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TMI Blog2017 (5) TMI 371X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. This application succeeds and is hereby allowed. The proceedings of the Criminal Case 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. - SPECIAL CRIMINAL APPLICATION (QUASHING) NO. 4377 of 2015 - - - Dated:- 25-4-2017 - MR. J.B.PARDIWALA, J. For The Applicant : MR ANUJ K TRIVEDI, ADVOCATE, For the Respondent : MR SIDDHARTHA SAMAL, ADVOCATE, MRS NISHA M PARIKH, ADVOCATE, MS. THAKORE, ADDL. PUBLIC PROSECUTOR ORAL JUDGMENT 1. Rule returnable forthwith. Ms. Thakore, the learned APP, waives service of notice of rule for and on behalf of the 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 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rements under Section 141. 15) In a catena of decisions, this Court has held that for 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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. 19. In view of the above discussion, our answers to the questions posed in the reference are as under: (a) It is necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponsible 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 require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 themselves in the management of the day-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rosecuted 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulars 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 the 100 branches could be made accused by simply making an allegation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efers to such Directors who have to retire (and may, subject to the Articles, be eligible for reappointment) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ector 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 company, i.e., owning two percent (2%) or more of the block ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainant 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 suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 armtwisting 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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