Cheque dishonour and corporate liability require statutory complaint, notice, and company arraignment before directors can be prosecuted.

Mere non-payment of dues did not by itself disclose cheating or criminal breach of trust, because the FIR contained no allegation of entrustment, dishonest misappropriation, or dishonest inducement at the inception of the transaction; the directors could not be proceeded against vicariously when the company was not arraigned as an accused. A prosecution under Section 138 of the Negotiable Instruments Act also required a proper complaint by the payee or holder in due course after statutory notice, and an FIR and police report were not a substitute for that ; where the cheque was issued on behalf of a company, the company had to be made an accused before liability could be fastened on its directors or signatory. The proceedings were quashed as an abuse of process.

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Issues: (i) Whether the allegations made in the FIR, even if taken at face value, disclosed the offences under Sections 406 and 420 of the Indian Penal Code, 1860 and justified prosecution of the directors when the company was not arrayed as an accused. (ii) Whether prosecution under Section 138 of the Negotiable Instruments Act, 1881 was maintainable on the basis of an FIR and police report without a complaint by the payee and without arraigning the company as an accused.

Issue (i): Whether the allegations made in the FIR, even if taken at face value, disclosed the offences under Sections 406 and 420 of the Indian Penal Code, 1860 and justified prosecution of the directors when the company was not arrayed as an accused.

Analysis: The allegations were confined to non-payment of dues to milk suppliers, the milk van, and the informant's salary. There was no allegation of entrustment of property, dishonest misappropriation, or dishonest inducement at the inception of the transaction. The essential element of fraudulent or dishonest intention at the time of inducement was absent. Since criminal liability under the Penal Code is personal and vicarious liability is not implied, the directors could not be proceeded against for company-related dues in the absence of the company being made an accused.

Conclusion: The offences under Sections 406 and 420 of the Indian Penal Code, 1860 were not made out, and the prosecution of the petitioners on that basis was not sustainable.

Issue (ii): Whether prosecution under Section 138 of the Negotiable Instruments Act, 1881 was maintainable on the basis of an FIR and police report without a complaint by the payee and without arraigning the company as an accused.

Analysis: A prosecution under Section 138 of the Negotiable Instruments Act, 1881 requires a complaint by the payee or holder in due course after service of statutory notice and completion of the statutory steps. The material disclosed no such notice or complaint. The proceeding was initiated through an FIR, which is not a complaint within the meaning of the Code of Criminal Procedure, 1973 for this purpose. Further, where the cheque is issued on behalf of a company, arraigning the company as an accused is imperative before fastening vicarious liability on its directors or authorised signatory.

Conclusion: The prosecution under Section 138 of the Negotiable Instruments Act, 1881 was not maintainable.

Final Conclusion: The criminal proceedings and the order refusing discharge were held to be an abuse of the process of law and were quashed.

Ratio Decidendi: For offences of cheating, criminal breach of trust, and dishonour of cheque, criminal liability cannot be inferred from mere non-payment or breach of contract; dishonest intention at inception, compliance with the statutory requirements of the cheque dishonour regime, and, where company liability is alleged, arraignment of the company are essential.

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