REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELALTE JURISDICTION

CRIMINAL APPEAL NO. 875   OF 2008

(Arising out of SLP (Crl.) No. 4801 of 2007)

DCM Financial Services Ltd. …. Appellant

Versus

J.N. Sareen and another …. Respondents

J U D G M E N T

S.B. SINHA, J.

1. Leave granted.

2. What  would  be  the  effect  of  a  post  dated  cheque  vis-à-vis

prosecution in terms of Section 141 of the Negotiable Instruments Act,

1881 (in  short  the  Act)  is  the question  involved in  this  appeal  which

arises out of a judgment and order dated 31st January, 2007 passed by the

High Court of Delhi at New Delhi in Criminal Revision No. 777 of 2003

dismissing  the  Criminal  Revision  Application  preferred from an order

dated 5th July, 2003 passed by the learned Additional  Sessions  Judge,

New Delhi, discharging the 1st  respondent No.1 herein.

3. The basic fact of the matter is not in dispute.

First  Respondent herein was a Director of a Company known as

M/s.  International  Agro Allied Products  Ltd.   (the Company).   It  had

purchased certain agricultural equipments on hire purchase/lease from on

3rd April, 1995.  As a part of the said transaction some post dated cheques

were  issued in  favour of  the  appellant  herein  towards the  payment  of

monthly hire/rental.   

First Respondent admittedly resigned from the Directorship of the

Company on or about 25th May, 1996.  It was accepted.  One of the said

post  dated  cheques  which  was  issued  in  April,  1995  was  dated  28th

January, 1998 amounting to Rs.2,01,298/-, when presented to the bank

by the appellant  for encashment,  was dishonoured.  Pursuant thereto a

notice for payment was issued.  Amount having not  been paid despite

service of notice, a complaint petition was filed under Section 138 of the

Act.  It was inter alia averred therein :-

“8. That  on  assurance  of  the  accused  persons cheque  No.0644739  dated  28th January,  1998  for  a sum  of  Rs.2,01,298/-  drawn  on  Bank  of  Baroda,

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Lucknow and delivered/issued by the accused towards payment  of  hire/lease  rentals,  were  presented  for encashment  again  by complainant  company through their bankers and the same was returned unpaid by the bankers  of  the accused  vide memo dated  22.6.1998 with the remarks “Insufficient Funds” to the banker’s of complainant company.  The complainant received the  information  only  on  21.6.1998.  (sic)  (Copy  of memo of cheque returned and above referred cheque are annexed herewith.).   

9. That  the  complainant  company  sent  a  legal notice to the accused persons through its advocate on 6th July, 1998, demanding the payment against these cheques within 15 days from the receipt of the notice. This  notice  was  sent  to  the  accused  persons  both through registered AD & UPC within 15 days from the  date  of  receiving  the  information  regarding dishonouring of the cheques.   

10. That  the  accused  persons  failed  to  make  the payment of the above said amount despite service of legal notice on him.   

13. That the accused No.1 is a ccompany/firm and accused  No.  2  to  10  were  in  charge  and  were responsible  to  the  accused  No.1,  at  the  time  when offence was committed.  Hence, the accused Nos. 2 to 10  in  addition  to  the accused  No.1  are  liable  to  be prosecuted and punished in accordance with law by this Hon’ble Court, as provided by section 141 of the N.I.  Act,  1881.   Further  the  offence  has  been committed by the accused No.1 with the consent and connivance of the accused Nos. 2 to 10.”

4. No  allegation  was  made  in  the  complaint  petition  that  the  1st

respondent was a signatory to the cheque or he was authorized therefor.  

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5. An application was filed by the 1st respondent for his discharge.

By reason of the order dated 5th July, 2003 the same was allowed by the

learned Additional Sessions Judge, New Delhi, stating :-

“….It is a well-known fact that the Constitution of the Board of Directors of a company keeps on changing and  a  fixed  ration  of  the  directors  of  the  company keep  on  retiring  by  rotation  every  year  and  new directors are inducted.  The complainant cannot make directors  of  the  year  1995  or  1996  as  the  accused person for a cheque dishonoured in the year 1998.  He can make accused only those directors who were the directors  of  the  company  in  the  year  1998.   The Companies  Act has made specific provisions  for  all companies registered with the Registrar of Companies to  file  a  return  about  the  directors  in  the company. These provisions have been made for  the benefit  to the public so that the people can get information from Registrar  of  Companies  about  the  change  in  the constitution of directors.  Change of the constitution of the Board of Directors is not a private affair of the company.  A complainant cannot take the plea that he had  made  those  directors  as  accused  which  were known to him.  If this plea of complainant is allowed then he would be at liberty to make all the person who at any point of time, had been the director of company as accused.

5. I consider in view of the documents placed by the  applicant  on  record  showing  that  applicant  had resigned way back in  1996 and his  resignation  was informed to  the  Registrar  of  Companies  in  October 1996  by  filing  the  statutory  Form  32,  the  plea  of complainant  that  applicant  was a director  cannot  be considered  without  any  affidavit  of  the  Authorized Representative of the complainant that he has verified from  the  Registrar  of  Companies  and  Form  No.32 filed  by  the  accused  was  not  genuine.   It  is  not  a

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trivial  matter  that  a  person  has  to  face  trial  as  an accused in the court.  No person can be asked to face trial  in  the  court  without  there  being  a  basis  of proceedings  against  him merely  at  the  wishes  of  a complainant.   The  court  must  be  satisfied  that  the persons  who  has  been  called  as  an  accused  against him there was sufficient grounds to proceed.  In this case I consider that complainant has taken vague plea in  reply  to  the  application  of  accused  regarding genuineness  and  non-admission  of  Form  No.32  or about  his  being  responsible  for  the  function  of  the company.   In  view  of  specific  documents  by  the accused applicant the vague pleas of the company do not and anywhere.”   

The Criminal Revision Application filed thereagainst, as indicated

hereinbefore, has been dismissed.   

6. Mr. P.S. Patwalia, learned Senior Counsel appearing on behalf of

the  appellant,  would  submit  that  although  before  the  High  Court  no

material was placed to show that the 1st respondent was a signatory to the

cheque  in  question,  in  view  of  the  fact  that  the  entire  records  were

available  to  the  High  Court,  it  should  have  been  held  that  the  First

Respondent was primarily liable for payment of the amount thereunder.   

7. Mr.  J.N.  Sareen,  learned counsel  appearing  on  behalf  of  the  1st

respondent, supported the impugned judgment.  

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8. In support of the said complaint petition one Peter N. Ballam was

examined on behalf of the appellant. In relation to the 1st respondent he

did not make any statement as is required in terms of Section 141 of the

Act.  He merely stated :-

“8. I state that the above named accused no.1 is a Company and accused No. 2  to  8  are Directors/key executives  of  the  accused  No.1  Company  and  are responsible  for  the  affairs  of  accused  No.1  is/are guilty of  offence u/s  138 of  Negotiable  Instruments Act & 420 of IPC and is/are liable to be prosecuted and punished in accordance with law.”  

He,  thus,  even  was  not  aware  of  the  post  held  by  the  First

Respondent herein at the relevant time.  

The learned Sessions Judge in his order dated 5th July, 2003 has

noticed that no contention had been raised that the 1st respondent in his

capacity as an authorized signatory signed the cheque.  Such a contention

appears to have been raised before us for the first time.  It has not been

disputed that the 1st respondent resigned as a Director of the Company on

or about 25th May, 1996.   

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9. The question which arises  for  consideration is  as  to  whether  an

authorized  signatory, in  a situation  of  this  nature,  would be liable  for

prosecution.  

10. The underlying purpose for which the Parliament enacted Section

138 of the Act is not in doubt or dispute.  What, however, is necessary to

be  borne  in  mind is  the  distinction  between  a  civil  proceeding  and  a

criminal proceeding.  What is also necessary to be borne in mind is the

standard of proof in a civil suit and a criminal case.   

11. Averments  made  in  the  complaint  petition  supported  by  the

statements of the complainant form the basis for taking cognizance of an

offence by the Magistrate.  Application of mind on the averments made

in  the  complaint  petition  vis-à-vis  the  order  which  is  required  to  be

passed for summoning the witnesses is imperative.   

12. The complaint petition did not disclose as to who had signed the

cheque on behalf of the Company.  Involvement of the 1st respondent in

commission of the offence as signatory was neither averred nor stated by

the authorized representative  of  the complainant.   Even the complaint

petition  proceeded  on  the  basis  that  the  averments  contained  in  the

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complaint  petition  were  sufficient  to  enable  the  learned  Magistrate  to

summon the accused.  Even before the High Court such a contention has

not been raised, as noticed hereinbefore.     

We may notice the concession made by Mr. Patwalia in this behalf

that such a contention has been raised before us for the first time.  This

itself  indicates the manner in which the complaint proceeded.  Fairness

on the part of the complainant is also expected in such a matter.   

It is now not in dispute that the 1st respondent had intimated the

complainant as regards his resignation from the Company.   

13. Section 138 of the Act reads as under :-

“138.  Dishonour  of  cheque  for  insufficiency, etc.,  of  funds  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

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without  prejudice  to  any  other  provisions  of this Act, be punished with imprisonment for a term which may extend to two year, or with fine which may extend to twice the amount of the cheque, or with both…”

14. For  constituting  an  offence  in  terms  of  the  said  provision,  the

following ingredients are to be satisfied:-

a) A cheque must be drawn;

b) It must be presented and returned unpaid inter alia with the

remarks “insufficient funds”;

c) A Notice for payment should be served on the accused;

d) The  accused  has  failed  to  make  the  payment  of  the  said

amount to the payee within 15 days from the date of receipt

of notice.  

15. First  Respondent  indisputably  was  a  Director  of  the  Company.

The  liability  attached  to  him  was  not  a  personal  liability.   It  was  a

constructive liability.  The cheque was drawn on behalf of the Company.

He might have been liable as a person incharge of the company within

the meaning of Section 141 of the Act as has been held by this Court in

S.M.S. Pharmaceuticals Ltd.  vs.  Neeta Bhalla and another :  (2005) 8

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SCC 89 whereupon  strong reliance  has  been placed  by Mr.  Patwalia.

One of the questions which indisputably arose for consideration therein

was  as  to  whether  a  signatory  of  the  cheque  would  come within  the

purview of Section 141 of the Act, as would appear from paragraph 1

thereof, which reads :-

“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 fulfil  the requirements  of  the  said section  and  it  is  not  necessary  to  specifically state in the complaint that  the person 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  or  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.”

It was opined :-

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“9. 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.”

It was concluded :-

“10. 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

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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 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 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  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.”

16. We may also notice a decision of this Court in N. Rangachari vs.

Bharat Sanchar Nigam Ltd. : (2007) 5 SCC 108 wherein it was held :-

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“21. A  person  normally  having  business  or commercial  dealings  with  a  company,  would satisfy  himself  about  its  creditworthiness  and reliability  by  looking  at  its  promoters  and Board of Directors and the nature and extent of its business and its memorandum or articles of association.  Other  than  that,  he  may  not  be aware of the arrangements within the company in regard to its management, daily routine, etc. Therefore, when a cheque issued to him by the company is dishonoured, he is expected only to be aware generally of who are in charge of the affairs of the company. It is not reasonable to expect  him to  know whether  the  person  who signed  the  cheque was  instructed  to  do  so  or whether he has been deprived of his authority to  do so when he actually signed the cheque. Those  are  matters  peculiarly  within  the knowledge of the company and those in charge of  it.  So,  all  that  a payee of  a cheque that  is dishonoured  can  be expected  to  allege is  that the  persons  named  in  the  complaint  are  in charge  of  its  affairs.  The  Directors  are  prima facie in that position.”

It was further held :-

27. We  think  that,  in  the  circumstances,  the High Court has rightly come to the conclusion that  it  is  not  a  fit  case  for  exercise  of jurisdiction under Section 482 of the Code of Criminal Procedure for quashing the complaint. In fact, an advertence to Sections 138 and 141 of  the  Negotiable  Instruments  Act  shows that on  the  other  elements  of  an  offence  under Section 138 being satisfied, the burden is on the Board of Directors or the officers in charge of the affairs of the company to show that they are not  liable  to  be  convicted.  Any restriction  on their  power  or  existence  of  any  special circumstance  that  makes  them  not  liable  is something  that  is  peculiarly  within  their knowledge and it is for them to establish at the trial  such  a  restriction  or  to  show that  at  the relevant  time  they  were  not  in  charge  of  the affairs of the Company. Reading the complaint as  a  whole,  we  are  satisfied  that  it  is  a  case where  the  contentions  sought  to  be  raised  by the appellant  can  only be dealt  with  after  the conclusion (sic commencement) of the trial.”

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17. We are, however, concerned with a different situation hereat.   

18. Section  141 of  the Act  provides  for  a  constructive  liability.   A

legal  fiction has been created thereby.  The statute being a penal  one,

should receive strict  construction.   It  requires  strict  compliance of the

provision.  Specific averments in the complaint petition so as to satisfy

the requirements of Section 141 of the Act are imperative.   Mere fact

that at one point of time some role has been played by the accused may

not  by  itself  be  sufficient  to  attract  the  constructive  liability  under

Section 141 of the Act.   (See  K. Srikanth Singh  vs.  M/s. North East

Securities Ltd. and another : JT 2007 (9) SC 449).   

19. We may also  notice  that  this  Court  in  N.K. Wahi  vs.  Shekhar

Singh and others :  (2007) 9 SCC 481 has observed :-

“8. To launch a prosecution, therefore, against the alleged Directors  there  must  be  a specific allegation in the complaint as to the part played by  them  in  the  transaction.  There  should  be clear and unambiguous allegation as to how the Directors are in-charge and responsible for the conduct  of  the  business  of  the company.  The description  should  be  clear.  It  is  true  that precise  words  from the  provisions  of  the  Act need  not  be  reproduced  and  the  court  can always come to  a conclusion  in  facts  of  each case.  But still, in the absence of any averment

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or specific evidence the net result would be that complaint would not be entertainable.”

[Emphasis supplied]

20. The cheque in question was admittedly a post dated one.  It was

signed  on  3rd April,  1995.   It  was  presented  only sometimes  in  June,

1998.   In  the  meantime he  had resigned  from the  directorship  of  the

Company.  The complaint  petition  was filed on or  about  20th August,

1998.  Intimation about his resignation was given to the complainant in

writing  by  the  1st respondent  on  several  occasions.   Appellant  was,

therefore,  aware  thereof.   Despite  having  the  knowledge,  the  1st

respondent  was  impleaded  one  of  the  accused  in  the  complaint  as  a

Director  Incharge  of  the  affairs  of  the  Company  on  the  date  of

commission  of  the  offence,  which  he  was  not.   If  he  was  proceeded

against  as  a  signatory  to  the  cheques,  it  should  have  been  disclosed

before the learned Judge as also the High Court so as to enable him to

apply his mind in that behalf.  It was not done.  Although, therefore, it

may be that as an authorized signatory he will be deemed to be person

incharge, in the facts and circumstances of the case, we are of the opinion

that the said contention should not be permitted to be raised for the first

time before us.  A person who had resigned with the knowledge of the

complainant in 1996 could not be a person incharge of the Company in

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1998 when the cheque was dishonoured.  He had no say in the matter of

seeing that the cheque is honoured.  He could not ask the Company to

pay the amount.  He as a Director or otherwise could not have been made

responsible  for  payment  of  the  cheque  on  behalf  of  the  Company  or

otherwise.  (See also  Shiv Kumar Poddar  vs.  State (NCT of Delhi) :

(2007) 3 SCC 693:  Everest  Adveristing Pvt.  Ltd. vs.   State (NCT of

Delhi) : (2007) 5 SCC 54 and Raghu Lakshminarayanan  vs. Fine Tubes :

(2007) 5 SCC 103.  

21. Mr. Patwalia, however, submitted that a situation may arise where

change in the management is  effected only to  avoid such constructive

liability.   

Firstly  we  are  not  concerned  with  such  a  hypothetical  case.

Secondly, as noticed by this Court  in  Rangachari’s case (supra) that  a

person  normally  having  business  or  commercial  dealings  with  a

company, would satisfy himself about its creditworthiness and reliability

by looking at its promoters and Board of Directors and the nature and

extent of its business and its memorandum or articles of association.  

22. When post  dated cheques  are issued and the same are accepted,

although it may be presumed that the money will be made available in

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the  bank  when  the  same  is  presented  for  encashment,  but  for  that

purpose,  the  harsh  provision  of  constructive  liability  may  not  be

available except when an appropriate case in that behalf is made out.

23. Section  140  of  the  Act  cannot  be  said  to  have  any application

whatsoever.  Reason to believe on the part of a drawer that the cheque

would not be dishonoured cannot be a defence.  But, then one must issue

the cheque with full knowledge as to when the same would be presented.

It appears to be a case where the appellant has taken undue advantage of

the post dated cheques given on behalf of the company.  The statute does

not envisage misuse of a privilege conferred upon a party to the contract.

Submission of Mr. Patwalia made in view of the decision of this Court in

Adalat  Prasad v.  Rooplal  Jindal  and  Others [(2004)  7  SCC  338]  is

misplaced.  Had such a contention been raised even in terms of  Adalat

Prasad (supra),  the  respondents  could  have  filed  an  application  for

quashing in terms of Section 482 of the Code of Criminal Procedure at

that stage.  Again such a contention had not been raised before the High

Court.  No such ground appears to have been taken even in the Special

Leave Petition.  While examining the issue, we have considered the case

from  a  broader  angle.   Having  found  that  the  prosecution  of  the

respondents being mala fide despite the fact that on technical grounds it

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may be lawful to set aside the order of the High Court, it, in our opinion,

should not be done.  Jurisdiction of this Court in terms of Article 136 of

the Constitution of India need not be exercised only because it would be

lawful to do so.  Various factors including the conduct of the appellant

will be relevant therefor.  Having regard to the facts and circumstances of

this case, it is not a fit case where we should allow the appellants to raise

additional  contentions  which  have  not  been  raised  before  the  courts

below.

24. For the reasons abovementioned we are of the opinion that no case

has been made out for interference with the impugned judgment.   

25. The appeal fails and is dismissed.  

       …………………………… …..J.

           ( S.B. Sinha )

       …………………………… …..J.

         ( Dr. Mukundakam Sharma ) New Delhi May 13, 2008

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