2007 JTR(SC) 980
2007 4 AD(Cr) 357 ; 2007 2 BomCR(Cri)(SC) 447 ; 2007 9 JT 449 ; 2007 12 SCC 788 ; 2007 8 Supreme 136
2007(8) Supreme 136
Supreme Court of india
S.B. Sinha & RS. Bedi, JJ.
K. Srikanth Singh — Appellant
versus
M\s North East Securities Ltd. & Anr. — Respondents
Criminal Appeal No. 919 of 2007
Decided on : 20-07-2006
Important Point
Negotiation for obtaining financial assistance on behalf of company by its directors itself is not an ingredient for purpose of constituting an offence u/s 138.
Act
Referred
:CRIMINAL PROCEDURE CODE : S.482
NEGOTIABLE INSTRUMENTS ACT : S.138, S.141
(A) The impugned proceedings were initiated under Section 138 of the Negotiable Instruments Act for dishonour of a cheque, where vicarious liability of a director is sought to be established based on allegations of his involvement in loan negotiations. The High Court examined the applicability of Section 141 of the Act, which creates vicarious liability only upon proof that the accused was in charge of and responsible for the conduct of the companys business at the time of the offence, and considered the safeguards under Section 482 of the Code of Criminal Procedure to quash the proceedings. The complaint petition was also evaluated for strict compliance with statutory averments required to attract personal criminal liability.
(B) Personal criminal liability under Section 138 does not arise merely from holding a designation such as director; it requires the accused to be in charge of and responsible for the day-to-day affairs of the company at the relevant time. Vicarious liability cannot be inferred lightly and must be pleaded and proved. A complaint petition must strictly comply with Section 141 requirements, and the court cannot determine questions of fact at the stage of quashing proceedings under Section 482 Cr.P.C.
Facts of the case:
The appellant was proceeded against for an offence under Section 138 of the Negotiable Instruments Act based on a complaint alleging that he, as a director of the company, participated in negotiations for a loan of Rs. 10 lakhs and thus was responsible for the companys day-to-day affairs. The appellant contended that he was not a director at the relevant time and that the complaint did not satisfy Section 141 requirements. The High Court allowed the proceedings, and the appellant filed an appeal under Section 482 Cr.P.C.
Findings of Court:
The High Court erred in holding that the allegations, if taken true, established a prima facie case, as the complaint did not aver that the appellant was in charge of and responsible for the conduct of business. Negotiation for financial assistance by directors is not an ingredient of the offence, and vicarious liability must be specifically pleaded and proved, not inferred. The court also noted that questions of fact cannot be decided at the quashing stage.
Issues:
Whether a director can be held liable under Section 138 merely for participating in loan negotiations, without evidence of being in charge of and responsible for the companys day-to-day affairs at the time of the offence, and whether the complaint petition complied with Section 141 requirements.
Ratio Decidendi:
Criminal liability under Section 138 attracts personal liability only when the accused was in charge of and responsible for the companys business at the time of the offence. Section 141 requires strict compliance with statutory averments, and vicarious liability cannot be based on inference. The quashing of proceedings under Section 482 is not permissible when the complaint discloses a prima facie case, and questions of fact are for trial.
Result:
Appeal allowed; impugned judgment set aside; order quashed; no costs.
(A) The impugned proceedings were initiated under Section 138 of the Negotiable Instruments Act for dishonour of a cheque, where vicarious liability of a director is sought to be established based on allegations of his involvement in loan negotiations. The High Court examined the applicability of Section 141 of the Act, which creates vicarious liability only upon proof that the accused was in charge of and responsible for the conduct of the companys business at the time of the offence, and considered the safeguards under Section 482 of the Code of Criminal Procedure to quash the proceedings. The complaint petition was also evaluated for strict compliance with statutory averments required to attract personal criminal liability.
(B) Personal criminal liability under Section 138 does not arise merely from holding a designation such as director; it requires the accused to be in charge of and responsible for the day-to-day affairs of the company at the relevant time. Vicarious liability cannot be inferred lightly and must be pleaded and proved. A complaint petition must strictly comply with Section 141 requirements, and the court cannot determine questions of fact at the stage of quashing proceedings under Section 482 Cr.P.C.
Facts of the case:
The appellant was proceeded against for an offence under Section 138 of the Negotiable Instruments Act based on a complaint alleging that he, as a director of the company, participated in negotiations for a loan of Rs. 10 lakhs and thus was responsible for the companys day-to-day affairs. The appellant contended that he was not a director at the relevant time and that the complaint did not satisfy Section 141 requirements. The High Court allowed the proceedings, and the appellant filed an appeal under Section 482 Cr.P.C.
Findings of Court:
The High Court erred in holding that the allegations, if taken true, established a prima facie case, as the complaint did not aver that the appellant was in charge of and responsible for the conduct of business. Negotiation for financial assistance by directors is not an ingredient of the offence, and vicarious liability must be specifically pleaded and proved, not inferred. The court also noted that questions of fact cannot be decided at the quashing stage.
Issues:
Whether a director can be held liable under Section 138 merely for participating in loan negotiations, without evidence of being in charge of and responsible for the companys day-to-day affairs at the time of the offence, and whether the complaint petition complied with Section 141 requirements.
Ratio Decidendi:
Criminal liability under Section 138 attracts personal liability only when the accused was in charge of and responsible for the companys business at the time of the offence. Section 141 requires strict compliance with statutory averments, and vicarious liability cannot be based on inference. The quashing of proceedings under Section 482 is not permissible when the complaint discloses a prima facie case, and questions of fact are for trial.
Result:
Appeal allowed; impugned judgment set aside; order quashed; no costs.
Counsel for the Parties :
For the Appellant :Anil Kumar Tandale, Advocate.
For the Respondent: None.
Judgment
S.B. Sinha, J.—
1.Leave granted.
2.Appellant has been proceeded against for alleged commission of an offence under Section 138 of the Negotiable Instruments Act. First respondent filed a complaint in the court of 3rd Additional Chief Metropolitan Magistrate, Hyderabad. In regard to the liability of the appellant, which is vicarious in nature, the following statement has been made in paragraph 2 of the complaint petition which reads as under :
“2.That the accused is a Company doing their business in the name and style of Ms/. Rishab Alchem India Ltd., having its Registered Office at 52, Shantinivas Apartments, Mettuguda, Secunderabad and represented by Accused No. 2 in the capacity of Managing Director of the first accused company and accused no.3 to 6 are the directors of the company. All the accused persons after negotiation with the Complaint firm had agreed to take financial assistance from the Complainant firm. After executing comprehensive loan documentation they have taken financial assistance to the tune of Rs. 10 lakhs from the Complainant firm. At the time of taking the loan amount accused persons also agreed to pay interest for the principle amount of Rs. 10 lakhs.”
3.The appellant herein contends that at the relevant point of time, he was not the Director of the Company. Inter alia, on the ground that no cognizance could be taken on the basis of the allegations made in the complaint petition as the same do not satisfy the requirement of the provisions of Section 141 of the Negotiable Instruments Act, the appellant filed a petition before the High Court of Judicature at Andhra Pradesh at Hyderabad under Section 482 of the Code of Criminal Procedure praying for quashing of the proceedings initiated against him. The High Court by reason of the impugned judgment stated as under :
“3.The learned counsel for the petitioner contended that even if the entire allegations in the complaint are taken as true, they do not make out a prima facie case against the present petitioner; that before issuance of the cheques, the Petitioner herein resigned as Director of A.1 company, hence, continuation of the proceedings against him is nothing but abuse of process of court and so he prayed to quash the same.
4.The allegation in the complaint is that the present Petitioner is one of the directors of A.1 Company. Simply because he is a Director, he can not be prosecuted for the offence under Section 138 of the Negotiable Instruments Act, 1881 unless his case falls under the provisions of Section 141 of the Act. Under Section 141 of the Act, it must be shown that every person, who at the time of the offence, is responsible to the company for conduct of its business and day-to-day affairs. It is alleged that all the accused persons after negotiations with the Complainant firm agreed to take financial assistance from the Complainant and after executing comprehensive loan documentation, they have taken financial assistance to a tune of Rs. 10.00 lakhs from the Complainant firm. Since it is alleged that all the Directors-accused participated in the negotiations with regard to the financial help to be taken by the A.1 company from the Complainant firm, it can be inferred that all the Directors were responsible for day-to-day transactions of A.1 Company. Therefore, the allegations in the complaint make out a prima facie case that all the directors are in-charge of, and responsible for, day-to-day affairs of the company.
5.The second contention is that the Petitioner was not a Director of the company at the time of issuance of the cheque. It is a question of fact that has to be established before the trial court. Exercising the powers under section 482 Cr. P.C., a question of fact cannot be decided and determined. Hence, there are no grounds to quash the impugned proceedings.”
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 the accused No.1, which in our opinion, would not give rise to an inference that the appellant was responsible for day-to-day affairs of the Company. An offence envisaged under Section 138 of the Negotiable Instruments Act contains several ingredients as has been held by a Three-Judge Bench of this Court in S.M.S. Pharmaceuticals Ltd. Vs. Neeta Bhalla and Another1, (2005) 8 SCC 89, in the following terms :
“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 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 no 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, 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 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.”
5.Negotiation for obtaining financial assistance on behalf of the Company by its Directors itself is not an ingredient for the purpose of constituting an offence under Section 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.
6.In Sabitha Ramamurthy and another v. R.B.S. Channabasavaradhya, reported in2, (2006) 10 SCC 581, this Court opined : -
“7.A bare perusal of the complaint petitions demonstrates that the statutory requirements contained in Section 141 of the Negotiable Instruments Act had not been complied with. It may be true that it is not necessary for the complainant to specifically reproduce the wordings of the section but what is required is a clear statement of fact so as to enable the court to arrive at a prima facie opinion that the accused are vicariously liable. Section 141 raises a legal fiction. By reason of the said provision, a person although is not personally liable for commission of such an offence would be vicariously liable therefore. Such vicarious liability can be inferred so far as a company registered or incorporated under the Companies Act, 1956 is concerned only if the requisite statements, which are required to be averred in the complaint petition, are made so as to make the accused therein vicariously liable for the offence committed by the company. Before a person can be made vicariously liable, strict compliance with the statutory requirements would be insisted. Not only the averments made in para 7 of the complaint petitions do not meet the said statutory requirements, the sworn statement of the witness made by the son of the respondent herein, does not contain any statement that the appellants were in charge of the business of the Company. In a case where the court is required to issue summons which would put the accused to some sort of harassment, the court should insist strict compliance with the statutory requirements. In terms of Section 200 of the Code of Criminal Procedure, the complainant is bound to make statements on oath as to how the offence has been committed and how the accused persons are responsible therefore. In the event, ultimately, the prosecution is found to be frivolous or otherwise mala fide, the court may direct registration of case against the complainant for mala fide prosecution of the accused. The accused would also be entitled to file a suit for damages. The relevant provisions of the code of Criminal Procedure are required to be construed from the aforementioned point of view.”
(See also : Everest Advertising Pvt. Ltd. v. State Govt. of NCT of Delhi & Ors. reported in3, JT 2007 (5) SC 529 and Raghu Lakshminarayanan v. M/s. Fines Tubes reported in4, JT 2007 (5) SC 552).
7.For the reasons aforementioned, the impugned judgment cannot be sustained and the same is accordingly set aside. The order taking cognizance is quashed. The appeal si allowed.
8.No costs.
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