S.M.S.
Pharmaceuticals Ltd. Vs. Neeta Bhalla and Anr [2005] Insc 500 (20 September 2005)
Y.K.
Sabharwal,Arun Kumar & B.N. Srikrishna
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.
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