Dcm Financial Services Ltd. Vs. J.N.Sareen & ANR.  INSC 901 (13
IN THE SUPREME COURT OF INDIA
CIVIL APPELALTE JURISDICTION CRIMINAL APPEAL NO. 875 OF 2008 (Arising out of
SLP (Crl.) No. 4801 of 2007) DCM Financial Services Ltd. .... Appellant Versus
J.N. Sareen and another .... Respondents
S.B. SINHA, J.
1. Leave granted.
2. What would be the effect of a
post dated cheque vis-`-vis prosecution in terms of Section 141 of the
Negotiable Instruments Act, 1881 (in short the Act) is the question involved in
this appeal which arises out of a judgment and order dated 31st January, 2007
passed by the High Court of Delhi at New Delhi in Criminal Revision No. 777 of
2003 2 dismissing the Criminal Revision Application preferred from an order
dated 5th July, 2003 passed by the learned Additional Sessions Judge, New
Delhi, discharging the 1st respondent No.1 herein.
3. The basic fact of the matter is
not in dispute.
First Respondent herein was a
Director of a Company known as M/s. International Agro Allied Products Ltd.
(the Company). It had purchased certain agricultural equipments on hire
purchase/lease from on 3rd April, 1995. As a part of the said transaction some
post dated cheques were issued in favour of the appellant herein towards the
payment of monthly hire/rental.
First Respondent admittedly
resigned from the Directorship of the Company on or about 25th May, 1996. It
was accepted. One of the said post dated cheques which was issued in April,
1995 was dated 28th January, 1998 amounting to Rs.2,01,298/-, when presented to
the bank by the appellant for encashment, was dishonoured. Pursuant thereto a
notice for payment was issued. Amount having not been paid despite service of
notice, a complaint petition was filed under Section 138 of the Act. It was
inter alia averred therein :- "8. That on assurance of the accused persons
cheque No.0644739 dated 28th January, 1998 for a sum of Rs.2,01,298/- drawn on
Bank of Baroda, 3 Lucknow and delivered/issued by the accused towards payment
of hire/lease rentals, were presented for encashment again by complainant
company through their bankers and the same was returned unpaid by the bankers
of the accused vide memo dated 22.6.1998 with the remarks "Insufficient
Funds" to the banker's of complainant company. The complainant received
the information only on 21.6.1998. (sic) (Copy of memo of cheque returned and
above referred cheque are annexed herewith.).
9. That the complainant company
sent a legal notice to the accused persons through its advocate on 6th July, 1998,
demanding the payment against these cheques within 15 days from the receipt of
This notice was sent to the
accused persons both through registered AD & UPC within 15 days from the
date of receiving the information regarding dishonouring of the cheques.
10. That the accused persons
failed to make the payment of the above said amount despite service of legal
notice on him.
13. That the accused No.1 is a
ccompany/firm and accused No. 2 to 10 were in charge and were responsible to
the accused No.1, at the time when offence was committed. Hence, the accused
Nos. 2 to 10 in addition to the accused No.1 are liable to be prosecuted and
punished in accordance with law by this Hon'ble Court, as provided by section
141 of the N.I. Act, 1881. Further the offence has been committed by the
accused No.1 with the consent and connivance of the accused Nos. 2 to 10."
4. No allegation was made in the
complaint petition that the 1st respondent was a signatory to the cheque or he
was authorized therefor.
4 5. An application was filed by
the 1st respondent for his discharge.
By reason of the order dated 5th
July, 2003 the same was allowed by the learned Additional Sessions Judge, New
Delhi, stating :- "....It is a well-known fact that the Constitution of
the Board of Directors of a company keeps on changing and a fixed ration of the
directors of the company keep on retiring by rotation every year and new
directors are inducted. The complainant cannot make directors of the year 1995
or 1996 as the accused person for a cheque dishonoured in the year 1998. He can
make accused only those directors who were the directors of the company in the
year 1998. The Companies Act has made specific provisions for all companies
registered with the Registrar of Companies to file a return about the directors
in the company.
These provisions have been made
for the benefit to the public so that the people can get information from
Registrar of Companies about the change in the constitution of directors.
Change of the constitution of the Board of Directors is not a private affair of
the company. A complainant cannot take the plea that he had made those
directors as accused which were known to him. If this plea of complainant is
allowed then he would be at liberty to make all the person who at any point of
time, had been the director of company as accused.
5. I consider in view of the
documents placed by the applicant on record showing that applicant had resigned
way back in 1996 and his resignation was informed to the Registrar of Companies
in October 1996 by filing the statutory Form 32, the plea of complainant that
applicant was a director cannot be considered without any affidavit of the
Authorized Representative of the complainant that he has verified from the
Registrar of Companies and Form No.32 filed by the accused was not genuine. It
is not a 5 trivial matter that a person has to face trial as an accused in the
court. No person can be asked to face trial in the court without there being a
basis of proceedings against him merely at the wishes of a complainant. The
court must be satisfied that the persons who has been called as an accused
against him there was sufficient grounds to proceed. In this case I consider
that complainant has taken vague plea in reply to the application of accused
regarding genuineness and non-admission of Form No.32 or about his being
responsible for the function of the company. In view of specific documents by
the accused applicant the vague pleas of the company do not and anywhere."
The Criminal Revision Application
filed thereagainst, as indicated hereinbefore, has been dismissed.
6. Mr. P.S. Patwalia, learned
Senior Counsel appearing on behalf of the appellant, would submit that although
before the High Court no material was placed to show that the 1st respondent
was a signatory to the cheque in question, in view of the fact that the entire
records were available to the High Court, it should have been held that the
First Respondent was primarily liable for payment of the amount thereunder.
7. Mr. J.N. Sareen, learned
counsel appearing on behalf of the 1st respondent, supported the impugned
8. In support of the said
complaint petition one Peter N. Ballam was examined on behalf of the appellant.
In relation to the 1st respondent he did not make any statement as is required
in terms of Section 141 of the Act. He merely stated :- "8. I state that
the above named accused no.1 is a Company and accused No. 2 to 8 are
Directors/key executives of the accused No.1 Company and are responsible for the
affairs of accused No.1 is/are guilty of offence u/s 138 of Negotiable
Instruments Act & 420 of IPC and is/are liable to be prosecuted and
punished in accordance with law."
He, thus, even was not aware of
the post held by the First Respondent herein at the relevant time.
The learned Sessions Judge in his
order dated 5th July, 2003 has noticed that no contention had been raised that
the 1st respondent in his capacity as an authorized signatory signed the
cheque. Such a contention appears to have been raised before us for the first
time. It has not been disputed that the 1st respondent resigned as a Director
of the Company on or about 25th May, 1996.
9. The question which arises for
consideration is as to whether an authorized signatory, in a situation of this
nature, would be liable for prosecution.
10. The underlying purpose for
which the Parliament enacted Section 138 of the Act is not in doubt or dispute.
What, however, is necessary to be borne in mind is the distinction between a
civil proceeding and a criminal proceeding. What is also necessary to be borne
in mind is the standard of proof in a civil suit and a criminal case.
11. Averments made in the
complaint petition supported by the statements of the complainant form the
basis for taking cognizance of an offence by the Magistrate. Application of
mind on the averments made in the complaint petition vis-`-vis the order which
is required to be passed for summoning the witnesses is imperative.
12. The complaint petition did not
disclose as to who had signed the cheque on behalf of the Company. Involvement
of the 1st respondent in commission of the offence as signatory was neither
averred nor stated by the authorized representative of the complainant. Even
the complaint petition proceeded on the basis that the averments contained in
the 8 complaint petition were sufficient to enable the learned Magistrate to
summon the accused. Even before the High Court such a contention has not been
raised, as noticed hereinbefore.
We may notice the concession made
by Mr. Patwalia in this behalf that such a contention has been raised before us
for the first time. This itself indicates the manner in which the complaint
proceeded. Fairness on the part of the complainant is also expected in such a
It is now not in dispute that the
1st respondent had intimated the complainant as regards his resignation from
13. Section 138 of the Act reads
as under :- "138. Dishonour of cheque for insufficiency, etc., of funds in
the account.- Where any 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 and shall 9 without prejudice to any other provisions of this Act,
be punished with imprisonment for a term which may extend to two year, or with
fine which may extend to twice the amount of the cheque, or with both..."
14. For constituting an offence in
terms of the said provision, the following ingredients are to be satisfied:-
A cheque must be drawn;
It must be presented and
returned unpaid inter alia with the remarks "insufficient funds";
A Notice for
payment should be served on the accused;
has failed to make the payment of the said amount to the payee within 15 days
from the date of receipt of notice.
15. First Respondent indisputably
was a Director of the Company.
The liability attached to him was
not a personal liability. It was a constructive liability. The cheque was drawn
on behalf of the Company.
He might have been liable as a
person incharge of the company within the meaning of Section 141 of the Act as
has been held by this Court in S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and
another : (2005) 8 10 SCC 89 whereupon strong reliance has been placed by Mr.
One of the questions which
indisputably arose for consideration therein was as to whether a signatory of
the cheque would come within the purview of Section 141 of the Act, as would
appear from paragraph 1 thereof, which reads :- "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 fulfil the requirements of the said section and it is not necessary
to specifically state in the complaint that the person 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 or 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."
It was opined :- 11 "9. 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."
It was concluded :- "10.
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
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 12 provision. It is
only those persons who were in charge of and responsible for the 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 the
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
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 the 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."
16. We may also notice a decision
of this Court in N. Rangachari vs.
Bharat Sanchar Nigam Ltd. : (2007)
5 SCC 108 wherein it was held :- 13 "21. A person normally having business
or commercial dealings with a company, would satisfy himself about its
creditworthiness and reliability by looking at its promoters and Board of
Directors and the nature and extent of its business and its memorandum or
articles of association. Other than that, he may not be aware of the
arrangements within the company in regard to its management, daily routine,
Therefore, when a cheque issued to
him by the company is dishonoured, he is expected only to be aware generally of
who are in charge of the affairs of the company. It is not reasonable to expect
him to know whether the person who signed the cheque was instructed to do so or
whether he has been deprived of his authority to do so when he actually signed
Those are matters peculiarly
within the knowledge of the company and those in charge of it. So, all that a
payee of a cheque that is dishonoured can be expected to allege is that the
persons named in the complaint are in charge of its affairs. The Directors are
prima facie in that position."
It was further held :-
27. We think that, in the
circumstances, the High Court has rightly come to the conclusion that it is not
a fit case for exercise of jurisdiction under Section 482 of the Code of
Criminal Procedure for quashing the complaint.
In fact, an advertence to Sections
138 and 141 of the Negotiable
Instruments Act shows that on the other elements of an offence under
Section 138 being satisfied, the burden is on the Board of Directors or the
officers in charge of the affairs of the company to show that they are not
liable to be convicted. Any restriction on their power or existence of any special
circumstance that makes them not liable is something that is peculiarly within
their knowledge and it is for them to establish at the trial such a restriction
or to show that at the relevant time they were not in charge of the affairs of
the Company. Reading the complaint as a whole, we are satisfied that it is a
case where the contentions sought to be raised by the appellant can only be
dealt with after the conclusion (sic commencement) of the trial."
14 17. We are, however, concerned
with a different situation hereat.
18. Section 141 of the Act
provides for a constructive liability. A legal fiction has been created
thereby. The statute being a penal one, should receive strict construction. It
requires strict compliance of the provision. Specific averments in the
complaint petition so as to satisfy the requirements of Section 141 of the Act
are imperative. Mere fact that at one point of time some role has been played
by the accused may not by itself be sufficient to attract the constructive
liability under Section 141 of the Act. (See K. Srikanth Singh vs. M/s. North
East Securities Ltd. and another : JT 2007 (9) SC 449).
19. We may also notice that this
Court in N.K. Wahi vs. Shekhar Singh and others : (2007) 9 SCC 481 has observed
:- "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 in-charge and responsible for the conduct of the business
of the company. The description should be clear. It is true that precise words
from the provisions of the Act need not be reproduced and the court can always
come to a conclusion in facts of each case. But still, in the absence of any
averment 15 or specific evidence the net result would be that complaint would
not be entertainable."
20. The cheque in question was
admittedly a post dated one. It was signed on 3rd April, 1995. It was presented
only sometimes in June, 1998. In the meantime he had resigned from the
directorship of the Company. The complaint petition was filed on or about 20th
August, 1998. Intimation about his resignation was given to the complainant in
writing by the 1st respondent on several occasions. Appellant was, therefore,
aware thereof. Despite having the knowledge, the 1st respondent was impleaded
one of the accused in the complaint as a Director Incharge of the affairs of
the Company on the date of commission of the offence, which he was not. If he
was proceeded against as a signatory to the cheques, it should have been
disclosed before the learned Judge as also the High Court so as to enable him
to apply his mind in that behalf. It was not done. Although, therefore, it may
be that as an authorized signatory he will be deemed to be person incharge, in
the facts and circumstances of the case, we are of the opinion that the said
contention should not be permitted to be raised for the first time before us. A
person who had resigned with the knowledge of the complainant in 1996 could not
be a person incharge of the Company in 16 1998 when the cheque was dishonoured.
He had no say in the matter of seeing that the cheque is honoured. He could not
ask the Company to pay the amount. He as a Director or otherwise could not have
been made responsible for payment of the cheque on behalf of the Company or
otherwise. (See also Shiv Kumar Poddar vs. State (NCT of Delhi) :
(2007) 3 SCC 693: Everest
Adveristing Pvt. Ltd. vs. State (NCT of Delhi) : (2007) 5 SCC 54 and Raghu
Lakshminarayanan vs. Fine Tubes :
(2007) 5 SCC 103.
21. Mr. Patwalia, however,
submitted that a situation may arise where change in the management is effected
only to avoid such constructive liability.
Firstly we are not concerned with
such a hypothetical case.
Secondly, as noticed by this Court
in Rangachari's case (supra) that a person normally having business or
commercial dealings with a company, would satisfy himself about its
creditworthiness and reliability by looking at its promoters and Board of
Directors and the nature and extent of its business and its memorandum or
articles of association.
22. When post dated cheques are
issued and the same are accepted, although it may be presumed that the money
will be made available in 17 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
23. 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
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 could have filed an
application for quashing in terms of Section 482 of the Code of Criminal
Procedure at that stage. Again such a contention had not been raised before the
High Court. No such ground appears to have been taken even in the Special Leave
Petition. While examining the issue, we have considered the case from a broader
angle. Having found that the prosecution of the respondents being mala fide
despite the fact that on technical grounds it 18 may be lawful to set aside the
order of the High Court, it, in our opinion, should not be done. Jurisdiction
of this Court in terms of Article 136 of the Constitution of India need not be
exercised only because it would be lawful to do so. Various factors including
the conduct of the appellant will be relevant therefor. Having regard to the
facts and circumstances of this case, it is not a fit case where we should
allow the appellants to raise additional contentions which have not been raised
before the courts below.
24. For the reasons abovementioned
we are of the opinion that no case has been made out for interference with the impugned
25. The appeal fails and is
( S.B. Sinha )