2022 (10) TMI 1135 - SC - Indian Laws

Dishonor of cheque - vicarious liability of director - it is alleged that all the Directors were conducting the business of CPPL and thus they were involved in the manufacturing process - HELD THAT - Merely because a person is a director of a company it is not necessary that he is aware about the day-to-day functioning of the company. This Court held that there is no universal rule that a director of a company is in charge of its everyday affairs. It was therefore necessary to aver as to how the director of the company was in charge of day-to-day affairs of the company or responsible to the affairs of the company. This Court however clarified that the position of a managing director or a joint managing director in a company may be different. This Court further held that these persons as the designation of their office suggests are in charge of a company and are responsible for the conduct of the business of the company. To escape liability they will have to prove that when the offence was committed they had no knowledge of the offence or that they exercised all due diligence to prevent the commission of the offence. This Court has held that merely reproducing the words of the section without a clear statement of fact as to how and in what manner a director of the company was responsible for the conduct of the business of the company would not ipso facto make the director vicariously liable. The learned Single Judge of the High Court held that though there was no formal order of issuance of process the record was sufficient to infer that the order of issue process was made - the order of issuance of process is not an empty formality. The Magistrate is required to apply his mind as to whether sufficient ground for proceeding exists in the case or not. The formation of such an opinion is required to be stated in the order itself. The order is liable to be set aside if no reasons are given therein while coming to the conclusion that there is a prima facie case against the accused. In the present case leaving aside there being no reasons in support of the order of the issuance of process as a matter of fact it is clear from the order of the learned Single Judge of the High Court that there was no such order passed at all. The learned Single Judge of the High Court based on the record has presumed that there was an order of issuance of process. We find that such an approach is unsustainable in law. The appeal therefore deserves to be allowed. Appeal is allowed.

Summary

Issues Involved:
1. Validity of the issuance of process by the Chief Judicial Magistrate (CJM).
2. Compliance with Section 34 of the Drugs & Cosmetics Act, 1940.
3. Role and responsibility of the Directors in the alleged offence.

Detailed Analysis:

1. Validity of the Issuance of Process by the Chief Judicial Magistrate (CJM):
The Supreme Court scrutinized the procedural correctness of the issuance of process by the CJM. The appellants argued that there was no formal order of issuance of process, which is a mandatory requirement. The Court noted that the High Court inferred the issuance of process from the record, which is insufficient. The Supreme Court emphasized that the Magistrate must apply their mind to determine if sufficient grounds exist for proceeding, and this must be explicitly stated in the order. The absence of a formal order and reasons for issuing the process rendered the issuance unsustainable in law.

2. Compliance with Section 34 of the Drugs & Cosmetics Act, 1940:
The appellants contended that the complaint lacked specific averments required under Section 34 of the Drugs & Cosmetics Act, which deals with the vicarious liability of directors and other officers. The Supreme Court reiterated that mere designation as a director does not automatically make one liable. There must be specific allegations showing how and in what manner the directors were responsible for the conduct of the business. The Court found that the complaint against the appellants lacked such specific averments, thus failing to meet the requirements of Section 34.

3. Role and Responsibility of the Directors in the Alleged Offence:
The Court examined the roles of the directors as per the complaint and found that the appellants were not managing directors or whole-time directors, which typically implies a higher degree of responsibility. The Court referenced multiple precedents, including the case of *State of Haryana vs. Brij Lal Mittal* and *S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla*, to underline that a director's mere association with the company does not suffice for liability. The complaint must detail the specific role and involvement of the directors in the day-to-day operations of the company. The Supreme Court concluded that the complaint did not adequately establish the directors' direct involvement or responsibility, thus failing to justify their prosecution.

Conclusion:
The Supreme Court allowed the appeal, quashing the orders of issuance of process and the subsequent orders of the Sessions Judge and the High Court. The complaint against the directors was dismissed due to the lack of specific averments and procedural lapses in the issuance of process. The case against the remaining accused would proceed as per the law.