Harish C. Chadda and Another vs XS Financial Services Ltd.

D. Murugesan, J.—The petitioners are accused Nos. 5 and 8 respectively in C.C. No. 1826 of 1998 on the file of the learned 18th

Metropolitan Magistrate, Saidapet, Chennai. The respondent is the complainant. The respondent in the complaint filed under Sections 190(1)(a)

and 200 of the Criminal Procedure Code, 1973, for an offence under Sections 138, 141(1) and 142 of the Negotiable Instruments Act, 1881, and

u/s 420 of the Indian Penal Code has stated that the respondent is a limited company incorporated under the provisions of the Companies Act,

1956, having its registered office at No. 21/1, Crescent Park Street, Chennai-17. The respondent had sanctioned a short-term loan for a sum of

Rs. 9 lakhs to the first accused, namely Nubal (India) Limited, Chennai. The said amount was disbursed to the first accused on January 3, 1996,

and was repayable with interest at the rate of 36 per cent per annum. Despite availing of the said facilities the first accused has not been regular in

respect of the repayment of the said sum and as on January 31,1997, a sum of Rs. 5,15,000 was due and payable by the first accused

respondent/complainant. Towards part payment of the above said amount, the first accused issued three cheques to the respondent/complainant

dated February 18,1997, each for a sum of Rs. 1 lakh, Rs. 2 lakhs and Rs. 2 lakhs respectively. The respondent presented those cheques for

payment through its Bankers, namely ICICI Banking Corporation Limited, Chennai, on June 18, 1997. But the same were returned on June 20,

1997, with an endorsement ""funds expected, present again"". With bona fide intention the respondent/complainant represented the cheques on June

24, 1997. However, those cheques were again returned with an endorsement ""payment stopped by drawer"". The cheques return memo dated

June 25, 1997, was received by the respondent/complainant on June 26, 1997. Therefore, the respondent/complainant caused a lawyer''s notice

dated June 30, 1997, to all the accused calling upon them to pay a sum of Rs. 5 lakhs due under those cheques within 15 days from the date of

receipt of the said notice. The notices sent through registered post with acknowledgement due was received by the first and second accused on,

July 2, 1997, and the fourth and sixth accused on July 3, 1997. However, the notices issued to the third and fifth accused were returned unserved.

Having waited for 15 days to enable the accused to make payment, and such payment has not been made by the accused, the respondent has

preferred the complaint against the accused on the ground that all the accused are involved in the day-to-day affairs and conduct of the business of

the company and are liable for prosecution.

It is the above complaint that has been challenged by accused Nos. 5 and 8 in this petition. Mr. V. Vibhishanan, learned Counsel appearing for

the petitioners, would challenge the complaint on the ground that no notices were either issued or served on the petitioners who are arrayed as

accused Nos. 5 and 8 respectively in the complaint. Inasmuch as no notices have been issued, the petitioners had no opportunity for making

payment of the amount as demanded by the respondent/complainant in the notice. Therefore, the complaint against the petitioners is not sustainable

and is liable to be rejected. In this connection, learned Counsel would rely upon a judgment of this Court made in Crl.O.P. No. 9530 of 1998,

dated July 7, 1999, wherein this Court quashed the complaint against the accused who were not served with the notices u/s 138(b) of the

Negotiable Instruments Act, hereinafter called ""the Act"".

On the other hand, learned Counsel appearing for the respondent would submit that as per Section 138(b) of the Act, no individual notice is

contemplated to be issued against all the directors. All that the section requires is only a notice to be issued to the drawer of the cheque. In case

the offence is committed by the company, a notice shall be issued to the drawer of the cheque, namely, the person who actually issued the cheque

on behalf of the company and to the company. The said section does not mandate the complainant to issue the notice to all the directors.

Therefore, it cannot be contended that merely because no notices had been issued to the petitioners who have been arrayed as accused Nos. 5

and 8 respectively, the complaint itself is not sustainable. In this connection, learned Counsel would heavily rely upon the following judgments :

(a) Oswal Ispat Udyog v. Salem Steel Suppliers, I (1991) BC 558 = (1991) 2 MWN (Cr.) 177;

(b) K. Pannir Selvam v. M.M.T.C. Ltd., II (2000) BC 354=(2000) 2 Crimes 354 (AP);

(c) Jain Associates and Others Vs. Deepak Chawdhary and Co.,

(d) Anita v. Anil K. Mehra (1996)1 Cri 412 (P&H).

Therefore, learned Counsel seeks for the dismissal of the petition.

In view of the rival submissions, the question that has to be decided is as to whether a notice as contemplated u/s 138(b) of the Act is

necessarily to be issued to all the directors when the offence is said to have been committed by the company and the petitioners who are the

directors of the company can be prosecuted in the absence of such notices.

In order to consider the above question, it would be relevant to extract Section 138(b) of the Act which reads as follows :

Dishonour of cheque for insufficiency, etc., offunds 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, without prejudice to any other provision of this Act, be punished with imprisonment for a term

which may extend to one year, 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-- ......

(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 amount of money by

giving a notice, in writing, to the drawer of the cheque, within fifteen days of the receipt of information by him from the Bank regarding the return of

the cheque as unpaid.

In this connection it would be also relevant to extract Section 141 of the Act which reads as follows:

Offences by companies.--(1) If the person committing an offence u/s 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.

(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 of 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.

Explanation.--For the purposes of this section--

(a) ''company'' means any body corporate and includes a firm or other association of individuals; and

(b) ''director'', in relation to a firm, means a partner in the firm.

On a plain reading of Section 138(b) of the Act, it is seen that when a cheque presented to a Bank is dishonoured, the payee or the holder in

due course of the said cheque can make a demand for payment of the said amount of money by giving a notice in writing to the drawer of the

cheque. In spite of the receipt of the said notice, if the drawer of the cheque fails to make 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, he shall be deemed to have committed an offence. Therefore, when the drawer of a

cheque is an individual who has been issued with the notice of dishonour of the cheques with a demand for making such payment issued u/s 138(b)

of the Act, and fails to make the payment of the said amount of money either to the payee or to the holder in due course he shall be deemed to

have committed the offence. However, when the offence is committed by a company, and by virtue of Section 141, 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, whether issue of notice

to the company alone is sufficient, is to be considered. In the case of an offence committed by a company, the cheque is drawn by a person who is

in charge of the company on behalf of the company. Therefore, in order to make the company and the drawer of the cheque liable for the offence,

a notice is necessarily to be issued to the company as well as the drawer of thecheque on behalf of the company as per Section 138(b) of the Act.

The next question to be considered and decided is that when a presumption of guilt could be drawn against every person who at the time the

offence is committed, was in charge of and was responsible to the company for the conduct of the business of the company, whether such notices

should be issued to such directors of the company also. It is no doubt true that Section 138(b) speaks of issuance of notice to the drawer of the

cheque only. While interpreting the said section it is to be presumed that unless^a notice is issued to the drawer of the cheque u/s 138(b) and in

spite of the receipt of such notice the drawer of the cheque fails to make the payment of the amount of money covered under the cheque to the

payee or the holder in due course within 15 days of the receipt of the said notice, the offence is deemed to have been committed. For the purpose

of the cause of action for prosecuting the drawer of the cheque, a notice u/s 138(b) is mandatory. In this context, it is to be borne in mind that the

cause of action for prosecuting either the company or its directors, a notice as contemplated u/s 138(b) is absolutely necessary. On the other hand

while reading Section 138(b) read with Section 141 of the Act, it is to be considered whether the cause of action for the offence against a director

who has not been put on notice of dishonour of cheques with a demand to make the payment of the amount covered under the cheque within 15

days, could also be prosecuted for the offence. Section 141 of the Act of course makes a director guilty of the offence and liable to be proceeded

against as if he has committed the offence u/s 138 of the Act when the offence is committed by a company. However, whether such a prosecution

could be launched without there being a cause of action arising against such director as having committed the offence in the absence of any

opportunity given to him personally in regard to the dishonour of cheque with consequent demand of payment of money covered under the cheque.

This, in my considered view has to be looked at from the point of the punishment that could be imposed on such director for the offence committed

by the company. Of course, when a company is found guilty for an offence u/s 138 of the Act, it could be convicted and be punished with a fine

which may extend to twice the amount of the cheque. However, the company by itself cannot be punished with imprisonment for a term as

contained u/s 138 of the Act which may extend to one year, and such punishment of imprisonment could be imposed only as against the directors.

When a director is presumably made guilty of the offence committed by the company by virtue of Section 141 of the Act, whether he should be

sentenced to imprisonment and whether his personal liberty can be curtailed without any opportunity being given to him for compliance with the

demand under the notice. If the matter is looked at from this point, the issuance of notice to the director of the company assumes importance. Of

course, u/s 141 every person who at the time of the offence was committed, was in charge of and was responsible for the company for the

conduct of the business of the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished

accordingly. The said presumption of guilt arises only when a notice is served u/s 138(b) of the Act calling upon such person to honour the notice

by making payment. Only in the event of failure to make payment within 15 days from the receipt of the notice, does the cause of action for

prosecuting such director arise. Of course, in the case of a cheque issued by an individual being dishonoured and non-compliance with the demand

despite notice u/s 138(b), it is presumed that such drawer of the cheque is said to have committed the offence. However, without the knowledge of

dishonour of cheque and without an opportunity to arrange for payment of the amounts covered under the cheque within 15 days of the date of

receipt of the notice can it be called that the director who has not been served with the notice can be proceeded against and punished for

imprisonment merely because he happens to be a director and is presumed to be guilty when the offence is committed by the company. In this

connection, it is relevant to note the proviso to Section 141 which states that ""provided 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"". The proviso to Section 141 assumes more significance with regard to the service of notice to the

individuals including the directors as there is a presumption of guilt and a liability to be proceeded against and punished for imprisonment. When

such notice is not given to a director it can be very well contended by such director that the offence was committed without his knowledge and in

the absence of such knowledge he could not exercise all due diligence to prevent the commission of the offence. Therefore, in the absence of any

notice to the individual director, it cannot be said that a cause of action has arisen to prosecute the said director also for the offence. Presumption

of guilt and liability to be proceeded against and punished is one thing. Before proceeding against such person, it is incumbent on the complainant

to put such person on notice and in the absence of such notice it cannot be considered that the cause of action arises against such person for being

prosecuted. Section 138(b) refers to issuance of notices to the drawer. Of course while interpreting the said section, notice to the drawer shall

mean notice to the drawer who has drawn the cheque in individual cases. However, when the offence is committed by a company and by virtue of

Section 141 of the Act 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 are presumed to be guilty of the offence, the word ""drawer"" as contained in Section 138(b) cannot be

restricted in the sense to the drawer of the cheque alone but also to those who are presumed to be guilty of the offence by virtue of Section 141

when more particularly such individuals are liable to be imprisoned for such offence and their personal liberty is infringed thereon. Therefore, I hold

that when the offence is committed by a company and by virtue of Section 141 of the Act 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, are presumed to be guilty of the offence,

those persons shall also be entitled to the notice u/s 138(b) of the Act. In the absence of such notice there cannot be a cause of action against

those directors as they had no knowledge of the offence and there was no opportunity for them to exercise all due diligence to prevent the

commission of such offence.

In the judgment reported in Oswal Ispat Udyog v. Salem Steel Suppliers, (supra), referred to by learned Counsel for the respondent, of course

it is.decided in that no notice to all the individual partners is necessary. Similarly, in the judgments reported in Jain Associates v. Deepak

Chaudhary and Co., (supra), K. Pannir Selvam v. M.M.T.C. Ltd. (supra) and Anita v. Anil K. Mehra, (supra) the Courts have also taken the

same view. However, the point as to the cause of action for the offence as well as the knowledge to the individual person of commission of offence

and in the absence of such knowledge there was no opportunity for them to exercise all due diligence to prevent the commission of such offence,

has not been either canvassed, argued, considered or decided in those judgments. In that view of the matter, with great respect to the learned

Judges, I do not agree with the decision rendered in the above judgments. No other judgments have been brought to my notice holding a contrary

view to that taken by me in this order. On the other hand I am supported by the judgment of this Court made in Crl.O.P. No. 9530 of 1998, dated

July 7 1999, wherein this Court has held that in the absence of statutory notice to the petitioner who was a managing director of the company

which is mandatory under the provisions of the Negotiable Instruments Act, a complaint could be quashed. Even though it is stated in the complaint

that notice sent to the fifth accused was returned unserved, Counsel for the petitioner submitted that no such notice was sent to the fifth accused.

This submission of learned Counsel for the petitioner is not disputed by learned Counsel for the respondent/ complainant. Furthermore, nothing has

been mentioned in the complaint as to the issue of notice to the eighth accused. Hence, it is no doubt clear that no notices were issued to both the

petitioners namely fifth and eighth accused. Therefore, the complaint against the petitioners pending on the file of the learned 18th Metropolitan

Magistrate, Saidapet, Chennai, in C.C. No. 1826 of 1998 is quashed insofar as the petitioners/accused Nos. 5 and 8 respectively are concerned

and the petition is allowed. Consequently, Crl.M.P. Nos. 5949 and 5950 of 1999 are closed.