2022 (4) TMI 1627 - HC - Indian Laws

Managing Director cannot be first accused in dishonoured cheque case when company is drawer under Section 141

PREESA FOODS AND SPICES (INDIA) PRIVATE LIMITED Versus STATE OF KERALA, KUNNATH RAFEEQUE, SREEJITH A.S

Kerala HC allowed an application challenging a dishonoured cheque case under NI Act. The court held that when a company is the drawer, the company must be ... Dishonour of Cheque - defalcation and misappropriation of the bank accounts of the company - vicarious liability of the Managing director of the company - mandate required by Section 141 N I Act not complied with - HELD THAT:- When the drawer of the cheque is a company, demand notice as demanded by clause (b) of proviso to Section 138 NI Act must be issued to the company, represented by it’s Managing Director. If notice is not issued, the complainant can be taken to have failed to comply with the mandatory requirements under the NI Act, which is very crucial for the prosecution to be successful and fruitful. Company must be arraigned as first accused in the cause title, represented by it’s Managing Director. Apart from that in the complaint necessary pleas about the involvement of the accused in the affairs of the company must also be incorporated. In the case on hand, in Annexure A1 complaint, in the cause title, Mr.Sreejith A.S, who is the Managing Director of Preesa Foods and Spices (India) Private Limited was shown as the 1st accused and one Mr.Nandakumar Konat, the Chairman of Preesa Foods and Spices (India) Private Limited, as the second accused. What can be gathered on a reading of the pleadings in the complaint was that the company has purchased stationary articles for a sum of Rs. 1,49,560/- from the complainant. The company is not made an accused in the case on hand. Since the articles are purchased for the benefit of the company and a cheque drawn from the account maintained by it was issued to discharge the cost of the articles bought, to the complainant, primarily the company must be arraigned as the accused. Company being a legal entity it must be represented by it’s Managing Director or any other officers duly authorised to represent it. Notice must also be issued to the company through it’s authorised representative as per the mandate of the statute, prior to lodging of a complaint to launch the prosecution. The manner in which the persons arraigned in their official capacity are responsible for the day to day affairs of the company as accused was also not stated in Annexure A1. That is also an essential mandate required by Section 141 N I Act, having crucial bearing on the sustainability of Annexure A1. A Managing Director who has not been continuing the status as such in the company at the relevant time of the transaction which created the monetary liability forming a legally enforceable debt or liability cannot be alleged as penally responsible for the monetary liability created by the bouncing of the cheque drawn and given towards discharge of the liability. Annexure A1 complaint is not maintainable. The court below ought not to have taken cognizance on Annexure A1 and registered S.T.No.986/2017 on it’s file and to proceed with it when ingredients relevant and essential to sustain it were totally lacking. Taking cognizance on Annexure A1 complaint, registration of S.T.No.986/2017 on it’s basis on the files of the court below suffers for non-compliance of the mandatory requirements under the N I Act - Application allowed. Issues Involved:1. Validity of the complaint under Section 138 of the Negotiable Instruments Act (NI Act).2. Requirement of issuing notice to the company and its authorized representative.3. The necessity of arraigning the company as an accused.4. Responsibility and liability of the directors and officers of the company.5. Compliance with the mandatory requirements under the NI Act for prosecution.Detailed Analysis:1. Validity of the Complaint under Section 138 NI Act:The petitioner, the 2nd accused, sought to quash the complaint (S.T.No.986/2017) under Section 482 of the Code of Criminal Procedure, 1973. The complaint was filed under Section 142 of the NI Act, alleging an offence under Section 138 NI Act due to the dishonour of a cheque issued by the 3rd respondent (1st accused). The cheque was issued for Rs.1,49,560/- and was dishonoured for 'funds insufficient.' The petitioner argued that the complaint was invalid as it did not meet the mandatory requirements under the NI Act, particularly the issuance of a notice to the company.2. Requirement of Issuing Notice to the Company and its Authorized Representative:The petitioner contended that the notice required under Section 138(b) NI Act was not issued to the company or its Managing Director. The court emphasized that the payee must demand payment from the drawer of the cheque, which in this case was the company. The absence of such a notice invalidated the complaint. The court cited several precedents, including Harshendra Kumar D. V. Rebatilata Koley and Others, Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd., and MSR Leathers V. Palaniappan, which underscored the necessity of serving a statutory demand notice to the drawer company.3. Necessity of Arraigning the Company as an Accused:The court noted that the company, being the drawer of the cheque, was not arraigned as an accused in the complaint. The transaction that created the liability was between the complainant and the company, and the cheque was issued from the company's account. The court held that the company must be arraigned as the first accused, represented by its Managing Director. The failure to do so rendered the complaint unsustainable. The court relied on decisions such as Himanshu v. B.Shivamurthy and Another and Fakrudhin V.P. v. State of Kerala and Another, which highlighted the imperative of arraigning the company in such cases.4. Responsibility and Liability of the Directors and Officers of the Company:The petitioner argued that he was merely a director and not involved in the day-to-day affairs of the company, which had ceased operations. The court observed that the complaint lacked averments about the involvement of the accused in the company's affairs. The court referred to Krishna Texport & Capital Markets Ltd. v. Ila A. Agrawal and Others, which clarified that directors must be aware of the notice issued to the company and that separate notices to individual directors are not mandatory. The court also cited Balachandran V. State of Kerala, reinforcing that directors are not entitled to separate notices under Section 138 NI Act.5. Compliance with Mandatory Requirements under the NI Act for Prosecution:The court reiterated that compliance with the mandatory requirements under Section 138 NI Act is crucial for a successful prosecution. The complaint must include necessary factual allegations constituting each ingredient of the offence. The court cited Harihara Krishnan N. V. J.Thomas, which emphasized the necessity of disclosing the name of the person drawing the cheque and the involvement of the accused in the company's affairs. The court concluded that the complaint failed to meet these requirements, rendering it invalid.Conclusion:The court held that the complaint (Annexure A1) was not maintainable due to non-compliance with the mandatory requirements under the NI Act. The court quashed the complaint and all proceedings initiated pursuant to it against the petitioner, the 2nd accused, emphasizing the necessity of issuing a demand notice to the drawer company and arraigning the company as an accused. The court underscored the importance of including necessary averments about the involvement of the accused in the company's affairs to sustain a complaint under Section 138 NI Act.