TaxTMI 
TaxTMI 
2006 (12) TMI 239
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....under sections 138 and 142 of the Negotiable Instruments Act, 1881 ('NI Act') based on dishonour of cheques. Further, in all these cases, the cheques are issued by and on behalf of a company incorporated under the Companies Act, 1956 or a partnership firm. The complainants, in addition to making the said companies/firms as principal accused, have also impleaded certain other persons in the capacity of their being directors or partners, as the case may be. Again, in all these cases, some of those directors or partners have come up and have filed these petitions under section 482 of the Code of Criminal Procedure, 1973 ('Cr.PC') seeking quashing of summoning orders against them. Plea is also common in these cases. It is either contended that they ceased to be the directors/partners before the cheque(s) was/were presented which got dishonoured and, therefore, since they had no concern with the company/firm as on the date of dishonour of the cheque(s), they could not be arraigned as accused persons. Or else, their contention is that they are not the persons who were incharge and responsible for the business of the company or the firm and, therefore, could not have been implicated in th....
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....amounts. As such it agreed to issue cheques in respect of purchases being made and assured that the said cheques would be cleared as and when they are presented for encashment. Number of cheques were issued, the details whereof are given in para 6 of the complaint, and on deposit of these cheques of a total amount of Rs. 10,68,405, the same were received back dishonoured with the remarks 'stop payment' and 'A/c closed'. It is alleged that the company, in order not to repay the amounts to the complainant, deliberately got the cheques dishonoured and there was no sufficient balance in the account. It is also alleged in the complaint that after the dishonour of the cheques, legal notice dated 13-11-2000 was sent by the complainant through its counsel to all the accused persons by means of registered AD post as well as UPC calling upon them to make the payment of the aforesaid amount. The notices as sent were returned with the remarks 'not met' and refusal to take delivery whereas the notices sent under UPC were duly served upon the respondent persons. The undelivered envelopes were returned on 22-11-2000. On the basis of these allegations, it is stated that since the payment is not ma....
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....l make the payment of the bill amount." 6. The complainant at pre-summoning stage examined himself as CW 1 and after considering his testimony and the record, following summoning order dated 19-4-2001 was passed by the learned MM : ". . . .CW 1 examined and discharged. CE closed. Record perused. The cheque, notice and complaint is within limitation. I am satisfied that a prima facie case is made out against accused under section 138 of NI Act. Hence accused be summoned on filing of PF and RC for 28-11-2001." 7. It is clear from the aforesaid order that the learned MM satisfied himself that the cheque, notice and complaint were within limitation. He also recorded that prima facie case was made out against the accused under section 138. 8. This petition is filed by two persons summoned, who are accused Nos. 3 and 6 in the said complaint. They have challenged the summoning orders on two counts : (i)They do not deny that they were the directors of the company at one point of time. However, their submission is that they resigned for the directorship with effect from 20-9-2000. The company also submitted Form 32 with the Registrar of Companies ('RoC') on 14-11-2000. Since ....
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....9-2000 as alleged by them. For this they will have to produce necessary evidence and the matter can be thrashed out only during trial of the case on this aspect. I had the occasion to discuss this aspect of the matter in detail in the case of Saria Kumar (Dr.) v. Srei International Finance Ltd. [2006] 132 DLT 363. I may mention here that the petitioners had cited judgment of Madras High Court in the case of S.B. Shankar v. Amman Steel Corporation [2002] II BC 351, wherein the court acted upon Form 32 because "the same has not been disputed by the counsel for the respondent/complainant" and, therefore, in the facts of this case that judgment also shall have no implication. (ii)Coming to the second contention raised by the learned counsel for the petitioners, it was vehemently argued by Mr. Neeraj Kaul, learned senior counsel appearing for the petitioners, that there have to be specific allegations in the complaint as to how the petitioners as directors were responsible for the day-to-day affairs of the company and mere reproduction of the language of section 141 would not suffice. For this what was necessary was to state the role assigned to such directors in the complaint in ....
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....f 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 firm.' 10. Thus, section 141 extends such criminal liability in case of a company to 'every person', who, at the time of the offence, was in charge and was responsible for the conduct of the business of the company. Sub-section (1), by using the expression 'every person' does not limit this vicarious liability only to directors, managers, secretary, etc. Any person who meets the test of his being responsible for the conduct of the business of the company and being in charge of the company can be held liable. Sub-section (2) of section 141, however, makes specific provision in the case of any director, manager, secretary or other officer of the company. This is a deeming provision starting with non obstante clause, i.e. irrespective of what is stipulated in sub-section (1) of section 141. It stipulates that any director, manager, secretary or other officer of the company shall also be deemed to be guilty of the offence if it is proved that the offence has been committed with the consent or connivan....
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.... Neeta Bhalla [2005] 8 SCC 89, in the following terms : "4. . . . Section 141 contains conditions which have to be satisfied before the liability can be extended to officers of a company. Since the provision creates criminal liability, the conditions have to be strictly complied with. The conditions are intended to ensure that a person who is sought to be made vicariously liable for an offence of which the principal accused is the company, had a role to play in relation to the incriminating act and further that such a person should know what is attributed to him to make him liable. . . ." (p. 96) 12. It may be stated at the outset that initial burden is on the complainant to show that 'accused person' was in charge of and responsible for the affairs of the company and in case accused is a director, then either he was in charge of and responsible to the company for the conduct of its business or the offence had been committed with his consent or connivance or is attributable to any neglect on his part. Therefore, the first requirement is that there have to be necessary averments in this behalf in the complaint. If, there is no such averment at all in the complaint and a person....
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....tributable to any neglect on the part of the said petitioners." 14. However, difficulty arises when the complainant states that the concerned accused was director and also makes averment that he was in charge of and responsible for the conduct of its day-to-day business, but does not make any further elaboration as to how he was in charge of and responsible for the day-to-day conduct of the business. The question would be as to whether making this averment, namely, reproducing the language of sub-section (1) of section 141 would be sufficient or something more is required to be done, i.e., is it necessary to make averment in the complaint elaborating the role of such a director in respect of his working in the company from which one could come to a prima facie conclusion that he was responsible for the conduct of the business of the company. 15. Before the decision of the Supreme Court in SMS Pharmaceuticals Ltd.'s case (supra) (which I shall advert to and discuss in detail at the appropriate stage) the trend in case law shows parallel thinking in either direction. One line of cases indicate that once there is an imputation made to the effect that the concerned director/perso....
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.... Finance Ltd. v. R.S. Aggarwal [2003] 10 SCALE 1000, did not agree with the reasoning given in Smt. Katta Sujatha's case (supra), and referred the matter to a Larger Bench after formulating the following three questions : (a)Whether for purposes of section 141, it is sufficient if the substance of the allegations read as a whole fulfil the requirements of the said section and it is not necessary to specifically state in the complaint that the persons 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 the cheque and/or the managing directors or joint director who admittedly would be in charge of the company and responsible to the company for conduct of its business could be proceeded against. However, the Larger Bench of the Supreme Court could not decide these three questions as the matter bet....
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....ctors, the Apex Court opined that a person may be a director in a company but he may not know anything about the day-to-day functioning of the company. As a director he may be attending meetings of the Board of directors of the company where usually they decide policy matters and guide the course of business of the company. It may be that a Board of directors may appoint sub-committees consisting of one or two directors out of the Board of the company who may be made responsible for the day-to-day functioning of the company. These are matters which form part of the resolution of the Board of directors of a company. Nothing is oral and the position in this respect was summarized in the following manner : "9. What emerges from this is that the role of a director in a company is a question of fact depending on the peculiar facts in each case. There is no universal rule that a director of a company is in charge of its every day affairs. We have discussed about the position of a director in a company in order to illustrate the point that there is no magic as such in a particular word, be it director, manager or secretary. It all depends upon the respective roles assigned to the offic....
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....inal 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 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. 18. In view ....
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....case of Sabitha Ramamurthy v. RBS Channabasavara [2006] 75 CLA 16, observing that matter has been set at rest by the Supreme Court in SMS Pharmaceuticals Ltd.'s case (supra). View of Delhi High Court 23. Even before the Supreme Court set at rest the controversy, predominant view in most of the judgments of this Court was that mere bald allegation that a particular person/director was responsible for the conduct of business of the company would not be sufficient and it was necessary to plead as to how he was so responsible. This is the view taken in the case of Rachna Kapoor v. State (NCT) of Delhi [2005] 121 DLT 431. This view was reiterated in Everest Advertising (P.) Ltd. v. State [2005] 124 DLT 353, after referring to the various judgments of the Supreme Court. The court drew the ratio therefrom in the following words: "10. . . If a director or other officer is necessarily covered by sub-section (1) of section 141 he need not have been mentioned again in sub-section (2) of that section. It is clear that a director or other officer can be prosecuted when he is covered by sub-section (2) of section 141. In the alternative, he can be prosecuted if he is a person in charge ....
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....the complainant to plead how such person was so responsible inasmuch as being an outsider he could not know the internal management of the company. However, that is not correct position in law in view of SMS Pharmaceuticals Ltd.'s case ( supra). 25. The same view was taken by the High Courts of Madras, Bombay and Andhra Pradesh. The view of Andhra Pradesh High Court is reflected in SMS Pharmaceuticals Ltd.'s case (supra), which was taken in appeal before the Supreme Court in SMS Pharmaceuticals Ltd.'s case (supra). In the case of Dr. O. P. Mehra v. Mansi Finance (Chennai) Ltd. [2001] 43 CLA 374 (Snr.) 16 (Delhi), the Madras High Court held that simple bald allegations in the complaint that accused directors are managing the accused company and were jointly and severally liable for the dishonour of the cheque would not satisfy the requirement of section 141. Identical view of the Bombay High Court is contained in its judgment in the case of Chaitan M. Maniar v. State of Maharashtra [2004] 61 CLA (Snr.) 3. Thus, many High Courts have taken the same view, which is now reinforced by the Supreme Court in SMS Pharmaceuticals Ltd.'s case (supra). Judgment of the Supreme Court in SMS Ph....
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....ch of the accused must be clearly stated in the complaint. Further, as already noted above, same is the view of not only this Court in various judgments, particulars whereof have been given above but also of Bombay High Court in Chaitan M. Maniar's case (supra), Karnataka High Court in Nucor Wires Ltd.'s case (supra), Kerala High Court in Biju Jacob v. Annie Mathew [2004] IV BC 35. 27. I may add here that it is also the principle laid down in some of the aforesaid judgments that while examining the matter from this angle, the Magistrate can take into consideration material on record suggesting that the accused was in overall control of business of the company. Purpose would suffice taking note, of the following observations of the Andhra Pradesh High Court in Neeta Bhalla's case (supra): "35. However, the learned counsel for the respondent-complainant contends that not only the complaint, but material made available along with the complaint also may have to be taken into consideration to find out as to whether any specific accusations such as is made against the persons arrayed as accused in the complaint. There is absolutely no difficulty whatsoever to agree with the said su....
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....t those documents available with the Registrar of Companies, which may throw light by spelling out the role the directors of a particular company are playing. Thus, the complainant is not in a helpless situation and can gather necessary material for the purpose of attributing role to a particular director/person while arraigning him as accused persons. However, tendency is to make all directors as accused whether they are active directors or not. It is for this reason that observations of the Supreme Court in SMS Pharmaceuticals Ltd.'s case (supra) become relevant where it is stated that since section 141(1) makes such persons vicariously liable by deeming provision, conditions contained in section 141(1) have to be strictly complied with by demonstrating that he "had a role to play in relation to the incriminating act" and further that "such a person should know what is attributed to him to make him liable". It may, however, be added here that if the complainant is able to show and there are imputation that such a person, who is director, manager, secretary or other officer of the company and the offence is committed with his consent or connivance or is attributable to any neglect....
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....ing of the accused. The Magistrate has to carefully scrutinize the evidence brought on record and may even himself put questions to the complainant and his witnesses to elicit answers in order 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. See Pepsi Foods Ltd. v. S. J. Magistrate, [1998] 28 CLA 4. No doubt, the Magistrate can discharge the accused at any stage of the trial if he considers the charge to be groundless, but the accused is entitled to approach the High Court under section 482 of the Cr.PC or article 227 of the Constitution to have the proceeding quashed against him when the complaint does not make out any case against him, instead of having to undergo the agony of a criminal trial. 32. After discussing the legal position and analysing the principles which have evolved, let me now deal with each case at hand. 33. Crl. MC No. 3514-15/2005. - In these cases the accused company is A S Impex Ltd. Mr. Arun Bhatia is impleaded as accused No. 2 in the capacity of managing director of accused No. 1-company. Other accused persons, namely, accused Nos. 3 to 6 are impleaded a....
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.... Sujata Bhatia and Sh. Anand Krishna (the petitioners herein), who are accused Nos. 3 to 5. The allegations qua them are identical as noted in the aforesaid complaints. In addition, the only averment made is that the cheques were signed by accused No. 2 and the accused Nos. 3 to 6 were aware of their liabilities. It is, thus, clear that apart from bald allegations that the petitioners were responsible for the conduct of day-to-day affairs of the company, nothing is produced on record to substantiate this averment nor any role is assigned to them. These petitions are accordingly allowed. The summoning orders qua the petitioners herein (accused Nos. 3 to 5) are quashed and the complaint qua them is dismissed. 35.1 The petition is disposed of. 36. Crl. MC Nos. 2914/04, 2915/04, 2831/04, 2913/04 & 2836/04. - Brig. H. S. Nanda (Retd.) (respondent herein) is the complainant, who has filed all these complaints against the same set of persons. Accused No. 1 is Premier Vinyl Flooring Ltd. Accused No. 2 was impleaded in the capacity of chairman and accused No. 3 as managing director. After filing of the complaint, accused No. 2 has died and, therefore, proceedings qua him have abated. ....
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.... above, accused No. 4 Sh. A. K. Goenka, as per the letters dated 23-4-1996 and 13-6-1996 is also liable for prosecution in his personal capacity." 36.1 From the aforesaid, it is clear that while accused Nos. 2 and 3 are impleaded as the chairman and the managing director respectively, in respect of accused Nos. 4 to 10, what is stated is that "being the directors of accused No. 1, are all incharge of and responsible for the conduct of day-to-day business, functioning, management and decision-making of the company" and in that capacity, it is alleged, they are jointly and severally liable for the dishonour of the said cheques. There is no specific role attributed to accused Nos. 5 to 10 and the petitioner is one of them being accused No. 6. In respect of accused Nos. 2 and 3, there is no problem because of their designation. Further, specific role is mentioned about accused No. 3 as signatory of the cheque and accused No. 4 as the signatory as well as the person who had acknowledged the loan and delivered the shares by way of security. However, what is stated qua the other accused persons (accused Nos. 5 to 10) is that the cheques in question were signed "with the consent and kno....
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....qua him in the complaint. It is also contended that the complainant had filed suit for recovery and in the said suit decree has been passed on the basis of consent terms for a sum of Rs. 80 lakhs and after the passing of the decree there was no reason to continue with the complaint. It was also submitted that there was no pleading to the effect that any representation was made or assurance was given that the cheques in question given by the petitioner would be honoured. It was further pleaded that the petitioner was not party to the agreement on the basis of which consent decree had been passed nor had he signed the cheques. 37.1 As pointed out above, in the complaint the petitioner is impleaded as the chairman of the accused No. 1-company. Apart from that it is specifically pleaded in para 10 that the notice was served upon the accused persons categorically stating that in case payment is not received within 15 days, it would be deemed that they have committed the offence under section 138 read with section 141 of the NI Act. It is also specifically pleaded that the accused persons had mens rea to cheat the complainant and they had led the complainant to believe that they would....
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....o. 1 is a limited company having its office at the address mentioned in the cause title. The accused Nos. 2 to 6 are the directors of the accused No. 1, accused Nos. 7, 8 and 9 are the Vice-President (Finance), General Manager and Deputy General Manager of the accused No. 1 who are directly and actively involved in the financial dealings of the accused company with accused Nos. 2 to 9. Hence all the accused are liable for action under section 138 read with section 141 of the NI Act." 38.1 In para 5 of the complaint it is mentioned that notice was issued to all the accused persons after dishonour of the cheque and it was specifically stated that if they fail to make payment within 15 days of the receipt of the said notice, they shall be deemed to have committed offence under section 138 read with section 141 of the NI Act. It is further alleged that all the accused persons received the notice but failed to make the payment. Further averments made qua the petitioners are in paras 11 and 13 of the complaint, which read as under : "11. The complainants state that the accused had mens rea to cheat the complainants inasmuch as all the accused deceived the complainants into believin....
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....ly and actively involved in the financial dealings of the accused company, no specific particulars are stated as to how they are involved and allegations are of general nature. Though it is alleged that legal notice demanding the amount was sent and in spite thereof they have not made the payment, record shows that demand notice is addressed only to accused No. 1 and accused No. 3. Therefore, there is no separate notice sent to these persons and, thus, there was no occasion for them to reply. Notice to the accused company may be notice to the directors as well. However, when accused Nos. 7 and 8 are only employees of the accused No. 1-company and are impleaded in that capacity, the ingredients of sub-section (1) of section 141 of the NI Act are to be satisfied and for lack of necessary averments in this behalf, the complaint against these two persons also cannot be maintained. Summoning orders against these two persons, therefore, shall also be quashed and the complaint qua them is dismissed. 38.5 As a consequence of the aforesaid discussion, Crl. MC Nos. 658/2003 and 662/2003 are allowed and the summoning orders are quashed against the petitioners therein, viz., Mr. Deepak Rawa....
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....lowed. I may mention that Mr. V.K. Vora (petitioner herein) had filed petition seeking quashing of summoning orders, which was allowed by this Court vide order dated 10-10-2002 and the respondents filed SLP thereagainst in which leave has been granted by the Supreme Court vide order dated 8-9-2003 and operation of the order dated 10-10-2002 is also stayed. However, in view of the subsequent case law and particularly, the judgment of the Supreme Court in SMS Pharmaceuticals Ltd.'s case (supra), in the year 2005, I have applied the principles laid down by the Supreme Court in that case as per which the petition of Mr. V.K. Vora warrants to succeed. This petition is accordingly allowed and the summoning order qua the petitioner Mr. V.K. Vora is quashed. Crl. MC No. 2746/2004 47. In this case the complaint is against VHEL Industries Ltd., which is accused No. 1. Accused Nos. 2 to 4 are the directors. Accused No. 5 is the Executive Director. Accused No. 6 is stated to be President, Cable Division and accused No. 7 is general manager (F&A) of the accused No. 1-company. The petition is filed by accused No. 7 Mr. N.K., general manager (F&A). Since he is a director, naturally he is so....
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....of SMS Pharmaceuticals Ltd.'s case (supra), I have no option but to quash the summoning order qua the petitioner. Accordingly, the summoning order against the petitioner is quashed and the complaint qua him is dismissed. 47.3 The petition is disposed of. Crl. MC Nos. 6268, 6284, 6285,6286, 6287, 6288, 6289, 6290, 6291, 6292, 6293, 6294, 6295, 6390, 6393, 6433, 6434, 6435, 6436, 6437, 6439 & 6440/2005 48. These petitions are filed by the petitioner Mukesh Punjwani challenging the summoning orders passed in different complaints filed by the complainants under section 138 read with section 1 of the Negotiable Instruments Act. Since similar issue is involved in all the aforementioned cases and law in respect thereto has been discussed by me in detail heretofore, facts of Crl. MC No. 6286/2005 are stated for the sake of brevity. 48.1 Complainant in this case is Associate India Financial Services Ltd. Accused No. 1 is Brown Paper Technologies Ltd., which was earlier known as Shirke Paper Mills Ltd. Loan-cum-Hire Purchase Agreement No. 363873, dated 21-3-2001 was entered into and loan was advanced by the complainant under the said agreement, which was to be paid in 36 monthly ....
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.... effect from 7-1-2004 whereas the cheques in question are issued thereafter, which were dishonoured and, therefore, as on the date of issuance of cheque or the date when they were got dishonoured the petitioners were not the directors. It is also their case that apart from the bald averment that they are incharge of and responsible for the conduct of day-to-day affairs of the company, no specific role has been assigned. Photocopies of the certified copies of Form 32 submitted with the Registrar of Companies are filed as per which, they were appointed as directors on 6-12-2003 and they resigned with effect from 7-1-2004. These certified copies of Form 32 are to be given credence, which would show that they were directors hardly for one month. Further, part from reproducing the language of section 141(1) of the NI Act alleging that they were responsible for the affairs of the company, no material has been produced in support thereof. These petitions are accordingly allowed and the complaint qua these petitioners is hereby quashed. Crl. MC No. 4257/2000 50. DCM Financial Services Ltd. is the complainant in this case and accused No. 1 is Perfect Drugs Ltd. Accused Nos. 2 to 7 are....
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.... As per the averments made in the complaints, accused No. 1 committed default in payment of equated monthly instalments as per the schedule agreed to by it in terms of the loan agreement. Rescheduling of the outstanding amount was done and at that time the accused No. 1-company gave certain post-dated cheques. These cheques were, dishonoured and on that basis, complaints in question are filed whenever after legal notice demand is not met. Apart from the company, Mr. H.B. Chaturvedi is impleaded as a chairman and managing director and Mr. Amit Chaturvedi as the Vice-Chairman/Director and Mr. Sanjay Chaturvedi as the Joint Managing Director. Accused Nos. 5 to 10 are the directors. The petitioner herein is accused No. 10 in all these complaints. In the complaint averments qua the accused persons are contained in para 3, which read as under : "The accused No. 1 is a company duly incorporated under the Companies Act, 1956 and having its registered office at 94, KM Stone, Delhi-Mathura Road, village Kotwan, Kosi Kalan, District Mathura, Uttar Pradesh. The accused No. 2 is the managing director and the accused Nos. 3 to 9 are directors of accused No. 1-company, who being incharge of ac....