Dear Sukhija,
You may got through the ruling stated by Mr. Gupta. Its citation is 2005(8)SCC 89.
CASE NO.:
Appeal (crl.) 664 of 2002
PETITIONER:
S.M.S. Pharmaceuticals Ltd.
RESPONDENT:
Neeta Bhalla and anr.
DATE OF JUDGMENT: 20/09/2005
BENCH:
Y.K. Sabharwal,Arun Kumar & B.N. Srikrishna
JUDGMENT:
J U D G M E N T
With
S.L.P.(Crl.)Nos. 2286/2002, 1926-1927/2003, 2090-
2091/ 2003, 2214/2003, 4795/2004, 4992/ 2004,
5073/2004, 5097/2004, 5130/2004, 612/2005, 613/2005,
614/2005, 615/2005 and 616/2005
ARUN KUMAR, J:
This matter arises from a reference made by a two Judge Bench of this
Court for determination of the following questions by a larger Bench :
" ( a) whether for purposes of Section 141 of the
Negotiable Instruments Act, 1881, it is sufficient if the
substance of the allegation read as a whole fulfill the
requirements of the said section and it is not necessary to
specifically state in the complaint that the persons accused
was in charge of, or responsible for, the conduct of the
business of the company.
(b) whether a director of a company would be
deemed to be in charge of, and responsible to, the
company for conduct of the business of the company and,
therefore, deemed to be guilty of the offence unless he
proves to the contrary.
( c ) even if it is held that specific averments are
necessary, whether in the absence of such averments the
signatory of the cheque and or the Managing Directors of
Joint Managing Director who admittedly would be in
charge of the company and responsible to the company for
conduct of its business could be proceeded against. "
The controversy has arisen in the context of prosecutions launched
against officers of Companies under Sections 138 and 141 of the Negotiable
Instruments Act of 1881 (hereinafter referred to as the "Act"). The relevant
part of the provisions are quoted as under :
"Section 138 :
Dishonour of cheque for insufficiency, etc., of funds in
the account
Where any cheque drawn by a persons on an account
maintained by him with a banker for payment of any
amount of money to another persons 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 and shall,
without prejudice to any other provisions of this Act, be
punished with imprisonment for a term which may be
extended to two years, or with fine which may extend to
twice the amount of the cheque, or with both:
Provided that nothing contained in this section shall
apply unless
(a) the cheque has been presented to the bank within a
period of six months from the date on which it is
drawn or within the period of its validity, whichever us
earlier.
(b) the payee or the holder in due course of the cheque, as
the case may be, makes a demand for the payment of
the said account of money by giving a notice in
writing, to the drawer of the cheque, within thirty days
of the receipt of information by him from the bank
regarding the return of the cheque as unpaid; and
( c )the drawer of such cheque fails to make the payment
of the said amount of money to the payee or, as the
case may be, to the holder in due course of the cheque,
within fifteen days of the receipt of the said notice.
Explanation For the purposes of this section, "debt or
other liability" means a legally enforceable debt or other
liability.
Section 141 :
Offences by companies
[1] If the person committing an offence under section 138 is
a company, every person who, at the time the offence was
committed, was in charge of, 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:
Provided that nothing contained in this sub-section shall
render any person liable to punishment if he proves that the
offence was committed without his knowledge, or that he had
exercised all due diligence to prevent the commission of such
offence.
Provided
[2] Notwithstanding anything contained in sub-section (1),
where any offence under this Act has been committed by a
company and it is proved that the offence has been
committed with the consent or connivance of, or is
attributable to, any neglect on the part of, any director,
manager, secretary or other officer of the company, such
director, manager, secretary or other officer shall also be
deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly."
It will be seen from the above provisions that Section 138 casts
criminal liability punishable with imprisonment or fine or with both on a
person who issues a cheque towards discharge of a debt or liability as a
whole or in part and the cheque is dishonoured by the Bank on presentation.
Section 141 extends such criminal liability in case of a Company to every
person who at the time of the offence, was incharge of, and was responsible
for the conduct of the business of the Company. By a deeming provision
contained in Section 141 of the Act, such a person is vicariously liable to be
held guilty for the offence under Section 138 and punished accordingly.
Section 138 is the charging section creating criminal liability in case of
dishonour of a cheque and its main ingredients are :
(i) Issuance of a cheque.
(ii) Presentation of the cheque
(iii) Dishonour of the cheque
(iv) Service of statutory notice on the person sought to be made liable,
and
(v) Non-compliance or non-payment in pursuance of the notice within
15 days of the receipt of the notice.
Sections 138 and 141 of the Act form part of Chapter XVII introduced
in the Act by way of an amendment carried out by virtue of Act 66 of 1988
effective from 1st April, 1989. These provisions were introduced with a
view to encourage the culture of use of cheques and enhancing the
credibility of the instruments. The legislature has sought to inculcate faith in
the efficacy of banking operations and use of negotiable instruments in
business transactions. The penal provision is meant to discourage people
from not honouring their commitments by way of payment through cheques.
Section 139, occurring in the same Chapter of the Act creates a presumption
that the holder of a cheque receives the cheque in discharge, in whole or in
part, of any debt or other liability.
In the present case, we are concerned with criminal liability on
account of dishonour of cheque. It primarily falls on the drawer company
and is extended to officers of the Company. The normal rule in the cases
involving criminal liability is against vicarious liability, that is, no one is to
be held criminally liable for an act of another. This normal rule is, however,
subject to exception on account of specific provision being made in statutes
extending liability to others. Section 141 of the Act is an instance of
specific provision which in case an offence under Section 138 is committed
by a Company, extends criminal liability for dishonour of cheque to
officers of the Company. Section 141 contains conditions which have to be
satisfied before the liability can be extended to officers of a company. Since
the provision creates criminal liability, the conditions have to be strictly
complied with. The conditions are intended to ensure that a person who is
sought to be made vicariously liable for an offence of which the principal
accused is the Company, had a role to play in relation to the incriminating
act and further that such a person should know what is attributed to him to
make him liable. In other words, persons who had nothing to do with the
matter need not be roped in. A company being a juristic person, all its deeds
and functions are result of acts of others. Therefore, officers of a Company
who are responsible for acts done in the name of the Company are sought to
be made personally liable for acts which result in criminal action being taken
against the Company. It makes every person who, at the time the offence
was committed, was incharge of, and was responsible to the Company for
the conduct of business of the Company, as well as the Company, liable for
the offence. The proviso to the sub-section contains an escape route for
persons who are able to prove that the offence was committed without their
knowledge or that they had exercised all due diligence to prevent
commission of the offence.
Section 203 of the Code empowers a Magistrate to dismiss a
complaint without even issuing a process. It uses the words "after
considering" and "the Magistrate is of opinion that there is no sufficient
ground for proceeding". These words suggest that the Magistrate has to
apply his mind to a complaint at the initial stage itself and see whether a case
is made out against the accused persons before issuing process to them on
the basis of the complaint. For applying his mind and forming an opinion as
to whether there is sufficient ground for proceeding, a complaint must make
out a prima facie case to proceed. This, in other words, means that a
complaint must contain material to enable the Magistrate to make up his
mind for issuing process. If this were not the requirement, consequences
could be far reaching. If a Magistrate had to issue process in every case,
the burden of work before Magistrates as well as harassment caused to the
respondents to whom process is issued would be tremendous. Even Section
204 of the Code starts with the words "if in the opinion of the Magistrate
taking cognizance of an offence there is sufficient ground for
proceeding" The words "sufficient ground for proceeding" again
suggest that ground should be made out in the complaint for proceeding
against the respondent. It is settled law that at the time of issuing of the
process the Magistrate is required to see only the allegations in the
complaint and where allegations in the complaint or the chargesheet do not
constitute an offence against a person, the complaint is liable to be
dismissed.
As the points of reference will show, the question for consideration is
what should be the averments in a complaint under Sections 138 and 141.
Process on a complaint under Section 138 starts normally on basis of a
written complaint which is placed before a Magistrate. The Magistrate
considers the complaint as per provisions of Sections 200 to 204 of the Code
of Criminal Procedure. The question of requirement of averments in a
complaint has to be considered on the basis of provisions contained in
Sections 138 and 141 of the Negotiable Instruments Act read in the light of
powers of a Magistrate referred to in Sections 200 to 204 of the Code of
Criminal Procedure. The fact that a Magistrate has to consider the complaint
before issuing process and he has power to reject it at the threshold, suggests
that a complaint should make out a case for issue of process.
As to what should be the averments in a complaint, assumes
importance in view of the fact that, at the stage of issuance of process, the
Magistrate will have before him only the complaint and the accompanying
documents. A person who is sought to be made accused has no right to
produce any documents or evidence in defence at that stage. Even at the
stage of framing of charge the accused has no such right and a Magistrate
cannot be asked to look into the documents produced by an accused at that
stage, State of Orissa vs. Debendra Nath Padhi [2005 (1) SCC 568].
The officers responsible for conducting affairs of companies are
generally referred to as Directors, Managers, Secretaries, Managing
Directors etc. What is required to be considered is: is it sufficient to simply
state in a complaint that a particular person was a director of the Company at
the time the offence was committed and nothing more is required to be said?
For this, it may be worthwhile to notice the role of a director in a company.
The word 'director' is defined in Section 2 (13) of the Companies Act, 1956
as under:
" "director" includes any person occupying the position of director,
by whatever name called" ;
There is a whole chapter in the Companies Act on directors, which is
Chapter II. Sections 291 to 293 refer to powers of Board of Directors. A
perusal of these provisions shows that what a Board of Directors is
empowered to do in relation to a particular company depends upon the role
and functions assigned to Directors as per the Memorandum and Articles of
Association of the company. There is nothing which suggests that simply by
being a director in a Company, one is supposed to discharge particular
functions on behalf of a company. It happens that a person may be a director
in a company but he may not know anything about day-to-day functioning of
the company. As a director he may be attending meetings of the Board of
Directors of the Company where usually they decide policy matters and
guide the course of business of a company. It may be that a Board of
Directors may appoint sub-committees consisting of one or two directors
out of the Board of the Company who may be made responsible for day-to-
day functions of the Company. These are matters which form part of
resolutions of Board of Directors of a Company. Nothing is oral. What
emerges from this is that the role of a director in a company is a question of
fact depending on the peculiar facts in each case. There is no universal rule
that a director of a company is in charge of its everyday affairs. We have
discussed about the position of a Director in a company in order to illustrate
the point that there is no magic as such in a particular word, be it Director,
Manager or Secretary. It all depends upon respective roles assigned to the
officers in a company. A company may have Managers or Secretaries for
different departments, which means, it may have more than one Manager or
Secretary. These officers may also be authorised to issue cheques under
their signatures with respect to affairs of their respective departments. Will
it be possible to prosecute a Secretary of Department-B regarding a cheque
issued by the Secretary of Department-A which is dishonoured? The
Secretary of Department-B may not be knowing anything about issuance of
the cheque in question. Therefore, mere use of a particular designation of an
officer without more, may not be enough by way of an averment in a
complaint. When the requirement in Section 141, which extends the liability
to officers of a company, is that such a person should be in charge of and
responsible to the company for conduct of business of the company, how can
a person be subjected to liability of criminal prosecution without it being
averred in the complaint that he satisfies those requirements ? Not every
person connected with a Compnay is made liable under Section 141.
Liability is cast on persons who may have something to do with the
transaction complained of. A person who is in charge of and responsible for
conduct of business of a Company would naturally know why the cheque in
question was issued and why it got dishonoured.
The position of a Managing Director or a Joint Managing Director in
a company may be different. 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. In order to escape liability such
persons may have to bring their case within the proviso to Section 141 (1),
that is, 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.
While analysing Section 141 of the Act, it will be seen that it operates
in cases where an offence under Section 138 is committed by a company.
The key words which occur in the Section are "every person". These are
general words and take every person connected with a company within their
sweep. Therefore, these words have been rightly qualified by use of the
words " who, at the time the offence was committed, was in charge of, 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 etc." What is required is that the persons who are sought to be made
criminally liable under Section 141 should be at the time the offence was
committed, in charge of and responsible to the company for the conduct of
the business of the company. Every person connected with the company
shall not fall within the ambit of the provision. It is only those persons who
were in charge of and responsible for conduct of business of the company at
the time of commission of an offence, who will be liable for criminal action.
It follows from this that if a
director of a Company who was not in charge of and was not responsible for
the conduct of the business of the company at the relevant time, will not be
liable under the provision. The liability arises from being in charge of and
responsible for conduct of business of the company at the relevant time
when the offence was committed and not on the basis of merely holding a
designation or office in a company. Conversely, a person not holding any
office or designation in a Company may be liable if he satisfies the main
requirement of being in charge of and responsible for conduct of business of
a Company at the relevant time. Liability depends on the role one plays in
the affairs of a Company and not on designation or status. If being a Director
or Manager or Secretary was enough to cast criminal liability, the Section
would have said so. Instead of "every person" the section would have said
"every Director, Manager or Secretary in a Company is liable"..etc. The
legislature is aware that it is a case of criminal liability which means serious
consequences so far as the person sought to be made liable is concerned.
Therefore, only persons who can be said to be connected with the
commission of a crime at the relevant time have been subjected to action.
A reference to sub-section (2) of Section 141 fortifies the above
reasoning because sub-section (2) envisages direct involvement of any
Director, Manager, Secretary or other officer of a company in commission of
an offence. This section operates when in a trial it is proved that the offence
has been committed with the consent or connivance or is attributable to
neglect on the part of any of the holders of these offices in a company. In
such a case, such persons are to be held liable. Provision has been made for
Directors, Managers, Secretaries and other officers of a company to cover
them in cases of their proved involvement.
The conclusion is inevitable that the liability arises on account of
conduct , act or omission on the part of a person and not merely on account
of holding an office or a position in a company. Therefore, in order to bring
a case within Section 141 of the Act the complaint must disclose the
necessary facts which make a person liable.
The question of what should be averments in a criminal complaint has
come up for consideration before various High Courts in the country as also
before this Court. Secunderabad Health Care Ltd. and others v.
Secunderabad Hospitals Pvt. Ltd. and others [1999 (96) C.C.(AP) 106]
was a case under the Negotiable Instruments Act specifically dealing with
Sections 138 and 141 thereof. The Andhra Pradesh High Court held that
every Director of a company is not automatically vicariously liable for the
offence committed by the company. Only such Directors or Director who
were in charge of or responsible to the company for the conduct of business
of the company at the material time when the offence was committed alone
shall be deemed to be guilty of the offence. Further it was observed that the
requirement of law is that "there must be clear, unambiguous and specific
allegations against the persons who are impleaded as accused that they were
in charge of and responsible to the company in the conduct of its business in
the material time when the offence was committed." The same High Court
in v. Sudheer Reddy v. State of Andhra Pradesh and others [2000 (99) CC
(AP)107] held that "the purpose of Section 141 of the Negotiable
Instruments Act would appear to be that a person who appears to be merely
a director of the Company cannot be fastened with criminal liability for an
offence under Section 138 of the Negotiable Instruments Act unless it is
shown that he was involved in the day-today affairs of the company and was
responsible to the company." Further, it was held that allegations in this
behalf have to be made in a complaint before process can be issued against
a person in a complaint. To same effect is the judgment of the Madras High
Court in R. Kannan v. Kotak Mahindra Finance Ltd. 2003 (115) CC (Mad)
321. In Lok Housing and Constructions Ltd. v. Raghupati Leasing and
Finance Ltd. and another [2003 (115) CC (Del) 957], the Delhi High Court
noticed that there were clear averments about the fact that accused No.2 to
12 were officers in charge of and responsible to the company in the conduct
of day-to-day business at the time of commission of offence. Therefore, the
Court refused to quash the complaint. In Sunil Kumar Chhaparia v.
Dakka Eshwaraiah and another [2002 (108) CC (AP) 687, the Andhra
Pradesh High Court noted that there was a consensus of judicial opinion that
" a director of a company cannot be prosecuted for an offence under Section
138 of the Act in the absence of a specific allegation in the complaint that
he was in charge of and responsible to the company in the conduct of its
business at the relevant time or that the offence was committed with his
consent or connivance." The Court has quoted several judgments of various
High Courts in support of this proposition. We do not feel it necessary to
recount them all.
Cases have arisen under other Acts where similar provisions are
contained creating vicarious liability for officers of a company in cases
where primary liability is that of a company. State of Karnataka v. Pratap
Chand and others 1981 (2) SCC 335 was a case under the Drugs and
Cosmetics Act, 1940. Section 34 contains a similar provision making every
person in charge of and responsible to the company for conduct of its
business liable for offence committed by a company. It was held that a
person liable for criminal action under that provision should be a person in
overall control of day-to-day affairs of the company or a firm. This was a
case of a partner in a firm and it was held that a partner who was not in such
overall control of the firm could not be held liable. In Municipal
Corporation of Delhi v. Ram Kishan Rohtagi and others [1983 (1) SCC 1],
the case was under the Prevention of Food Adulteration Act. It was first
noticed that under Section 482 of the Criminal Procedure Code in a
complaint, the order of a Magistrate issuing process against the accused can
be quashed or set aside in a case where the allegation made in the complaint
or the statements of the witnesses recorded in support of the same taken at
their face value make out absolutely no case against the accused or the
complaint does not disclose the essential ingredients of an offence which is
arrived at against accused. This emphasises the need for proper averments
in a complaint before a person can be tried for the offence alleged in the
complaint.
In State of Haryana v. Brij Lal Mittal and others 1998 (5) SCC 343
it was held that vicarious liability of a person for being prosecuted for an
offence committed under the Act by a company arises if at the material time
he was in charge of and was also responsible to the company for the conduct
of its business. Simply because a person is a director of a company, it does
not necessarily mean that he fulfils both the above requirements so as to
make him liable. Conversely, without being a director a person can be in
charge of and responsible to the company for the conduct of its business.
K.P.G. Nair v. Jindal Menthol India Ltd. [2001 (10) SCC 218] was a
case under the Negotiable Instruments Act. It was found that the allegations
in the complaint did not in express words or with reference to the allegations
contained therein make out a case that at the time of commission of the
offence, the appellant was in charge of and was responsible to the company
for the conduct of its business. It was held that requirement of Section 141
was not met and the complaint against the accused was quashed. Similar
was the position in Katta Sujatha v. Fertilizers & Chemiucals Travancore
Ltd. and another [ 2002 (7 SCC 655]. This was a case of a partnership. It
was found that no allegations were contained in the complaint regarding the
fact that the accused was a partner in charge of and was responsible to the
firm for the conduct of business of the firm nor was there any allegation that
the offence was made with the consent and connivance or that it was
attributable to any neglect on the part of the accused. It was held that no
case was made out against the accused who was a partner and the complaint
was quashed. The latest in the line is the judgment of this Court in
Monaben Ketanbhai Shah and another v. State of Gujarat and others
[2004 (7) SCC 15]. It was observed as under:
"4. .It is not necessary to reproduce the language of Section
141 verbatim in the complaint since the complaint is required to
be read as a whole. If the substance of the allegations made in
the complaint fulfil the requirements of Section 141, the
complaint has to proceed and is required to be tried with. It is
also true that in construing a complaint a hypertechnical
approach should not be adopted so as to quash the same. The
laudable object of preventing bouncing of cheques and
sustaining the credibility of commercial transactions resulting
in enactment of Sections 138 and 141 has to be borne in mind.
These provisions create a statutory presumption of dishonesty,
exposing a person to criminal liability if payment is not made
within the statutory period even after issue of notice. It is also
true that the power of quashing is required to be exercised very
sparingly and where, read as a whole, factual foundation for the
offence has been laid in the complaint, it should not be quashed.
All the same, it is also to be remembered that it is the duty of
the court to discharge the accused if taking everything stated in
the complaint as correct and construing the allegations made
therein liberally in favour of the complainant, the ingredients of
the offence are altogether lacking. The present case falls in this
category as would be evident from the facts noticed
hereinafter."
It was further observed:
"6 ..The criminal liability has been fastened on those who, at
the time of the commission of the offence, were in charge of
and were responsible to the firm for the conduct of the business
of the firm. These may be sleeping partners who are not
required to take any part in the business of the firm; they may
be ladies and others who may not know anything about the
business of the firm. The primary responsibility is on the
complainant to make necessary averments in the complaint so
as to make the accused vicariously liable. For fastening the
criminal liability, there is no presumption that every partner
knows about the transaction. The obligation of the appellants to
prove that at the time the offence was committed they were not
in charge of and were not responsible to the firm for the
conduct of the business of the firm, would arise only when first
the complainant makes necessary averments in the complaint
and establishes that fact. The present case is of total absence of
requisite averments in the complaint."
To sum up, there is almost unanimous judicial opinion that necessary
averments ought to be contained in a complaint before a persons can be
subjected to criminal process. A liability under Section 141 of the Act is
sought to be fastened vicariously on a person connected with a Company,
the principal accused being the company itself. It is a departure from the
rule in criminal law against vicarious liability. A clear case should be
spelled out in the complaint against the person sought to be made liable.
Section 141 of the Act contains the requirements for making a person liable
under the said provision. That respondent falls within parameters of Section
141 has to be spelled out. A complaint has to be examined by the Magistrate
in the first instance on the basis of averments contained therein. If the
Magistrate is satisfied that there are averments which bring the case within
Section 141 he would issue the process. We have seen that merely being
described as a director in a company is not sufficient to satisfy the
requirement of Section 141. Even a non director can be liable under Section
141 of the Act. The averments in the complaint would also serve the
purpose that the person sought to be made liable would know what is the
case which is alleged against him. This will enable him to meet the case at
the trial.
In view of the above discussion, our answers to the questions posed in
the Reference are as under:
(a) It is necessary to specifically aver in a complaint under Section
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. This averment is an essential requirement of Section
141 and has to be made in a complaint. Without this averment
being made in a complaint, the requirements of Section 141 cannot
be said to be satisfied.
(b) The answer to question posed in sub-para (b) has to be in negative.
Merely being a director of a company is not sufficient to make the
person liable under Section 141 of the Act. A director in a
company cannot be deemed to be in charge of and responsible to
the company for conduct of its business. The requirement of
Section 141 is that the person sought to be made liable should be
in charge of and responsible for the conduct of the business of the
company at the relevant time. This has to be averred as a fact as
there is no deemed liability of a director in such cases.
(c) The answer to question (c ) has to be in affirmative. The question
notes that the Managing Director or Joint Managing Director
would be admittedly in charge of the company and responsible to
the company for 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 in charge of and
responsible for the conduct of business of the company. Therefore,
they get covered under Section 141. So far as signatory of a
cheque which is dishonoured is concerned, he is clearly
responsible for the incriminating act and will be covered under
sub-section (2) of Section 141.
The Reference having been answered, individual cases may be listed
before appropriate Bench for disposal in accordance with law.
You may asses the facts of the case and decide whether this principle will apply to your case.
