2014 (12) TMI 1116 - SC - Companies Law

Dishonor of cheque - Directors at the time of commission of offence were in-charge or not Complaint u/s 138 r.w. 141 of NI Act Validity of assertions made - Whether the High Court was justified in quashing the proceedings initiated by the Magistrate on the ground that there was merely a bald assertion in the complaint filed under Section 138 r.w. Section 141 of the Negotiable Instruments Act 1881 that the Directors were at the time when the offence was committed in charge of and responsible for the conduct and day-to-day business of the accused-company Held that - The decision delivered in SMS Pharmaceuticals Ltd. Versus Neeta Bhalla 2005 (9) TMI 304 - SUPREME COURT OF INDIA holds good wherein it has been held that it is necessary to specifically aver in a complaint u/s 141 that at the time the offence was committed the person accused was in charge of and responsible for the conduct of business of the company. The Court quashed the complaint filed under Section 138 read with Section 141 of the NI Act relying on the certified copy of the annual return which was a public document as per the Companies Act read with Section 74(2) of the Evidence Act which established that the appellant/Director therein had resigned from the Directorship much prior to the issuance of cheques. High Court did not go into the second question raised before it as to whether the Director who has resigned can be prosecuted after his resignation has been accepted by the Board of Directors of the company. Pertinently in the application filed by the respondents no clear case was made out that at the material time the Directors were not in charge of and were not responsible for the conduct of the business of the company by referring to or producing any uncontrovertible or unimpeachable evidence which is beyond suspicion or doubt or any totally acceptable circumstances. It is merely stated that Sidharth Mehta had resigned from the Directorship of the company on 30/9/2010 but no uncontrovertible or unimpeachable evidence was produced before the High Court as was done in Anita Malhotra to show that he had in fact resigned long before the cheques in question were issued. Similar is the case with Kanhaiya Lal Mehta and Anu Mehta. Nothing was produced to substantiate the contention that they were not in charge of and not responsible for the conduct of the business of the company at the relevant time. In the circumstances we are of the opinion that the matter deserves to be remitted to the High Court for fresh hearing. It is however necessary for the High Court to consider the cases of other Directors in light of the decisions considered by us and the conclusions drawn by us in this judgment. However the order passed by the High Court quashing the process as against Shobha Mehta is upheld - Shobha Mehta is stated to be an old lady who is over 70 years of age - Considering this fact and on an overall reading of the complaint in the peculiar facts and circumstances of the case making her stand the trial would be an abuse of process of the court the order to the extent it quashes the process issued against Shobha Mehta is confirmed Decided partly in favour of appellant.

Issues Involved:
1. Whether the High Court was justified in quashing the proceedings initiated by the Magistrate based on the assertion in the complaint under Section 138 read with Section 141 of the NI Act.
2. Whether a Director who has resigned can be prosecuted after his resignation has been accepted by the Board of Directors of the Company.

Detailed Analysis:

Issue 1: Justification of Quashing Proceedings by the High Court
The key question was whether the High Court was justified in quashing the proceedings initiated by the Magistrate on the basis that the complaint contained merely a bald assertion that the Directors were in charge of and responsible for the conduct and day-to-day business of the accused company. The Supreme Court analyzed the necessity of specific averments in the complaint under Section 138 read with Section 141 of the NI Act.

Legal Precedents and Principles:
- The Court referred to several precedents, including SMS Pharmaceuticals Ltd. v. Neeta Bhalla (2005), which established that it is necessary to specifically aver in a complaint that the person accused was in charge of and responsible for the conduct of business of the company at the relevant time.
- K.K. Ahuja v. V.K. Arora (2009) reiterated that a Director's liability under Section 141 of the NI Act requires specific averments in the complaint.
- National Small Industries Corporation Limited v. Harmeet Singh Paintal (2010) emphasized that vicarious liability must be pleaded and proved, not inferred.

Court's Findings:
- The Supreme Court held that the basic averment in the complaint that the Director was in charge of and responsible for the conduct of the business of the company is essential for the Magistrate to issue process.
- The High Court's decision to quash the proceedings was based on the absence of specific details about the role of the Directors, which was deemed insufficient by the Supreme Court.
- The Supreme Court clarified that while the basic averment is necessary, the High Court has the discretion to quash the complaint if unimpeachable evidence or acceptable circumstances indicate that the Director could not have been concerned with the issuance of the cheques.

Issue 2: Prosecution of Resigned Directors
The High Court did not address the second question regarding the prosecution of a Director who had resigned, as it quashed the complaint based on the first issue.

Court's Findings:
- The Supreme Court noted that no clear evidence was presented to substantiate the resignation of Director Sidharth Mehta before the issuance of the cheques.
- The Court emphasized that if a Director can provide unimpeachable evidence of resignation, such as Form-32, the High Court may consider quashing the complaint.
- The Court confirmed the quashing of the process against Shobha Mehta, considering her age and the circumstances, but remitted the matter to the High Court for fresh consideration regarding other Directors.

Conclusion:
The Supreme Court set aside the High Court's order quashing the proceedings against Kanhaiya Lal Mehta, Anu Mehta, and Siddharth Mehta, remitting the matter for fresh consideration. The order quashing the process against Shobha Mehta was confirmed due to her age and circumstances. The High Court was requested to dispose of the matter expeditiously, considering the complaints were from 2011. The Supreme Court emphasized that the High Court should consider the merits independently and not be influenced by the Supreme Court's observations.

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