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TMI Blog2016 (6) TMI 726X X X X Extracts X X X X X X X X Extracts X X X X ..... OF INDIA], the Supreme Court has explained the vicarious liability of persons of the company. In view of the aforesaid dictum of law explained by the Supreme Court, the other accused who have been arrayed as accused by virtue of Section 141 of the N.I. Act could not be held liable. 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 and make enquiries and ascertain the fact as to whether a particular Director was incharge of and responsible to the affairs and conduct of the business of the company. Routinely roping in all the Directors by merely repeating the words used in Section 141 of the N.I. Act without ascertaining the facts is a serious mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ah is an authorized person so far as the business of the partnership firm is concerned. Both Shri Bharat B. Shah and Shri Chimanlal B. Shah are brothers. 2.2 The Gujarat Pipavav Port Limited (original accused No.1) is a company incorporated under the Companies Act. The accused Nos.2 to 19 shown in the complaint are the Directors and other Office Bearers of the company. 2.3 Sometime in the decade of early 90 s, the company started constructing a Jetty at the Pipavav Port. An agreement was entered into between the complainant firm and the accused company for supply of Steel, Cement, etc for the purpose of the construction of the Port. 2.4 At the relevant point of time i.e. the applicant of the Criminal Miscellaneous Application No.968 of 2014, in his capacity, as the Managing Director and Vice President of the company issued a blank signed cheque in favour of the complainant firm as a security. 2.5 In the course of the business transactions, a dispute arose between the accused company and the complainant firm. The complainant firm preferred three Special Civil Suits Nos.35 of 2000, 36 of 2000 and 37 of 2000 in the Court of the Civil Judge, Senior Division, Amreli, for rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings initiated for the offence punishable under Section 138 of the Negotiable Instruments Act. 3 At the outset, I may state that the learned counsel appearing for the complainant very fairly made a statement that the criminal proceedings may be quashed so far as the following applicants of the Criminal Miscellaneous Application No.1067 of 2014 and Criminal Miscellaneous Application No.1756 of 2014 are concerned. A pursis in writing duly signed by the advocates on record was tendered before this Court. The details are as under: Criminal Miscellaneous Application No.1067 of 2014 1. Christian Moller Laursen (petitioner No.1 and original accused No.5) 2. Luis Miranda (petitioner No.3 and original accused No.8) Criminal Miscellaneous Application No.1756 of 2014 1. Mr. Sunil Chawla (petitioner No.1 and original accused No.11) 2. Mr. Anup Sheth (petitioner No.2 and original accused No.10) 3. Dinesh Kumar Lal (petitioner No.3 and original accused No.7). 4 The aforesaid concession at the end of the complainant was given on the ground that at the time when the offence is alleged to have been committed, they were no way concerned with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... livery of cement and iron and other materials to you No.1 by our clients, You No.1 through You No.2 have issued to our clients cheques signed in blank including cheque No.839170 drawn on Dena Bank, Industrial Finance Branch, Bombay400 005. The said cheques were given by way of security towards payment of the price of the said goods sold and delivered by our clients to You No.1 from the office of our clients from Mahuva. Thye said cheques were signed by You No.2 as Director and on behalf of You No.1 . 10 In the reply to the statutory notice issued by the complainant, the following was informed by the drawer of the cheque, namely, Shri Gandhi. 2.1 That the Management of Gujarat Pipavav Port Limited (hereinafter referred to as GPPL Company , for short) has been changed with effect from 30.5.2005 and the said GPPL Company was taken over by A.P. Moller Group upon purchase of shares and execution of Transfer Agreement and since then, GPPL Company is run and managed by said A.P. Moller Group and our clients i.e. Mr. Nikhil P. Gandhi and Mr. Sunil Tandon have ceased to be the Director and the Managing Director respectively of the said GPPL Company. Please note that Mr. Sunilt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e simple reason that he has already resigned as Director of GPPL Company and h is resignation was duly accepted and acted upon with effect from 13.4.2005 by GPPL Company. It is under these circumstances, either the signature of Mr. Nikhil Gandhi is forged by your client or the negotiable instrument (cheque) is not negotiable under the provisions of the Negotiable Instruments Act, 1881 being time barred, has been misused by your client by writing the date on which the instrument. Our clients have further instructed us to state that even the Account from which the said cheque was alleged to have been issued was also closed long back by the new Management of GPPL Company. Therefore, your client ought not to have utilized the said cheque for the simple reason that the dispute between the parties is still pending before the Civil Court, claims and counter claims are yet to be adjudicated, liabilities of any of the parties have still to be determined by the Civil Court and, therefore, there is not question of issuance of a cheque dated 25.3.2013 of the alleged amount by our client in favour of your client. Your client, with mala fide intention and ulterior motive to abuse the process of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losure of Bank A/c: 1772008 (iv) Date of Cheque drawn by Nikhil Gandhi : 2532013 CRIMINAL MISCELLANEOUS APPLICATION NO.1754 OF 2014 Petitioner No.: Gujarat Pipavav Port Ltd Petitioner No.2: Prakash Tulsiani (Managing Director) Date of Appointment : 2812009 CRIMINAL MISCELLANEOUS APPLICATION NO.1755 OF 2014 Petitioner No.1 Mr. Pravain K Laheri (NonExecutive Director) Date of Appointment : 2982008 till date. Petitioner No.2 Pradeep Srikrishna Mallick (NonExecutive Director) Date of appointment : 492012. Petitioner No.3 Rabinda Gaitonde (Chief Operating Officer) Date of appointment : 1122008 till date. Petitioner No.4 Hariharan Iyer (Chief Financial Officer) Date of appointment : 152009 till date. Petitioner No.5 C.S. Venkiterswaran (Financial Controller) Date of appointment : 26112001 to 632009 CRIMINAL MISCELLANEOUS APPLICATION NO.1756 of 2014 Petitioner No.1 Mr. Sunil Chawla (Nominee Director) Date of Appointment : 2292006 Date of Retirement : 15122009. Petitioner No.2 Anoop Kishore Sheth (NoneExecutive Director) Date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t shall be presumed that every negotiable instruments bearing a date was made or drawn on such date. 18 Mr. Nanavati submitted that the presumption which is available in the law, by virtue of Section 139 of the N.I. Act, that the holder of the cheque received the cheque of the nature referred to in Section 138 for the discharge, in whole or in part, or any debt or other liability, could be said to have stood rebutted on the face of the admission made by the complainant in the complaint itself that the instrument was handed over by way of security. 19 Mr. Nanavati submitted that filling up of a signed blank, after a period of almost seventeen years, without the consent of the company or the the drawer of the cheque and without any implied authority, would amount to material alteration, as explained in Section 87 of the N.I. Act. 20 Mr. Nanavati, in support his submissions, placed reliance on two decisions of the Supreme Court (1) D.C.M. Financial Services Limited v. J.N. Sareen and another [2008 (8) SCC 1] and (2) Indus Airways Pvt Ltd v. Magnum Aviation Private Limited [2014 (2) 12 SCC 539]. 21 Mr. Nephde, the learned senior advocate appearing for some of the accus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheque, yet his client had the implied authority to fill up the signed blank cheque and present it for the purpose of encashment. He vehemently submitted that a signed blank cheque would remain a bill of exchange till the date is filled up in the said instrument. 29 Mr. Ponda submitted that the drawer of the cheque cannot absolve himself from the liability only on the ground that he ceased to be the Managing Director of the company in the year 2005. According to Mr. Ponda, although he ceased to be the Managing Director much before the cheque was filled up and presented, yet being the drawer, his liability would continue. 30 Mr. Ponda submitted that except the few Directors for whom he gave concession to quash the complaint, all other accused could be said to be liable for the dishonour of the cheque by virtue of Section 141 of the N.I. Act. 31 Mr. Ponda submitted that there are highly disputed questions of fact which will have to be considered by the trial Court on the basis of the evidence that would be led oral as well as documentary. He submitted that having regard to the limited scope of interference in exercise of the inherent powers under Section 482 of the Cr.P.C., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the N.I. Act? (iii) Is there an implied authority to a person who receives a signed blank cheque leaf to fill up the same showing any amount as he likes? (iv) Whether the presumption under Section 139 of the Act could be said to have stood rebutted by the admission in the complaint itself that the blank signed cheque was issued by way of security? (v) A person who had resigned as the Managing Director with the knowledge of the complainant in 2005 could be said to be a person incharge of the company in 2013 when the cheque was dishonoured? Whether it could be said that the drawer of the cheque, who ceased to be the Director eight years before the dishonour, had no say in the matter of seeing that the cheque is honoured? Whether he could have asked the company to pay the amount? (vi) Whether mere reproduction of the wordings of the Section 141(1) of the N.I. Act in the complaint is sufficient to make a person liable to face prosecution for the dishonour of the cheque? ● DISCUSSION: THE ISSUE AS REGARDS SECTIONS 20 AND 87 OF THE NEGOTIABLE INSTRUMENTS ACT : 36 Section 20 of the N.I. Act reads as under: 20. Inchoate stamped instruments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of two different persons. One is the right given to the holder of the document, the person who is in possession of the document, the document being an inchoate document, and that right is the right to complete it. The other right conferred is upon the holder in due course, and that right is that even though the holder in due course might come in possession of a negotiable instrument which was not wholly completed by the maker, he has the same right against the maker as if he had himself written out the whole of the document, if the document has been completed by a person who has come into possession of it as contemplated by Section 20. Therefore, a person who permits an incomplete document to go out into the world by giving and delivering it to any person, takes the risk of having to discharge the liability, which may be provided under the document by the amount being filled in, to the person who bona fide and for consideration comes into possession of that document. That seems to be the scheme of Section 20. [See: Tarachand Kevalram v. Sikri Brothers, AIR 1953 Bom 290] 38 Thus, to constitute an inchoate stamped instrument within the purview of Section 20 Negotiab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and and it includes the electronic image of a truncated cheque and a cheque in the electronic form. Explanation I. For the purposes of this section, the expressions( a) a cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system; (b) a truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. Explanation II. For the purposes of this section, the expression clearing house means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.] 40 Section 5 of the N.I. Act defines a bill of exchange as under: A bill of exchange is an instrument in writing containing an unconditional order, sig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would not apply to a cheque. I may quote the observations in paras 14 and 15 as under: 14. Learned counsel for the plaintiff then argued that even the case of the fourth defendant is that he had entrusted cheque duly signed by the fourth (defendant) and the fourth defendant was authorised to issue the cheque on behalf of the Firm. He relied on Section 20 of the Negotiable Instruments Act and contended that on the basis of that the defendants are estopped from denying their liability under the cheque. So far as Section 20 of the Negotiable Instruments Act is concerned, according to us, it does not apply because Section 20 applies only with regard to inchoate negotiable instruments. So far as the cheques are concerned, they don't require any stamp under the Stamp Act in force. 15. The Lahore High Court in Dower v. Sohan Lal, AIR 1937 Lahore 816 have held that insofar as the cheque do not require to be stamped , Section 20 of the Negotiable Instruments Act is not applicable. Learned counsel for the plaintiff then submitted that even if the principles under Section 20 of the Negotiable Instruments Act do not apply, the general principles of law of estoppel will apply. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... showing the actual amount payable by the drawer of the cheque to the other party, then also it can be said that there was the implied authority to fill up the signed blank cheque leaf. There may be such instances where the sum is ascertainable and the signed blank cheque leaf is given to fill up the same after ascertaining the same. In such cases there would be no difficulty to infer an implied authority given by the drawer. Simply because the cheque is seen filled up or written in the hand writing of another person it cannot lead to a conclusion that only a signed blank cheque leaf was given. The person signing the cheque may have difficulty due to many reasons to write the cheque and it might have been filled up by the payee or by another. In such cases it cannot be said that what was handed over was only a signed blank cheque leaf. In all such cases the ultimate conclusion may depend upon the proof of the transaction and execution of the instrument. It must also be held that when it is a case that only a signed blank leaf was handed over by the accused, then he must offer satisfactory explanation as to the circumstances under which the signed blank cheque happened to be handed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no clear provision in the Negotiable Instruments Act, in the light of the above discussion, the court finds that if a drawer of a cheque gives authority to the payee or holder in due course or a stranger for that matter to fill up the cheque signed by him, such an instrument also is valid in the eye of law. There is no bar for the drawer of a cheque to give authority to a third person to fill up the cheque signed by him for the purpose of negotiating the same. 49 A learned Single Judge of this Court in the case of Hitenbhai Parekh Proprietor Parekh Enterprises v. State of Gujarat [2009(3) GLH 742] has elaborately explained Section 20 of the N.I. Act. 9.1 Any material alteration of a negotiable instrument, however, renders it void as against any one who is a party thereto at the time of making such alteration and does not consent thereto, unless the alteration was made in order to carry out the common intention of the original parties. The provision to that effect contained in section 87 has to be read in harmony with section 20 which permits and authorizes the holder of a negotiable instrument to complete the instrument for any amount and renders the drawer liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e all the legal consequences of dishonour of a cheque proper. 50 In view of the aforesaid discussion, I am of the view that Section 20 of the N.I. Act would not save the situation as such for the accused applicants. The collective reading of the various provisions of the N.I. Act shows that even under the scheme of the N.I. Act, it is possible for the drawer of a cheque to give a blank cheque signed by him to the payee and consent either impliedly or expressly to the said cheque being filled up at a subsequent point in time and present the same for payment by the drawee. 51 The first three questions are answered accordingly. ● EXISTING DEBT OR ANY OTHER LEGAL LIABILITY : 52 Let me now proceed further to consider whether there was any existing debt or any other legal liability at the time when the blank signed cheque was handed over to the complainant. I take notice of the fact that the cheque in question was not even a postdated cheque. If it would have been a postdated cheque, it would have remained as a bill of exchange till the date shown on the cheque, and thereafter, it would have assumed the character of a cheque, but in the instant case, except the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the Civil Court is yet to fix the liability, the complainant, on the strength of the report of the Chartered Accountants, misused the blank signed cheque. The account, on which the cheque was drawn, already stood closed on 17th July 2008 after the new management took over the company. By the time the new management took over, the drawer of the cheque had ceased himself to be the Director in the year 2005. The account on which the cheque was drawn was not closed upon the instructions issued by the drawer, but the same was upon the instructions of the new management. 56 In such circumstances referred to above, I find it extremely difficult to fasten any liability under Section 138 of the N.I. Act. 57 Mr. Ponda vehemently submitted that even if a cheque is issued by way of security, and if such a cheque is dishonoured, the Section 138 would be attracted. This submission is sought to be fortified by the decision of the Supreme Court in the case of I.C.D.S. Limited (supra) . In that case, the husband of the accused/respondent No. 1 had obtained a car under a hire purchase agreement from the complainant. The accused was a guarantor for payment of the amount by her husband and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried away by the issue of guarantee and guarantor's liability and thus has overlooked the true intent and purport of Section 138 of the Act. The judgments recorded in the order of the High Court do not have any relevance in the contextual facts and the same thus do not lend any assistance to the contentions raised by the respondents. 58 The Supreme Court in I.C.D.S. Limited (supra) c onsidered the provisions of the law and held that when the cheque is issued by the guarantor in discharge of such other liability, the provisions of section 138 are applicable. In fact, Section 138 itself specifically provides that the cheque should have been issued by a person for the discharge of any debt or other liability. The guarantor may not be himself a debtor but he guarantees the repayment of the loan taken by the principal debtor. By giving such a guarantee, the guarantor incurs a liability towards the creditor and for the discharge of that liability, if he issues a cheque, he will be covered by the provisions of Section 138. As the cheque was issued for the discharge of other liability case would be covered by Section 138. 59 In Indus Airways Private Limited (supra) , th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Balaji Seafoods Exports (India) Ltd v. Mac Industries Ltd [1999 (1) CTC 6 (Mad)], the Madras High Court held: Section 138 of the Negotiable Instruments Act makes it clear that where the cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence under Section 138 of the Act. The explanation reads that for the purposes of this section, debt or other liability means a legally enforceable debt or liability. 13. The Kerala High Court in Ullas Supply House v. Ullas [2006 CriLJ 4330(Ker)] had an occasion to consider Section 138 of the N.I. Act. In that case, the postdated cheque was issued by the accused along with the order for supply of goods. The supply of goods was not made by the complainant. The accused f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offence stands defeated. The purpose of making or enacting Section 138 of the N.I. Act was to enhance the acceptability of cheque in settlement of commercial transactions, to infuse trust into commercial transactions and to make a cheque as a reliable negotiable instrument and to see that the cheques of business transactions are not dishonoured. The purpose of Negotiable Instrument Act is to make an orderly statement of rules of law relating to negotiable instruments and to ensure that mercantile instruments should be equated with goods passing from one hand to other. The sole purpose of the Act would stand defeated if after placing orders and giving advance payments, the stop payments are issued and orders are cancelled on the ground of pricing of the goods as was done in this case. 15. The above reasoning of the Delhi High Court is clearly flawed inasmuch as it failed to keep in mind the fine distinction between civil liability and criminal liability under Section 138 of the N.I. Act. If at the time of entering into a contract, it is one of the conditions of the contract that the purchaser has to pay the amount in advance and there is breach of such condition then purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot a demand which may or may not come into existence; coming into existence being contingent upon the happening of an event. 62 A learned Single Judge of the Karnataka High Court in the case of M/s. Shreyas Agro Services Pvt Ltd v. Chandrakumar [2006 Criminal Law Journal 3140] considered almost an identical issue which I am called upon to decide. A learned Single Judge of the High Court even considered the Supreme Court decision in I.C.D.S. Limited (supra ). Considering the same, the learned Single Judge held in paras 3, 4 and 5 as under: 3. The very scheme of procedure adopted shows that the cheques are not issued in respect of any current existing ascertained liability. The words for discharge of any debt or other liability in Sec. 138 of N.I. Act should be interpreted to mean current existing or past ascertained liabilities. The cheque issued in respect of future liabilities not in existence as on the date of cheque would not attract prosecution u/S. 138 of N. I. Act. 4. The decision of the Supreme Court in I.C.D.S. Ltd. v. Beena Shabeer, ILR 2003 Kar 4373 : (AIR 2002 SC 3014) has no application to the facts of the present case. In the said case the cheque was is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lank cheque as such was misused by the complainant after almost a period of seventeen years. Such misuse can be inferred from the indirect threats given in the statutory notice itself that if the amount is not paid, then the complainant would fill up the signed blank cheque and present the same for its encashment. In the year 2013, neither the accused i.e. the drawer of the cheque was the Managing Director of the company or in any way concerned with the company nor the account on which the blank signed cheque was drawn in existence. In such peculiar circumstances, it is difficult to fix the strict liability under Section 138 of the N.I. Act on the drawer of the cheque. 64 As on date, there may be a report of the Chartered Accountants fixing some liability on the accused company to be discharged towards the complainant, but the report of the Chartered Accountants cannot be termed as final. The civil suits are still pending, and are yet to be adjudicated. 65 I also take notice of the two decisions of the Supreme Court, which are helpful to the drawer of the cheque. 66 In D.C.M. Financial Services (supra), the cheque in question was a postdated one. It was drawn in 1995 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Board of Directors and the nature and extent of its business and its memorandum or articles of association. 23. When post dated cheques are issued and the same are accepted, although it may be presumed that the money will be made available in the bank when the same is presented for encashment, but for that purpose, the harsh provision of constructive liability may not be available except when an appropriate case in that behalf is made out. 24. Section 140 of the Act cannot be said to have any application whatsoever. Reason to believe on the part of a drawer that the cheque would not be dishonoured cannot be a defence. But, then one must issue the cheque with full knowledge as to when the same would be presented. It appears to be a case where the appellant has taken undue advantage of the post dated cheques given on behalf of the company. The statute does not envisage misuse of a privilege conferred upon a party to the contract. Submission of Mr. Patwalia made in view of the decision of this Court in Adalat Prasad v. Rooplal Jindal and Others [(2004) 7 SCC 338] is misplaced. Had such a contention been raised even in terms of Adalat Prasad (supra), the respondents coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of repayment of the fixed deposit. Those four cheques were issued in the name of the complainant and were drawn on the account of the company under the signature of the accused. The accused had not drawn such cheques in her personal capacity, but in her capacity as the Managing Director of the said company. The cheques were postdated whereby the due date was 13th July 1999. The accused resigned from the company, both as Director as well as Managing Director. In such circumstances, this Court held in paras 9 and 10 as under after considering the decision of the Supreme Court: 9. The short contention raised on behalf of the present applicant [accused No.1] is that even according to the complainant, the offence is committed by the company and the accused No.1 is only liable on account of her position as Managing Director of the company. On a plain reading of section 141 of the Negotiable Instruments Act, it becomes obvious that every person at the time the offence was committed, was in charge of and was responsible to the company shall be deemed to be guilty of the offence....... On the facts of the case, it is an admitted position that the offence was committed [u/s 138] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the company when the cause of action in fact accrued against the company. 71 The decision of the Supreme Court in D.C.M. Financial Services Limited (supra) has been considered by a Division Bench of the Bombay High Court in the case of Suhas Bhand v. State of Maharastra reported in 2010 (1) BankCas 207. The Division Bench, while answering the reference made by a learned Single Judge, observed in para 32 as under: In the case of DCM Financial Service Ltd. vs. J.N. Sareen anr., 2008 ALL MR (Cri) 2272, the Supreme Court has considered the effect of resignation of a Director in proceedings under Section 138 of the Act. In that case, the Director had already resigned prior to the complaint being filed and the complainant was kept informed of his resignation. The complainant had not even raised the plea that that Director was incharge and management of the Company at the relevant time in the complaint. That was also a case of PDCs. The resignation of the Director was accepted by the Company. The agreement of purchase/lease was entered into between the Company and the complainant in April 1995. The PDCs were issued in April 1995 itself. The Director resigned in May ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y at the time when the offence was committed. It was also alleged that the offence had been committed by the Company with the consent and connivance of accused Nos.2 to 10, which included respondent No.1 before the Hon'ble Supreme Court. He filed an application seeking discharge, relying upon Form No.32 issued by Registrar of Companies in support of his contention that he had resigned as a Director of the Company much prior to dishonour of the cheque in question. The learned Additional Sessions Judge took note of Form No.32 and also noted that the complainant had not filed any affidavit to the effect that it had verified from the Registrar of Companies and Form No.32 filed by the accused was not genuine. A Criminal Revision Petition filed against the order of the learned Additional Sessions Judge was dismissed by the High Court. Relying upon its earlier decisions in the case of K.Srikanth Singh Vs. M/s.North East Securities Limited Another , 2007(3) RCR (Criminal) 934 : 207 (4) RAJ 226 : JT 2007 (9) SC 449, the Hon'ble Supreme Court observed as under: Section 141 of the Act provides for a constructive liability. A legal fiction has been created thereby. The statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted, even an employee of the Company, who on account of his being an authorized signatory signs a cheque issued by the Company towards discharge of the debt or other liability of the Company, would be liable to prosecution and conviction under Section 138 of Negotiable Instruments Act even after he resigns from the company and is no more in its employment. This certainly could not have been the intention of the legislature. Even the vicarious liability created under Section 138 of Negotiable Instruments Act would not be attracted in respect of a Director or an employee of the Company who resigns and severs his connections with the company, unless the complainant is able to bring his case within the purview of subSection 2 of Section 141 of Negotiable Instruments Act , by proving that the offence had been committed with his consent or connivance or was otherwise attributable to any neglect on his part. 73 Mr. Ponda placed strong reliance on the decision of the Supreme Court in the case of Laxmi Dyechem v. State of Gujarat and others [2012 (13) SCC 375] to meet with the contention as regards the drawer of the cheque ceasing to be the Managing Director much before the blank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (c) has to be in the affirmative. The question notes that the Managing Director or Joint Managing Director would be admittedly incharge of the company and responsible to the company for the conduct of its business. When that is so, holders of such positions in a company become liable under Section 141 of the Act. By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are incharge of and responsible for the conduct of business of the company. Therefore, they get covered under Section 141. So far as the signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under subsection (2) of Section 141. 74 It is well settled that an authorized signatory is very much liable to be prosecuted along with the company for the offence under Section 138 of the N.I. Act. However, it would all depend on the facts of each case. As discussed by me, the facts of the case in hand are all together different. I find it difficult to accept the argument of Mr. Ponda outright relying upon the decision of the Supreme Court in the case of Laxmi Dyechem (supra). So far as this issue is conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agar University v. Palitana Sugar Mill (P) Ltd. and Ors., (2003) 2 SCC 111 : (AIR 2003 SC 511) 140. Although, decisions are galore on this point, we may refer to a recent one in State of Gujarat and Ors. v. Akhil Gujarat Pravasi V.S. Mahamandal and Ors., AIR 2004 SC 3894 wherein this Court held: ... It is trite that any observation made during the course of reasoning in a judgment should not be read divorced from the context in which they were used. 77 The above now takes me to consider the case of other Office Bearers of the company who have been arrayed as accused by virtue of section 141 of the N.I. Act. As such it is not necessary for me to go into this issue in view of the discussion on other points, but there are few NonExecutive Directors and Office Bearers, like Chief Operating Officer, Chief Financial Officer, Financial Controller, nominated Directors who have been arrayed as accused since they all came into picture after the new management took over the company. Whether they could be held liable under Section 141 of the N.I. Act is the question? ● SCOPE OF SECTION 141 OF THE NEGOTIABLE INSTRUMENTS ACT : 78 Before I proceed to consider the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f, 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 of the Negotiable Instruments Act. They are: (1) The company which committed the offence. (2) Every person who was incharge of and responsible to the company for the conduct of the business of the company. (3) Any other person who is a director or a manager or a secretary or any officer of the company with whose connivance or with whose neglect the company has committed the offence. [Followed in M/s. B.S.I. Ltd v. Gift Holdings Pvt Ltd, 2000 Cr. LJ 1424 : AIR 2000 SC 926 ] The Apex Court in the said case of Anil Hada further explaining the law as to the liability of the company and its directors, for committing offence of dishonour of cheque, has h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer 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 subsections (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 from which a reasonable inference of their vicarious liability cane be drawn. [Ashok Muthanna v. Exports Finance Ltd (2001) 2 Crimes 602 (Mad)] Vicarious liability in legal parlance means the liability of the master for the acts of the servant or agent done in the course of employment. Section 141 makes a natural person vicariously liable for the contravention committed by a company provided such person has some nexus with the crime either because of his connivance with it or due to by criminal negligence which had resulted in its commission. No doubt the law makes the principal liable for the acts of his agent, but unless there is some absolute duty cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 Subsection (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 liable if the offence had been committed with his consent or connivance or if the offence was a result of any 12 negligence on his part. The liability of persons mentioned in subsection (2) is not on account of any legal fiction but on account of the specific part played consent and connivance or negligence. If a person is to be made liable under subsection (2) of section 141, then it is necessary to aver consent and connivance, or negligence on his part. 19 This takes us to the next question under subsection (1) of section 141, as to (i) who are the persons who are responsible to the company for the conduct of the business of the company, and (ii) who c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t; (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 conduct of the business of the company. 22 Section 141 uses the words was in charge of, and was responsible to the company for the conduct of the business of the company . It is evident that a person who can be made vicariously liable under subsection (1) of Section 141 is a person who is responsible to the company for the conduct of the business of the company and in addition is also in charge of the business of the company. There may be many directors and secretaries who are not in charge of the business of the company at all. The meaning of the words person in charge of the business of the company was considered by this Court in Girdhari Lal Gupta v. D.N. Meh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer 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 subsection (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 subsection (2) of Section 141 of the Act. 26 Another aspect that requires to be noticed is that only a Director, Manager, Secretary or other officer can be made liable under subsection (2) of section 141. But under subsection (1) of section 141, it is theoretically possible to make even a person who is not a director or officer, liable, as for example, a person falling under category (e) and (f) of section 5 of Companies Act, 1956. When in SMS Pharma (I), this Court observed that 'conversely, a person not holding any office or designation in a company may be liable if he satisfies the requirement of being in charge of and responsible for conduct of the business of the company', this Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that they were in charge of and were responsible to the company for the conduct of the business of the company. That would be absurd and not intended under the Act. 29 As the trauma, harassment and hardship of a criminal proceedings in such cases, may be more serious than the ultimate punishment, it is not proper to subject all and sundry to be impleaded as accused in a complaint against a company, even when the requirements of section 138 read and section 141 of the Act are not fulfilled. 81 In view of the aforesaid dictum of law explained by the Supreme Court, the other accused who have been arrayed as accused by virtue of Section 141 of the N.I. Act could not be h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors 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 and make enquiries and ascertain the fact as to whether a particular Director was incharge of and responsible to the affairs and conduct of the business of the company. Routinely roping in all the Directors by merely repeating the words used in Section 141 of the N.I. Act without ascertaining the facts is a serious matter which has to be deprecated . 85 Some of the applicants before me are indisputably nonexecutive Directors of the company. A nonexecutive Director is no doubt a custodian of the governance of the company, but does not involve in the daytoday affairs of the running of its business and only monitors the executive activity. [See: Pooja Ravinder Devidasani v. State o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must have a Managing or Wholetime 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 in the annual general meeting ( AGM ). 2. Casual vacancies: Where a Director appointed at the AGM vacates office before his or her term of office expires in the normal course, the resulting vacancy may, subject to the Articles, be filled by the Board. Such person so appointed shall hold office up to the time which the Director who vacated office would have held office if he or she had not so vacated such office. 3. Additional Directors: If the Articles specifically so provide or enable, the Board has the discretion, where it feels it necessary and expedient, to appoint Additional Directors who will hold office until the next AGM. However, the numb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 will depend on the application of the legal provisions in question, the fiduciary duties involved and whether such nominee Director is to be regarded as being in control or in charge of the company and its activities. This determination ultimately turns on the specific facts and circumstances involved in each case. B. Classification under the Listing Agreement The Securities Contracts (Regulation) Act, 1956, read with the rules and regulations made thereunder, requires every company desirous of listing its shares on a recognized Indian stock exchange, to execute a listing agreement ( Agreement ) with such Indian stock exchange. This Agreement is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of voting shares; and g. he is not less than twentyone (21) years of age. Nominee directors appointed by an institution that has invested in, or lent money to, the company are also treated as independent Directors. 88 The following observations of the Supreme Court, made in the case of M/s. Pepsi Foods Ltd v. Special J.M. [1998 Cri. L.J. 1 : AIR 1998 SC 128] should be kept in mind by the Magistrates, when they decide to summon a director or partner of a company or firm to face trial under Section 138 of the Negotiable Instruments Act. Summoning of an accused in a criminal case is a serious matter. Criminal law cannot be set into mot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 such person would be held liable if at the time when offence is committed he was in charge and was responsible to the company for the conduct of the business of the company as well as the company. Merely being a Director of the company in the absence of above factors will not make him liable. 8. To launch a prosecution, therefore, against the alleged Directors there must be a specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegation as to how the Directors are incharge and responsible for the conduct of the business of the company. The description should be clear. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 depends upon the facts and circumstances of each case. The High Court at that stage does not conduct a mini trial or roving inquiry, but, nothing prevents it from taking unimpeachable evidence or totally acceptable circumstances into account which may lead it to conclude that no trial is necessary qua a particular Director. 91 In view of the above, there is no cogent material on record to fasten any vicarious liability so far as the other accused are concerned who are NonExecutive Directors including the Office Bearers concerned with the Accounts Department of the company. 92 The plain reading of Section 138 of the N.I. Act would clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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