SUPREME COURT OF INDIA
S.M.S. Pharmaceuticals Limited
Vs
Neeta Bhalla
Appeal (Crl.) 664 of 2002, 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
(Y.K.Sabharwal and Arun Kumar)
20/09/2005
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 cheques
(iii)Dishonour of the cheques
(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 charge sheet 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
5] (referred).
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 Company 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 [ 1998
Indlaw AP 378] (referred) 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
[ 1999 Indlaw AP 269] (referred) 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. 2000 Indlaw MAD 550 (referred). In Lok
Housing and Constructions Ltd. v. Raghupati Leasing and Finance Ltd. and
another [ 2002 Indlaw DEL 935] (referred), 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 [ 2001 Indlaw AP 298
(referred), 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
(referred) 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 ]
(referred), 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 (referred) 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. 6] (referred) 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
[ 2] (referred). 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 ] (referred). 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.