Case BriefsSupreme Court

   

Supreme Court: In an appeal against a judgment passed by the Calcutta High Court dismissing the Criminal Revision Application filed by the appellants for quashing the proceedings under Sections 138 and 141 of the Negotiable Instruments (NI) Act,1881, the division bench of Indira Banerjee* and J.K. Maheshwari has held that the requirement of Section 141 of the NI Act 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 and specific averments must be made in the pleadings to substantiate the contention in the complaint, that such Director was in charge of and responsible for conduct of the business of the Company. Thus, the Court set aside the High Court's Judgment and quashed the Criminal Case against the appellants i.e., independent non-executive Directors of the accused company, under Sections 138 and 141 of the NI Act.

In this case the accused company placed orders on the respondent (PSQ) on different dates for purchase of Stone Dust and Stone Aggregate, specifying the materials required to be supplied, along with the rates and quantity. Further, pursuant to the aforesaid purchase orders, PSQ supplied materials to the accused Company, and raised bills totaling Rs.2,31,60,674/- on the accused company. In discharge of its liability against the bills the accused company had issued an account payee cheque dated 15.03.2017 for a sum of Rs.1,71,08, 512/-.Alleging that the accused company had not paid the amount of the dishonoured cheque to PSQ within the time stipulated, PSQ filed the aforesaid complaint under Section 138 read with Section 141 of the NI Act. Thereafter, the appellants filed petitions under Sections 205 and 305 of the CrPC, however, the Court in their absence rejected the said petitions.

Further, the appellants filed a Criminal Revision Application in the High Court under Section 482 of the Code of Criminal Procedure (CrPC) for quashing the said proceedings, claiming that they are independent non-executive Directors of the accused company, who are in no way responsible for the day-to-day affairs of the company. However, the High Court rejected the said application.

The Court noted that the appellants have submitted that Section 205 of the CrPC confers discretion on the Court to exempt personal appearance of an accused, till such time as his appearance may be considered necessary, and Section 305 of the Cr.P.C. provides how a body corporate, made accused in a criminal case, can be represented; and how the Magistrate overlooked the fact that the accused company was being represented by an authorized officer. It further submitted that Section 141 of the NI Act must be strictly construed, as it is a penal provision creating vicarious liability.

The Court took note of the ruling in K.K. Ahuja v. V.K. Vora, (2009) 10 SCC 48 , wherein the Court discussed the principles of the vicarious liability of the officers of a company in respect of dishonour of a cheque and held that “if the accused is the Managing Director or a Joint Managing Director, it is not necessary to make an averment in the complaint that he is in charge of, and is responsible to the company, for the conduct of the business of the company”. Further, the director of the company who signed the cheque renders himself liable in case of dishonour and other officers of a company can be made liable only under sub-section (2) of Section 141 of the NI Act by averring in the complaint, their position and duties in the company, and their role regarding the issue and dishonour of the cheque, disclosing consent, connivance or negligence.

Further, it also took note of the ruling in Pooja Ravinder Devidasani v. State of Maharashtra, (2014) 16 SCC 1, wherein the Court held that “Section 141 is a penal provision creating vicarious liability and must be strictly construed. Thus, it is not sufficient to make a bald cursory statement in a complaint that the director is in charge of and responsible for the conduct of the business of the company, but the complaint should spell out as to how and in what manner the respondent was in charge of or was responsible to the accused company for the conduct of its business. This is in consonance with strict interpretation of penal statutes, especially, where such statutes create vicarious liability”

The Court further noted that the National Company Law Tribunal (NCLT) admitted the application of a Financial Creditor of the accused company for appointment of an Interim Resolution Professional (IRP) to administer the accused company, as a result of which the appellants were suspended by operation of law. Thus, when statutory notice of dishonour was sent to the appellants, the management of the accused company had been taken over by the IRP.

The Court observed that it is true that inherent jurisdiction under Section 482 should be exercised sparingly, carefully and with caution and only when such exercise is justified by the tests specially laid down in Section and when the interest of justice so requires. It was also observed that the High Court rightly held that when a complaint was filed against the Director of a company, a specific averment that such person was in charge of and responsible for the conduct of business of the company was an essential requirement of Section 141 of the NI Act and merely being a Director of the company is not sufficient to make the person liable under the said Section.

Further, it was observed that the High Court rightly held that the Managing Director or Joint Managing Director would admittedly be in charge of the company and responsible to the company for the conduct of its business by virtue of the office they hold, also a signatory of a cheque is clearly liable under Sections 138, 141 of the NI Act, however, the High Court failed to note that none of these appellants were Managing Director or Joint Managing Director of the accused company nor were they signatories of the cheque which was dishonoured.

Moreover, the Court viewed that the High Court was right in holding that neither a hyper technical approach should be adopted, to quash complaint, nor it must be read with a pedantically hyper technical approach to deny relief under Section 482 of the CrPC to those impleaded as accused, who do not have any criminal liability in respect of the offence alleged in the complaint. Further, it was viewed that there can be no doubt that in deciding a Criminal Revision Application under Section 482 of the CrPC for quashing a proceeding under Sections 138, 141 of the NI Act, the laudable object of preventing bouncing of cheques and sustaining the credibility of commercial transactions resulting in enactment of the said Sections must be borne in mind. Further, the said provisions of the NI Act create a statutory presumption of dishonesty on the part of the signatory of the cheque, and when the cheque is issued on behalf of a company, also those persons in charge of or responsible for the company or the business of the company and every person connected with the company does not fall within the ambit of Section 141 of the NI Act.

Placing reliance on S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89 , the Court observed that a director of a company who was not in charge or responsible for the conduct of the business of the company at the relevant time, will not be liable under those provisions and the liability depends on the role one plays in the affairs of a company and not on designation or status alone. It also took note of the decision in Pooja Ravinder Devidasani (Supra) and observed that when a complaint is filed against a director of the company, who is not the signatory of the dishonoured cheque, specific averments must be made in the pleadings to substantiate the contention in the complaint, that such Director was in charge of and responsible for conduct of the business of the Company, unless such director is the designated Managing Director or Joint Managing Director who would obviously be responsible for the company and its business.

The Court viewed that the High Court was correct in observing that three categories of persons were covered by Section 141 of the NI Act — the company who committed the offence as alleged; everyone who was in-charge of or was responsible for the business of the company and any other person who was a Director or a Manager or a Secretary or Officer of the Company with whose connivance or due to whose neglect the company had committed the offence.

However, while the High Court deprecated the adoption of a hyper technical approach in construing pleadings and to quash criminal proceeding, it adopted a hyper technical approach in rejecting the application under Section 482 of the CrPC, on a cursory reading of the formalistic pleadings in the complaint, endorsing the contents of Section 141 of the NI Act, without any particulars and it overlooked the contention of these appellants that they were non-Executive Independent Directors of the accused company, based on unimpeachable materials on record.

The Court referred to the decision in the National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, (2010) 3 SCC 330 , and Pooja Ravinder Devidasani (Supra) wherein the Court held that the impleadment of all Directors of an accused company based on a statement that they are in charge of and responsible for the conduct of the business of the company, without anything more, does not fulfil the requirements of Section 141 of the NI Act. Further, it placed reliance on the ruling in Pepsi Foods Ltd. v. Special Judicial Magistrate, (1998) 5 SCC 749 and observed that there could be no justification for not dispensing with the personal appearance of the appellants, when the Company had entered appearance through an authorized officer. Thus, the Court set aside the High Court's Judgment and quashed the Criminal Case.

[Sunita Palita v. Panchami Stone Quarry, 2022 SCC OnLine SC 945 , decided on 1.09.2022]

Judgment by: *Justice Indira Banerjee

Case BriefsSupreme Court

Supreme Court: In a case relating to dishonour of cheques where it was alleged that the complaint was filed by the managing director in his personal capacity and not on behalf of the Company, the bench of Sanjay Kishan Kaul* and MM Sundresh, JJ has held that there could be a format where the Company’s name is described first, suing through the Managing Director but there cannot be a fundamental defect merely because the name of the Managing Director is stated first followed by the post held in the Company. It was further held that it would be too technical a view to take to defeat the complaint merely because the body of the complaint does not elaborate upon the authorisation.

Facts

The respondent had issued 8 cheques totalling to Rs.1,60,000/- in favour of Bell Marshall Telesystems Limited, however, all the cheques got dishonoured on account of “funds insufficient” after which legal notices were issued by the beneficiary under Section 138(b) of the Negotiable Instruments Act, 1881. The demand was, however not met within fifteen days of the receipt of the notice nor was any reply sent which resulted in the complaint being filed by the Company’s Managing Director Bhupesh Rathod before the Special Metropolitan Magistrate, Mumbai. The Company also filed an affidavit through its Managing Director, i.e., Bhupesh Rathod, stating that it had authorised to file a complaint case against the respondent. A copy of the Board Resolution was also presented.

The respondent took an objection that the complaint was filed in the personal capacity of Bhupesh Rathod and not on behalf of the Company. On the other hand it was contended by the appellant that the complaint was in the name of the Company and in the cause title of the complaint he had described himself as the Managing Director. The Company was a registered company under the Companies Act, 1956. On this, the respondent contended that it is only in the aforesaid title description that the complainant is described as the Managing Director of the Company but in the body of the complaint it is not so mentioned.

Analysis

The Court took note of the facts that the description of the complainant with its full registered office address is given at the inception itself except that the Managing Director’s name appears first as acting on behalf of the Company. The affidavit and the cross-examination in respect of the same during trial supports the finding that the complaint had been filed by the Managing Director on behalf of the Company.

It, hence, noticed that the format itself cannot be said to be defective though it may not be perfect.

“The body of the complaint need not be required to contain anything more in view of what has been set out at the inception coupled with the copy of the Board Resolution. There is no reason to otherwise annex a copy of the Board Resolution if the complaint was not being filed by the appellant on behalf of the Company.”

It further explained that a Manager or a Managing Director ordinarily by the very nomenclature can be taken to be the person in-charge of the affairs Company for its day-to-day management and within the activity would certainly be calling the act of approaching the court either under civil law or criminal law for setting the trial in motion.

“It would be too technical a view to take to defeat the complaint merely because the body of the complaint does not elaborate upon the authorisation. The artificial person being the Company had to act through a person/official, which logically would include the Chairman or Managing Director. Only the existence of authorisation could be verified.”

The Court considered the governing principles in respect of a  corporate entity which seeks to file the complaint, as laid down in Associated Cement Co. Ltd. v. Keshavanand, (1998) 1 SCC 687, and said that,

“If a complaint was made in the name of the Company, it is necessary that a natural person represents such juristic person in the court and the court looks upon the natural person for all practical purposes. It is in this context that observations were made that the body corporate is a de jure complainant while the human being is a de facto complainant to represent the former in the court proceedings. Thus, no Magistrate could insist that the particular person whose statement was taken on oath alone can continue to represent the Company till the end of the proceedings. Not only that, even if there was initially no authority the Company can at any stage rectify that defect by sending a competent person.”

Further, the Court noticed that the signatures on the cheques were not denied. Neither was it explained by way of an alternative story as to why the duly signed cheques were handed over to the Company. There was no plea of any fraud or misrepresentation.

“It does, thus, appear that faced with the aforesaid position, the respondent only sought to take a technical plea arising from the format of the complaint to evade his liability.”

Ruling

The Court held that the complaint was properly instituted and also that the respondent failed to disclose why he did not meet the financial liability arising to a payee, who is a holder of a cheque in due course.

The Court was of the view that the respondent should be sentenced with imprisonment for a term of one year and with fine twice the amount of the cheque, i.e., Rs.3,20,000/-. However, since 15 years have elapsed since the complaint was filed, the Court directed if the respondent pays a further sum of Rs.1,60,000/- to the appellant, then the sentence would stand suspended.

[Bhupesh Rathod v. Dayashankar Prasad Chaurasiya, 2021 SCC OnLine SC 1031, decided on 10.11.2021]


*Judgment by: Justice Sanjay Kishan Kaul