(Criminal Original Petition filed under Section 482 Cr.P.C. for the reliefs as stated therein.)
By consent of both sides, the matter is taken up for final hearing. The petitions are filed seeking a direction to call for the records in C.C.No.424 of 2006 on the file of the learned Judicial Magistrate No.I, Udumalpet and quash the same.
2. The petitioners are A.1 to A.4 in the complaint given by the respondent under Sec.138 of the Negotiable Instruments Act (hereinafter called to as "Act"). In the complaint, it was alleged that the accused Company was engaged in manufacturing papers and its allied products and A.2 to A.4 are in-charge of the day today affairs of the business of the company. A.3 was the Managing Director and on 6.4.2005, A.3 borrowed a sum of Rs.3,00,000/- for business purpose and he issued a cheque payable on State Bank of India on 11.8.2006 and when the same was presented by the complaint with his banker Tamil Nadu Mercantile Bank, it was returned with an endorsement "account closed". It is further alleged that the complainant issued statutory notice demanding repayment and A.1 and A.4 received notice and A.2 and A.3 purposely evaded receipt of notice and on failure of repayment, the criminal prosecution has been launched.
3. A.1 to A.4 are before this Court for quashing the proceedings on the ground that apart from general and omnibus allegation that A.2 to A.4 were actively taking part in the business and day to day affairs of the company, there is no specific allegation against the petitioner and also on the ground that the complaint never disclosed who issued the cheque when there is allegation that A.3 borrowed a sum of Rs.3,00,000/- and the Directors of the Company are not liable as there is no specific averment.
4. Mr.C.D. Johnson, learned counsel for the petitioner submitted that the 1st petitioner is the Company and the other petitioners are the Directors and the complainant would allege that the 3rd petitioner borrowed a sum of Rs.5,00,000/- and a cheque was issued on 11.8.2006 and the signatory of the cheque has not been disclosed and therefore, submitted that the Company and its Directors cannot be held responsible for the alleged offence.
5. On the contrary, Mr. V.T. Narendhiram, learned counsel for the respondent would submit that specific and clear averments are made by the part played by the Directors of the Company and therefore, the proceedings need not be quashed.
6. The issue whether all the directors of a Company is liable to be prosecuted was under the consideration of Hon'ble Supreme Court on many occasions. There are catena of decisions rendered by the Hon'ble Supreme Court regarding the liability of the Directors of the Company. It is well settled that to launch a prosecution for the offence by a Company and its Directors, there must be specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegations as to how the Directors were in-charge and responsible for the conduct of the business of the Company.
7. In the case of SMS Pharmaceuticals vs Neeta Bhalla (2005 8 SCC 89), the Supreme Court held as follows:
(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) 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.
8. Following the above judgment cited supra, the Apex Court has held in N.K. Wahi vs Shekhar Singh and others (2007) 9 SCC 481
"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 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 or specific evidence the net result would be that complaint would not be entertainable.
9. In the case of (K. Srikanth Singh vs North East Securities Ltd and another) (2007) 12 SCC 788, the Apex Court has held as follows:
"4. It is not in dispute that for showing a vicarious liability of a Director of a company upon the complaint it is incumbent to plead that the accused was responsible to the Company for the conduct of the business of the company. No such allegation having been made in the complaint petition, in our opinion, the High Court was not correct in passing the impugned judgment. The allegation contained in the complaint petition was that all the accused Directors participated in the negotiations for obtaining financial help for Accused 1, which in our opinion, would not give rise to an inference that the appellant was responsible for day-today- affairs 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 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 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 the conduct of business of a company at the relevant time...."
5. Negotiation for obtaining financial assistance on behalf of the by its Directors itself is not an ingredient for the purpose of constituting an offence under Sec.138 of the Negotiable Instruments Act. Furthermore, a vicarious liability on the part of a person must be pleaded and proved. It cannot be a subject matter of mere inference".
10. In (DCM Financial Services Limited vs J.N. Sareen and another) (2008) 8 SCC 1, which is a case where proceedings were initiated against the accused company and also against the person who signed the cheque when he was Director of the accused company and later resigned from the accused company before bouncing of the cheque. The Hon'ble Supreme Court held,
""19. 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 with 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 be itself by sufficient to attract the constructive liability under Section 141 of the Act".
11. In Malwa Cotton and Spinning Mills Limited vs Virsa Singh Sidhu and others (2008) 17 SCC 147 , the Apex Court held as follows:
"We find that the prayers before the courts below essentially were to drop the proceedings on the ground that the allegations would not constitute a foundation for action in terms of Section 141 of the Act. These questions have to be adjudicated at the trial. Whether a person is in charge of or is responsible to the company for conduct of business is to be adjudicated on the basis of materials to be placed by the parties. Sub section (2) of Section 141 is a deeming provision which as noted supra operates in certain specified circumstances. Whether the requirements for the application of the deeming provision exist or not is again a matter for adjudication during trial. Similarly, whether the allegations contained are sufficient to attract culpability is a matter for adjudication at the trial."
12. In N.K. Wahi vs Shekhar Singh and others (2007) 9 SCC 481, the Apex Court reiterated the principles laid down in Sabitha Ramamurthi's case and SMS Pharmaceutical's case.
13. The decisions would show that there must be specific averments against a Director for a vicarious liability; for fastening the criminal liability, there is no presumption that every Director knows about the transaction; once the specific averments are made, it is deemed that every person who is in-charge and responsible to the company for conduct of the business of the company are guilty of the offence; a person who proves that the offence was committed without his knowledge or that he had exercised all due diligence is exempted from becoming liable by operation of proviso under sub sec.1 of sec.141 of the Act. The burden in this regard has to be discharged by the accused.
14. In my considered view, the primary responsibility of the complainant is to make specific averment as required under Sec.141 of the Act. If the court is satisfied that it is not made, then the court can and should exercise its power under Sec.482 of the Code in quashing the proceedings as otherwise it would amount to harassment and abuse of process of law. If the court is satisfied that specific averment has been made, then it is deemed that the accused is guilty of the offence. If such person pleads that the offence was committed without his knowledge or he was not in-charge and was not responsible for the conduct of the business of the company or that he had exercised all due diligence to prevent the commission of an offence, he has to prove his innocence by discharging the burden only in the trial. The court can not and should not exercise its power under 482 of the code.
20. Issuance of cheque 'per se' is not an offence. Dishonour of cheque on presentation may be the starting point for an offence. A statutory notice has to be issued within the specified time demanding payment within 15 days from the date of receipt of the notice and if the drawer repays the amount, there ends the matter. If not complied within the stipulated time, the offence is said to be committed.
21. Sec.141 of the Act relates to an offence committed by the Company. As stated earlier, issuance of cheque is not an offence, but the offence is completed when the Company and every person who is in-charge of and is responsible for the business of the Company failed to comply with the demand made in the statutory notice. A director, who is in-charge of and is responsible for the business of the Company, is expected to exercise all due diligence to prevent the commission of an offence.
22. Any person who is in-charge and is responsible for the business of the Company, must be a person who can direct such payment or make such payment. If any person pleads that he has no knowledge about the transaction or is not in-charge and is also not responsible for the business of the Company or has exercised all due diligence to comply the demand made in the statutory notice, has to prove by
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material evidence and it is a matter for trial. 23. In the present case, the 1st petitioner is a Company, and 2 to 4 are Directors. In the complaint, it is stated, that the 3rd petitioner is the Managing Director and the petitioners 2 and 4 are actively taking part in the business and they were looking after the production and sale of the paper manufacturing of the Company and they are also looking after the accounts of the Company. The statutory notice was received by the accused Company and the 4th petitioner and the petitioners 2 and 3 are stated to be evading service of notice. However, considering the petitioners 2 and 4 are women, I am of the considered view that the averments made in the complaint are sufficient enough to presume that the petitioners 2 and 4 were incharge of and responsible for the conduct of the business of the company and were in position to exercise due diligence in prevention of committing of the offence. 24. Therefore, the petitioners 2 and 4 are concerned, the court can and should exercise its power under Sec.482 Cr.P.C otherwise, continuance of the proceedings will be only an abuse of process law. 25. In the result, criminal original petition is partly allowed and as far as petitioners 2 and 4 are concerned the proceedings in C.C.No.424 of 2006 on the file of the learned Judicial Magistrate No.I, Udumalpet is quashed.