2016 (4) TMI 532 - SC - Indian Laws

Validity of issuance of summons under Section 138 of the Negotiable Instruments Act, 1881 - Held that - Person who commits an offence under Section 138 of the Act is a company, the company as well as other person in charge of or responsible to the company for the conduct of the business of the company at the time of commission of the offence is deemed to be guilty of the offence. Thus, it creates a constructive liability on the persons responsible for the conduct of the business of the company. It is apt to mention here that there are seven accused persons. Accused No.1 is the Company, accused Nos.2 and 3 are the Chairman and Managing Director respectively and accused Nos.6 and 7 were signatory to the cheques. As far as the accused Nos.4 and 5 were concerned, they were whole-time Directors and the assertion is that they were in charge of day to day business of the Company and all of them had with active connivance, mischievously and intentionally issued the cheques in question. Thus, considering the totality of assertions made in the complaint and also taking note of the averments put forth relating to the respondent Nos. 2 and 3 herein that they are whole-time Director and Executive Director and they were in charge of day to day affairs of the Company, we are of the considered opinion that the High Court has fallen into grave error by coming to the conclusion that there are no specific averments in the complaint for issuance of summons against the said accused persons. We unhesitatingly hold so as the asseverations made in the complaint meet the test laid down in Gunmala Sales Pvt. Ltd. (2014 (12) TMI 1116 - SUPREME COURT ).

Issues Involved:

1. Whether the High Court was correct in quashing the summons issued against the Executive Director and whole-time Director under Section 138 of the Negotiable Instruments Act, 1881.
2. Whether the complaint contained sufficient averments to hold the Executive Director and whole-time Director liable under Section 141 of the Negotiable Instruments Act, 1881.
3. Interpretation of Sections 138 and 141 of the Negotiable Instruments Act, 1881 concerning the liability of company directors.

Issue-wise Detailed Analysis:

1. Whether the High Court was correct in quashing the summons issued against the Executive Director and whole-time Director under Section 138 of the Negotiable Instruments Act, 1881:

The Supreme Court found that the High Court erred in quashing the summons against the Executive Director and whole-time Director. The High Court had quashed the summons on the ground that there were no allegations connecting the respondents with the affairs of the company. However, the Supreme Court observed that the complaint did contain specific averments regarding the roles and responsibilities of the accused, thereby making them liable under Section 138 of the Act. The Supreme Court emphasized that the High Court should not have exercised its inherent jurisdiction under Section 482 CrPC to set aside the order issuing summons.

2. Whether the complaint contained sufficient averments to hold the Executive Director and whole-time Director liable under Section 141 of the Negotiable Instruments Act, 1881:

The Supreme Court scrutinized the complaint and found that it contained necessary averments to hold the Executive Director and whole-time Director liable. The complaint stated that the accused were responsible for the day-to-day business of the company and had actively connived in issuing the cheques, which were dishonored. The Court referred to various precedents, including S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Gunmala Sales Pvt. Ltd. v. Anu Mehta, to conclude that the averments in the complaint met the requirements of Section 141 of the Act.

3. Interpretation of Sections 138 and 141 of the Negotiable Instruments Act, 1881 concerning the liability of company directors:

The Supreme Court elaborated on the interpretation of Sections 138 and 141 of the Act. Section 138 deals with the dishonor of cheques, while Section 141 deals with offenses by companies and the vicarious liability of directors and officers. The Court reiterated that for a director to be held liable under Section 141, the complaint must specifically aver that the director was in charge of and responsible for the conduct of the business of the company at the time the offense was committed. The Court referred to several judgments, including SMS Pharma I and II, to emphasize that merely holding a designation or office is not sufficient; the complaint must show the director's involvement in the conduct of the business.

Conclusion:

The Supreme Court allowed the appeals, set aside the High Court's order, and directed the learned Magistrate to proceed with the complaint cases in accordance with law. The Court held that the averments in the complaint were sufficient to hold the Executive Director and whole-time Director liable under Sections 138 and 141 of the Negotiable Instruments Act, 1881.

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