K. Chinnusamy and Others vs S.S. Dye Chem

C.T. Selvam, J.—These petitions seek to quash the proceedings in C. C. No. 567 of 2004 on the file of the learned Judicial Magistrate II,

Erode in so far as the petitioners are concerned.

C.C. No. 567 of 2004 is a case pending adjudication for alleged offences under Sections 138, 141 and 142 of the Negotiable Instruments Act,

1881, read with Section 420 of the Indian Penal Code, 1860. The petitioners in Crl. O.P. No. 18130 of 2005 are accused Nos. 4, 6, 7 and 8,

while the petitioner in Crl. O.P. No. 20867 of 2007 is the fifth accused in the case. The complaint case has been filed on the averments that the

first accused-company by name M/s. Adhavan Processors P. Ltd., used to purchase dyes and chemicals from the respondent/complainant on

credit for its textile processing and moneys were owing to the company in the course of such business transactions. The accused had

acknowledged and confirmed the liability to the respondent/complainant in a sum of Rs. 27,61,963.25 based on their accounts in the proceedings

before the BIFR in Case No. 273 of 2000. Towards discharging a part thereof, a cheque dated May 17, 2004, bearing No. 862048 drawn on

Bank of Rajasthan, Erode branch in favour of the respondent/complainant and in a sum of Rs. 25,00,000 was issued by the third accused on

behalf of the first accused company. The respondent/ complainant had followed the procedure envisaged u/s 138 of the Negotiable Instruments

Act, 1881 and having had no payment despite the statutory notice, preferred a complaint before the lower court. The further contention in the

complaint is that the first accused-company and its directors without having sufficient funds in the bank account, issued a cheque to the

respondent/complainant with dishonest intention knowing fully well that it would not be duly honoured on its presentation and thereby cheated the

complainant.

Learned Counsels appearing for the petitioners submitted that a reading of the complaint would show that only a blanket allegation of the

directors being incharge of and responsible for the day-to-day business activities of the first accused-company was made therein. On such an

averment, no complaint u/s 138 of the Act could be maintained and it is repeatedly has been so held by the honourable apex court. Reliance was

placed on the decision of the honourable apex court in K.K. Ahuja v. V.K. Vora [2009] 152 Comp Cas 520 : [2009] 2 L. W. (Crl.) 1386,

wherein it is held as follows (page 536):

If a mere reproduction of the wording of Section 141(1) in the complaint is sufficient to make a person liable to face prosecution, virtually every

officer/employee of a company without exception could be impleaded as accused by merely making an averment that at the time when the offence

was committed they were in charge of and were responsible to the company for the conduct and business of the company. This would mean that if

a company had 100 branches and the cheque issued from one branch was dishonoured, the officers of all the 100 branches could be made

accused by simply making an allegation that they were in charge of and were responsible to the company for the conduct of the business of the

company. That would be absurd and not intended under the Act. As the trauma, harassment and hardship of a criminal proceedings in such cases,

may be more serious than the ultimate punishment, it is not proper to subject all and sundry to be impleaded as accused in a complaint against a

company, even when the requirements of Section 138 read and Section 141 of the Act are not fulfilled.

It is the contention on behalf of the petitioners that they are not signatories to the cheque nor they held the capacity of a managing director or

manager of the first accused-company. Placing reliance on the decision abovementioned learned Counsel submitted that they do not fall within the

category of persons who would necessarily be held to be in charge of and responsible to the company. In this regard, reliance is placed on

paragraphs 14 to 16 of the said judgment (page 533 of 152 Comp Cas):

The words ''every person who, at the time of the offence was committed, was in charge of, and was responsible for the conduct of the business of

the company'' occurs not only in Section 141(1) of the Act but in several enactments dealing with offences by companies, to mention a few--

Section 278B of the Income Tax Act, 1961, Section 22C of the Minimum Wages Act, 1948, Section 86A of the Employees'' State Insurance

Act, 1948, Section 14A of the Employees'' Provident Funds and Miscellaneous Provisions Act, 1952, Section 29 of the Payment of Bonus Act,

1965, Section 40 of the Air (Prevention and Control of Pollution) Act, 1981 and Section 47 of the Water (Prevention and Control of Pollution)

Act, 1974. But neither Section 141(1) of the Act, nor the pari materia provisions in other enactments give any indication as to who are the persons

responsible to the company, for the conduct of the business of the company. Therefore, we will have to fall back upon the provisions of the

Companies Act, 1956, which is the law relating to and regulating companies. Section 291 of the said Act provides that subject to the provisions of

that Act, the board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is

authorised to exercise and do. A company though a legal entity can act only through its board of directors. The settled position is that a managing

director is prima facie in charge of and responsible for the company''s business and affairs and can be prosecuted for offences by the company.

But in so far as other directors are concerned, they can be prosecuted only if they were in charge of and responsible for the conduct of the

company''s business. A combined reading of Sections 5 and 291 of Companies Act, 1956, with the definitions in Sub-section (24), (26), (30),

(31), (45) of Section 2 of that Act would show that the following persons are considered to be the persons who are responsible to the company

for the conduct of the business of the company:

(a) the managing director/s;

(b) the whole-time director/s;

(c) the manager;

(d) the secretary;

(e) any person in accordance with whose directions or instructions the board of directors of the company is accustomed to act;

(f) any person charged by the Board with the responsibility of complying with that provision (and who has given his consent in that behalf to the

Board); and

(g) where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the

Board in this behalf or where no director is so specified, all the directors.

It follows that other employees of the company, cannot be said to be persons who are responsible to the company, for the conduct of the business

of the company.

Section 141 uses the words was in charge of, and was responsible to the company for the conduct of the business of the company. It is evident

that a person who can be made vicariously liable under Sub-section (1) of Section 141 is a person who is responsible to the company for the

conduct of the business of the company and in addition is also in charge of the business of the company. There may be many directors and

secretaries who are not in charge of the business of the company at all. The meaning of the words person in charge of the business of the company

was considered by this Court in Girdhari Lal Gupta Vs. D.H. Mehta and Another, , followed in State of Karnataka Vs. Pratap Chand and Others,

and Smt. Katta Sujatha Vs. Fertilizers and Chem. Travancore Ltd. and Another, . This Court held that the words refer to a person who is in

overall control of the day-to-day business of the company. This Court pointed out that a person may be a director and thus belongs to the group of

persons making the policy followed by the company, but yet may not be in charge of the business of the company; that a person may be a manager

who is in charge of the business but may not be in overall charge of the business; and that a person may be an officer who may be in charge of only

some part of the business.

Therefore, if a person does not meet the first requirement, that is being a person who is responsible to the company for the conduct of the business

of the company, neither the question of his meeting the second requirement (being a person in charge of the business of the company), nor the

question of such person being liable under Sub-section (1) of Section 141 does not arise. To put it differently, to be vicariously liable under Sub-

section (1) of Section 141, a person should fulfil the ''legal requirement of being a person in law (under the statute governing companies)

responsible to the company for the conduct of the business of the company and also fulfil the ''factual requirement'' of being a person in charge of

the business of the company.

Reliance also is placed on the decision of the honourable apex court in S.M.S. Pharmaceuticals Ltd. Vs. Neeta Bhalla and Another, , to submit

that the honourable apex court had found the allegation of directors being in charge of and responsible to the company in the conduct of its affairs

at the time of commission of offence, a necessary and requisite pleading in the complaint. It is contended that the complaint case would fail also on

this score.

Learned Counsel for the respondent would draw the attention of this Court to certain allegations in the complaint which reads as follows:

(1) All are in charge and responsible for the day-to-day business activities of accused No. 1 company.

(2) The accused has also acknowledged and confirmed their liability to the complainant to a sum of Rs. 27,61,963.25 based on their accounts in

the proceedings before the Board for Industrial and Financial Reconstruction (BIFR) in Case No. 273 of 2000. By confirming their liability

referred to above and to discharge the same, on May 14, 2004, the third accused on behalf of other accused had issued a cheque post dated May

17, 2004 bearing No. 862048 for Rs. 25,00,000 (rupees twenty five lakhs only) drawn on Bank of Rajasthan, Erode branch to the favour of the

complainant. Upon issuing the cheque, the third accused had promised that the above said cheque would be duly honoured on its presentation.

(3) The complainant submits that accused No. 3 on behalf of accused No. 1 company and its directors without having sufficient funds in the bank

account issued the above cheque to the complainant with dishonest intention knowing fully well that it would not be duly honoured on its

presentation and thereby cheated the complainant. Hence, accused Nos. 1 to 10 have committed the offences under Sections 138, 141 and 142

of the Negotiable Instruments Act and also the offence u/s 420 of the Indian Penal Code.

It is the contention of learned Counsel for the respondent that the allegations above reproduced would fully satisfy the legal requirements and be

sufficient and sure compliance with the requisites put forth in the decisions of the honourable apex court. Learned Counsel would refer to the

decision of the honourable apex court in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhatla [2007] 136 Comp Cas 268 : [2008] 1 LW (Crl.) 50,

wherein at paragraph 19 it had been observed as follows (page 276):

The averments must state that the person who is vicariously liable for commission of the offence of the company both was in charge of and was

responsible for the conduct of the business of the company. The requirements laid down therein must be read conjointly and not disjunctively.

Learned Counsel for the respondent would submit that the complaint ought to be read conjointly and not disjunctively and when the allegations

of the complaint reproduced are so read, it would be clear that sufficient averments are made in the complaint towards arraying the petitioners

herein, who are the directors of the first accused-company, as accused. A conjoint reading of the complaint would show that all directors had

knowledge of issue of the cheque, and liability thereunder to payment. According to learned Counsel for the respondent, the fact that these

petitioners as directors, were in charge of and responsible to the first accused-company at the time of commission of offence, was self-evident. The

lower court has taken cognisance on the strength of the complaint also against these accused and on the strength of necessary averments contained

therein. This Court would not interfere and exercise its power u/s 482 of the Criminal Procedure Code.

I have considered the rival submissions.

Repeatedly, it has been held by the honourable apex court that mere averment of persons being in charge of and responsible to company in the

conduct of its affairs, i.e., averments in the nature of verbatim reproduction of Section 141 of the Negotiable Instruments Act, would not suffice.

The averments should be such, as would clearly indicate that the persons arrayed as accused in fact were so. In the instant case, the complaint

would have to be found falling short on this score. The reliance placed by learned Counsel for the respondent in S.M.S. Pharmaceuticals Ltd. v.

Neeta Bhalla [2007] 136 Comp Cas 268 (SC) : [2008] 1 LW (Crl.) 50, is misplaced. It is in discussing the facts of the particular case that the

honourable apex court states that not all directors may be associated with the management of the day-to-day affairs of the company and

accordingly, that a person was a party to a purported resolution would not necessarily lead to the inference that she was actively associated with

the management of the affairs of the company. It is in such context that the honourable apex court has observed as follows (page 276):

The averments must state that the person who is vicariously liable for commission of the offence of the company both was in charge of and was

responsible for the conduct of the business of the company. The requirements laid down therein must be read conjointly and not disjunctively.

Clearly, the observations cannot be taken out of context and relied upon on behalf of the respondents. Again the requirements put forth by the

honourable apex court in S.M.S. Pharmaceuticals Ltd. Vs. Neeta Bhalla and Another, , have not been met. The honourable Supreme Court has

held in paragraph 20 as follows (page 578):

(a) It is necessary to specifically aver in a complaint u/s 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-paragraph (b) has to be in the negative. Merely being a director of a company is not sufficient to make

the person liable u/s 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 u/s 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 u/s 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.

For the reasons above said, criminal original petitions shall stand allowed. The proceedings in C.C. No. 567 of 2004 on the file of the learned

Judicial Magistrate II, Erode shall stand quashed in so far as these petitioners are concerned. Consequently, the connected miscellaneous petitions

are closed.