set into motion as a matter of course. It is not that the complainant has to bring only two witnesses to support his allegations in the complaint to have the criminal law set into motion. The order of the Magistrate summoning the accused must reflect that he has applied his mind to the facts of the case and the law applicable thereto. He has to examine the nature of allegations made in the complaint and the evidence both oral and documentary in support thereof and would that be sufficient for the complainant to succeed in bringing charge home to the accused. It is not that the Magistrate is a silent spectator at the time of recording of preliminary evidence before summoning of the accused. Magistrate has to carefully scrutinise the evidence brought on record and may even himself put questions to the complainant and his witnesses to elicit answers to find out the truthfulness of the allegations or otherwise and then examine if any offence is prima facie committed by all or any of the accused.
This has assumed all the more significance in view Page 40 of 45 HC-NIC Page 40 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT of the recent trend found that in respect of offences under Section 138 of the Negotiable Instruments Act alleged against a company, all the Directors of the company are being routinely roped in as accused with a statement that they are in-charge of and responsible to the business of the company as required under Section 141 of the Negotiable Instruments Act. In fact, it has been seen that some times, even the nominee Directors nominated by the financial agencies like IDBI have also been arrayed as accused for the offence committed by the Company on the Board of which they have been nominated. The need to carefully scrutinize the material and if necessary to question the complainant as to the basis for implicating an accused as observed by the Supreme Court in the above cited judgment cannot be ignored.
Considering this, it appears necessary that at any rate even if on the basis of formal allegations in the complaint such Directors have been summoned to face the trial, they must be afforded an opportunity at least at the earliest stage to show with reference to the material which may be placed before the Court that they are not in-charge of and are not responsible to the business of the company and on that basis seek their discharge from the array of the accused. In such cases, I think it will be a great injustice if they are asked to go through the ordeal of the trial and plead their defence only during the trial. [Om Prakash Agrawal v. State of A.P., 2001 Cri. L.J. 253 (para 13) A.P.] 89 In N.K. Wahi v. Shekhar Singh and others [2007 (9) SCC 481], the Supreme Court, after considering its earlier judgment on the point in question, held as under:
7. This provision clearly shows that so far as the companies are concerned if any offence is committed by it then every person who is a Director or employee of the company is not liable. Only such person would be held liable if at the time when offence is committed he was in charge and was responsible to the company for the conduct of the business of the company as well as the company.Page 41 of 45
HC-NIC Page 41 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT Merely being a Director of the company in the absence of above factors will not make him liable.
8. To launch a prosecution, therefore, against the alleged Directors there must be a specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegation as to how the Directors are incharge and responsible for the conduct of the business of the company. The description should be clear. It is true that precise words from the provisions of the Act need not be reproduced and the Court can always come to a conclusion in facts of each case. But still in the absence of any averment or specific evidence the net result would be that complaint would not be entertainable.
90 In Gunmala Sales Private Limited (supra), the Supreme Court, after an exhaustive review of all its earlier decisions on Section 141 of the N.I. Act, summarized its conclusion as under:
a) Once in a complaint filed under Section 138 read with Section 141 of the NI Act the basic averment is made that the Director was in charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed, the Magistrate can issue process against such Director;
b) If a petition is filed under Section 482 of the Code for quashing of such a complaint by the Director, the High Court may, in the facts of a particular case, on an overall reading of the complaint, refuse to quash the complaint because the complaint contains the basic averment which is sufficient to make out a case against the Director;
c) In the facts of a given case, on an overall reading of the complaint, the High Court may, despite the presence of the basic averment, quash the complaint because of the absence of more particulars about role of the Director in the complaint. It may do so having come across some unimpeachable, uncontrovertible evidence which is Page 42 of 45 HC-NIC Page 42 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT beyond suspicion or doubt or totally acceptable circumstances which may clearly indicate that the Director could not have been concerned with the issuance of cheques and asking him to stand the trial would be abuse of the process of the court. Despite the presence of basic averment, it may come to a conclusion that no case is made out against the Director. Take for instance a case of a Director suffering from a terminal illness who was bedridden at the relevant time or a Director who had resigned long before issuance of cheques. In such cases, if the High Court is convinced that prosecuting such a Director is merely an arm- twisting tactics, the High Court may quash the proceedings. It bears repetition to state that to establish such case unimpeachable, uncontrovertible evidence which is beyond suspicion or doubt or some totally acceptable circumstances will have to be brought to the notice of the High Court. Such cases may be few and far between but the possibility of such a case being there cannot be ruled out. In the absence of such evidence or circumstances, complaint cannot be quashed;
d) No restriction can be placed on the High Court's powers under Section 482 of the Code. The High Court always uses and must use this power sparingly and with great circumspection to prevent inter alia the abuse of the process of the Court. There are no fixed formulae to be followed by the High Court in this regard and the exercise of this power depends upon the facts and circumstances of each case. The High Court at that stage does not conduct a mini trial or roving inquiry, but, nothing prevents it from taking unimpeachable evidence or totally acceptable circumstances into account which may lead it to conclude that no trial is necessary qua a particular Director.
91 In view of the above, there is no cogent material on record to fasten any vicarious liability so far as the other accused are concerned who are Non-Executive Directors including the Office Bearers concerned with the Accounts Department of the company.
Page 43 of 45
HC-NIC Page 43 of 45 Created On Wed Aug 16 06:04:30 IST 2017
R/SCR.A/4377/2015 JUDGMENT
92 The plain reading of Section 138 of the N.I. Act would clearly go to show that by reason thereof, a legal fiction had been created. A legal fiction, as is well-known, although is required to be given full effect, yet has its own limitations. It cannot be taken recourse to for any purpose other than the one mentioned in the statute itself. Section 138 of the Act moreover provides for a penal provision. A penal provision created by reason of a legal fiction must receive strict construction. Such a penal provision, enacted in terms of the legal fiction drawn, would be attracted when a cheque is returned by the bank unpaid. Before a proceeding thereunder is initiated, all the legal requirements therefor must be complied with. The Court must be satisfied that all the ingredients of commission of an offence under the said provision have been complied with. [See: Raj Kumar Khurana v. State of (NCT of Delhi) and another, (2009) 6 SCC 72]."
10. I also take notice of the fact that this Court quashed the proceedings of the criminal case referred to above so far as the other two independent directors are concerned, namely, Pradeep Krishna Prasad and Ram Singh in the Special Criminal Applications Nos. 5208 of 2014 and 5209 of 2014, decided on 27th April, 2015. I am informed by Mr. Samal, the learned counsel appearing for the Bank that the judgment has been accepted and has attained finality.
11. In view of the above, this application succeeds and is hereby allowed. The proceedings of the Criminal Case No.259 of 2012 pending in the court of the learned Metropolitan Magistrate, Court No.36, Ahmedabad are hereby quashed so far as the applicant is concerned. The case shall now proceed further expeditiously in accordance with law so far as the other co-accused are concerned. Rule is made absolute to the aforesaid extent.
Page 44 of 45 HC-NIC Page 44 of 45 Created On Wed Aug 16 06:04:30 IST 2017 R/SCR.A/4377/2015 JUDGMENT Direct service is permitted. (J.B.PARDIWALA, J.) Vahid Page 45 of 45 HC-NIC Page 45 of 45 Created On Wed Aug 16 06:04:30 IST 2017