2008 (2) TMI 615 - HC - Companies Law

FIR seeked to be quashed - Complaint against Director - Held that - The offences with which the petitioners 13 are sought to be charged are all under the Indian Penal Code. On the strength of the law as explained by the Supreme Court, it has to be held that the mere statement that the petitioners were directors of the company without reference to their precise role at the time of the commission of offence would not be sufficient to attach criminal liability to them. The inevitable conclusion is therefore that the criminal proceedings against these directors are unsustainable in law. Accordingly, FIR No. 972 of 1998 registered at police station, Connaught Place, under section 406/409/420/ 120B of the Indian Penal Code and all consequential proceedings thereto including the charge sheet as far as the three petitioners here are concerned, hereby stand quashed.

Summary

Issues Involved:
1. Quashing of FIR No. 972 of 1998 and the criminal proceedings emanating therefrom.
2. Vicarious liability of directors under the Indian Penal Code (IPC).
3. Role and involvement of specific directors in the alleged offences.

Issue-Wise Detailed Analysis:

1. Quashing of FIR No. 972 of 1998 and the criminal proceedings emanating therefrom:

The petitions sought the quashing of FIR No. 972 of 1998 registered at Connaught Place police station under sections 406, 409, 420, and 120B of the IPC. The FIR was based on a complaint by Dr. Rakesh Oberoi against K.M. Capital Ltd. and its managing director for failing to repay fixed deposits and issuing dishonoured cheques. The police investigation led to a charge sheet filed on April 20, 2000, indicating that the company had collected Rs. 79,78,000 from 39 complaints and issued post-dated cheques that were dishonoured due to insufficient funds.

2. Vicarious liability of directors under the Indian Penal Code (IPC):

The principal ground for quashing the FIR was the non-applicability of vicarious liability to the directors under the IPC. The petitioners argued that, as per the Supreme Court's ruling in *Maksud Saiyed v. State of Gujarat*, there is no provision in the IPC similar to section 141 of the Negotiable Instruments Act, 1881, which attaches liability to persons in charge of the company's affairs. The Supreme Court had clarified that the IPC does not contain any provision for attaching vicarious liability to the managing director or directors when the company is the principal accused.

3. Role and involvement of specific directors in the alleged offences:

- Shri Ashok Sikka: The affidavit by the Investigating Officer (IO) revealed that Ashok Sikka was a director and tax consultant of K.M. Capital Ltd. from 1995 until his resignation in May 1997. The IO noted that Sikka attended board meetings and signed the company's prospectus, which was used to attract investors. However, the affidavit did not indicate any involvement in the acceptance of deposits or the dishonour of cheques post his resignation.

- Shri V.H. Pandya: The IO's affidavit stated that Pandya was a director from 1994 until his resignation on June 25, 1997. He signed the company's prospectus and was highlighted in publicity materials to attract investors. Similar to Sikka, there was no evidence of Pandya's involvement during the period when the company defaulted on repayments or issued dishonoured cheques.

- Shri Bhaskar Joshi: Although a common petition was filed by Pandya and Joshi, there was no specific affidavit filed by the IO regarding Joshi's role.

The court observed that the affidavits did not provide sufficient evidence of the petitioners' involvement in the offences at the time of the company's default. The cheques were dishonoured after their resignations, and the mere fact that they were directors or signed the prospectus was insufficient to attach criminal liability.

Conclusion:
Based on the Supreme Court's ruling in *Maksud Saiyed v. State of Gujarat*, the court held that the mere statement of the petitioners being directors without reference to their precise role at the time of the offence was insufficient to attach criminal liability. Consequently, the criminal proceedings against the petitioners were deemed unsustainable in law. The FIR No. 972 of 1998 and all consequential proceedings, including the charge sheet, were quashed as far as the three petitioners were concerned. The petitions were allowed with no order as to costs, and the trial court record was ordered to be sent back immediately.