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CASE NO.: Appeal (crl.)  520 of 2007

PETITIONER: Everest Advertising Pvt. Ltd

RESPONDENT: State, Govt. of NCT of Delhi & Ors

DATE OF JUDGMENT: 10/04/2007

BENCH: S.B. Sinha & Markandey Katju

JUDGMENT: J U D G M E N T

CRIMINAL APPEAL NO.      520          OF 2007 [Arising out of SLP (Crl.) No. 6204-6205 of 2005]

S.B. SINHA,  J :

       Leave granted.

       This appeal is directed against a judgment and order dated 13.07.2005  passed by a learned Single Judge of the Delhi High Court in Criminal M.C.  Nos. 3690 and 3691 of 2001.

       Respondent Nos. 2 and 3 herein are Chairman and Managing Director  of a Company known as ’Dalmia Industries Ltd.’, (The Company)  which is  registered and incorporated under the Companies Act, 1956.  It was arrayed  as Accused No. 6 in the complaint petition.

       The Company is engaged in the business of advertising and publicity.   By an agreement dated 17.07.1995, the Company as also Accused No. 6  entered into an agreement in terms whereof the Company was appointed as  advertising and publicity agents of Accused No. 6 in respect of their various  products on the terms and conditions contained therein.  Allegedly, the  Company carried out various jobs and releases between the period July,  1997 and December, 1997.  It raised bills to the extent of Rs. 2,59,21,053.37  for the work executed by it.  On 14.11.1997, Accused No. 6 issued various  post dated cheques allegedly towards part payment of the said dues which on  presentation to the bank on 6.04.1998 admittedly were dishonoured.  Notices  were served on  the Respondents Nos. 2 and 3 on 18.04.1998.   

       Appellant \026 Company (Company) filed two complaint petitions  against the accused persons including Respondent Nos. 2 and 3 herein  alleging:

"4. That accused No. 1 to 5 are the Chairman, Vice  Chairman, Director (Technical), Executive Director, and  Senior General Manager (Finance) of the accused  Company respectively and are Incharge and responsible  to the accused company for the conduct of the business  of the Company and are thus liable for making the  payment.

***                     ***                     *** 9.That the complainant company presented these cheques  on 26.3.1998 for encashment through their bankers  Central Bank of India, Ram Tilak Nagar Branch, New

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Delhi, which have been returned back to the complainant  company on 28.3.1998 by the Banker with the  endorsement dated 27.3.1998 of the State Bank of  Bikaner and Jaipur D 72 Connaught Circus, New Delhi  to the bank of the accused company "payment stopped by  the drawer".  One of the cheque bearing No. 588184  dated 6.11.1997 drawn on the State Bank of Bikaner and  Jaipur, D-72 Connaught Circus, New Delhi returned with  the endorsement of the accused Bank "exceeds  arrangement".  This Bank Memo along with the cheque  was sent by the Banker of the complainant company vide  Memo dated 28.3.1998.  Subsequently, the accused gave  pay order in lieu of the cheque.

***                     ***                     *** 11. That these post dated cheques as per Annexure ’B’  were given after the accused No. 1 to 5 had various  meetings with the complainant company and it is only  after persuasion that the complainant company owes  money to various Media Concessionais and unless they  are being paid, the releases of the accused company shall  not be entertained by the Media Concessionais. ***                     ***                     *** 13. That accused No. 1 to 5 are Incharge and responsible  for the conduct of the business and the offence is  committed by the accused company with the active  connivance of the accused No. 1 to 5."

       On the said complaint petitions and upon recording the initial  deposition of the complainant and its witnesses under Section 200 of the  Code of Criminal Procedure, by an order dated 24.07.1999, processes were  directed to be issued by the learned Magistrate against the accused persons  in terms of  Section 204 of the Code of Criminal Procedure.   

       An application was filed by them for recalling the processes so issued.   By an order dated 11.07.2001, the learned Magistrate recalled the said order  dated 24.07.1999 issuing  summons against Respondent Nos. 2 and 3.   Criminal Miscellaneous applications were filed by the Company  thereagainst before the High Court.  By reason of the impugned judgment,  the said applications have been dismissed by the High Court holding:

"13. Coming back to the facts of the two cases before me,  I find that the allegations in the complaint are far from  sufficient to summon respondents 2 and 3 for the offence  of the company - accused No.6. Apart from making an  omnibus allegation that all the accused were responsible  for the conduct of the business of the company and that  all of them connived in the offence, there is no specific  averment as to how any of the accused 1 and 2  (respondents 2 and 3 herein) were actually involved in  the conduct of the business of the company relating to the  transaction in question or how and on what basis it can be  said that it was with the active connivance of these two  accused that the offence was committed by the company.  In my opinion, the petitioners could not have been  summoned on the basis of the allegations made by the  complainant. The Metropolitan Magistrate has not  committed any mistake in declining to summon the two  accused. The petitions have no merit and, therefore,  dismissed."

       Mr. Aloke Kumar Sengupta, learned Senior Counsel appearing on  behalf of the Company, would submit that having regard to the allegations  made in the complaint petition, the High Court committed a serious illegality  in passing the impugned judgment.  The learned counsel submitted that the

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learned Magistrate had no jurisdiction to recall its order whereby the accused  persons were summoned.

       Mr. K.T.S. Tulsi, learned senior counsel appearing on behalf of  Respondents Nos. 2 and 3, on the other hand, would submit that complaint  petition contained mechanical reproduction of the wordings of a section and,  thus, without making any allegation that Respondent Nos. 2 and 3 had any  role to play in the matter of issuance of cheque or the dishonour thereof, no  order issuing summons as against the said Respondents could have been  passed. A distinction, according to the learned counsel, must be made  between a Chairman of a Company and a Managing Director or a Deputy  Managing Director thereof inasmuch  whereas a Managing Director or a  Deputy Managing Director is presumed to be involved in the day to day  affairs of the Company, the Chairman of a Company may not even have any  knowledge in relation thereto.  Provisions of the Negotiable Instruments Act,  it was submitted, are being misused and this Court, therefore, should strike a  balance between the interest of a complainant and interest of an accused who  is alleged to be vicariously liable for the offences committed by the  Company.

       Summons were issued by the learned Magistrate by reason of an order  dated 24.07.1999.  He recalled the said order.  He did not have any  jurisdiction in that behalf.  A Magistrate does not have and, thus, cannot  exercise any inherent jurisdiction.

       In Adalat Prasad v. Rooplal Jindal and Others [(2004) 7 SCC 338], a  3-Judge Bench of this Court while overruling an earlier decision of this  Court in K.K. Mathew v. State of Kerala and Anr. [(1992) 1 SCC 217] stated  the law thus : "14. But after taking cognizance of the complaint and  examining the complainant and the witnesses if he is  satisfied that there is sufficient ground to proceed with  the complaint he can issue process by way of summons  under Section 204 of the Code. Therefore, what is  necessary or a condition precedent for issuing process  under Section 204 is the satisfaction of the Magistrate  either by examination of the complainant and the  witnesses or by the inquiry contemplated under Section  202 that there is sufficient ground for proceeding with the  complaint hence issue the process under Section 204 of  the Code. In none of these stages the Code has provided  for hearing the summoned accused, for obvious reasons  because this is only a preliminary stage and the stage of  hearing of the accused would only arise at a subsequent  stage provided for in the latter provision in the Code. It is  true as held by this Court in Mathew case1 that before  issuance of summons the Magistrate should be satisfied  that there is sufficient ground for proceeding with the  complaint but that satisfaction is to be arrived at by the  inquiry conducted by him as contemplated under  Sections 200 and 202, and the only stage of dismissal of  the complaint arises under Section 203 of the Code at  which stage the accused has no role to play, therefore, the  question of the accused on receipt of summons  approaching the court and making an application for  dismissal of the complaint under Section 203 of the Code  on a reconsideration of the material available on record is  impermissible because by then Section 203 is already  over and the Magistrate has proceeded further to Section  204 stage.         ***                     ***                     *** 16. Therefore, in our opinion the observation of this  Court in the case of Mathew1 that for recalling an  erroneous order of issuance of process, no specific  provision of law is required, would run counter to the

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scheme of the Code which has not provided for review  and prohibits interference at interlocutory stages.  Therefore, we are of the opinion, that the view of this  Court in Mathew case1 that no specific provision is  required for recalling an erroneous order, amounting to  one without jurisdiction, does not lay down the correct  law."           The said ratio has been reiterated by another 3-Judge Bench of this  Court in Subramanium Sethuraman v. State of Maharashtra and Anr. [JT  2004 (8) SC 220 and N.K. Sharma v. Abhimanyu (2005)13 SCC 213].  

       Unfortunately, this aspect of the matter was not considered by the  High Court despite the aforementioned binding precedents.  The High Court,  however, for all intent and purport upheld the order passed by the learned  Magistrate on the premise that allegations made in the complaint petition do  not satisfy the requirements of Section 141 of the Negotiable Instruments  Act.   

       The said provision reads thus :

’’141. Offences by companies.- (1) If the person  committing an offence under section 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: Provided further that where a person is nominated as a  Director of a company by virtue of his holding any office  or employment in the Central Government or State  Government or a financial corporation owned or  controlled by the Central Government or the Sate  Government, as the case may be, he shall not be liable for  prosecution under this Chapter. (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 on the art 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.’’

       As the contentions of the parties are covered by a few decisions of this  Court, we may at the outset notice the law operating in the field.

       The applicability and/or extent of Section 141 of the Act was referred  to and considered by a 3-Judge Bench of this Court in S.M.S.  Pharmaceuticals Ltd. v.  Neeta Bhalla and Anr. [(2005) 8 SCC 89 : 2005 (7)  SCALE 397].   

       The questions so referred read as under :

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"(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 fulfill the  requirements of the said section and it is not necessary to  specifically state in the complaint that the persons  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 of 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."

       They were answered in the following terms :

"19. In view of the above discussion, our answers to the  questions posed in the reference are as under: (a) It is necessary to specifically aver in a complaint  under Section 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 the question posed in sub-para (b) has  to be in the negative. Merely being a director of a  company is not sufficient to make the person liable under  Section 141 of the Act. A director in a company cannot  be deemed to be in charge of and responsible to the  company for the 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 the  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 the conduct of its business. When that is so, holders  of such positions in a company become liable under  Section 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  under Section 141. So far as the 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."

       In Saroj Kumar Poddar v. State (NCT of Delhi) and Anr. [2007 (2)  SCALE 36], this Court held :

       "Apart from the Company and the appellant, as  noticed hereinbefore, the Managing Director and all other  Directors were also made accused.  The appellant did not  issue any cheque.  He, as noticed hereinbefore, had  resigned from the Directorship of the Company.  It may

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be true that as to exactly on what date the said resignation  was accepted by the Company is not known, but, even  otherwise, there is no averment in the complaint petitions  as to how and in what manner the appellant was  responsible for the conduct of the business of the  Company or otherwise responsible to it in regard to its  functioning.  He had not issued any cheque.  How he is  responsible for dishonour of the cheque has not been  stated.  The allegations made in paragraph 3, thus, in our  opinion do not satisfy the requirements of Section 141 of  the Act."   

       Yet again in S.M.S. Pharmaceuticals Ltd. v.  Neeta Bhalla and Anr.  [2007 (3) SCALE 245], it was held:

"In terms of Section 138 of the Act, a complaint petition  alleging an offence thereto must demonstrate that the  following ingredients exist that:

(i)     a cheque was issued; (ii)    the same was presented; (iii)   but, it was dishonoured; (iv)    a notice in terms of the said provision was  served on the person sought to be made liable;  and (v)     despite service of notice, neither any payment  was made nor other obligations, if any, were  complied with within fifteen days from the date  of receipt of the notice.

       The liability of a Director must be determined on  the date on which the offence is committed.  Only  because Respondent No. 1 herein was a party to a  purported resolution dated 15.02.1995 by itself does not  lead to an inference that she was actively associated with  the management of the affairs of the Company.  This  Court in this case has categorically held that there may be  a large number of Directors but some of them may not  associate themselves in the management of the day to day  affairs of the Company and, thus, are not responsible for  conduct of the business of the Company.  The averments  must state that the person who is vicariously liable for  commission of the offence of the Company both was  incharge of and was responsible for the conduct of the  business of the Company.  Requirements laid down  therein must be read conjointly and not disjunctively.   When a legal fiction is raised, the ingredients therefor  must be satisfied.

       If the complaint petition is read in its entirety, the  same would show that the only person who was actively  associated in the matter of obtaining loan, signing  cheques and other affairs of the company which would  lead to commission of the alleged offence was the  accused No. 2.  By reason of the purported resolution  dated 15.02.1995, whereupon strong reliance has been  placed by Mr. Mishra, only the accused No. 2 was  authorized to do certain acts on behalf of the Company.   The cheques were issued on 15.08.1996, i.e., after a  period of 17 months from the date of the said resolution.   As is evident from the averments made in the complaint  petition, the cheques represented the amount of interest  payable for a total period of 15 days only calculated at  the rate of 25% per annum on the amount of deposit, viz.,  rupees two crores."

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       The observations made in Saroj Kumar Poddar (supra)  were,  however,  explained therein, stating: "A faint suggestion was made that this Court in Saroj  Kumar Poddar (supra) has laid down the law that the  complaint petition not only must contain averments  satisfying the requirements of Section 141 of the Act but  must also show as to how and in what manner the  appellant was responsible for the conduct of the business  of the company or otherwise responsible to it in regard to  its functioning.  A plain reading of the said judgment  would show that no such general law was laid down  therein.  The observations were made in the context of  the said case as it was dealing with a contention that  although no direct averment was made as against the  appellant of the said case fulfilling the requirements of  Section 141 of the Act but there were other averments  which would show that the appellant therein was liable  therefor."

[See also N.K. Wahi v. Shekhar Singh & Others \026 2007 (4) SCALE 188]

       The law operating in this behalf is, therefore, no longer res integra.   What is, therefore, necessary is the application of law.  Necessary  ingredients of Section 141 have been stated in the complaint petition at more  than one place.  Whether the same satisfies the requirements of law or not is  the question.           A Chairman of a large Company may or may not be aware of the  actual transaction.  If in a given situation, cheques are issued in ordinary  course of business.  The Managing Director or a Deputy Managing Director,  in view of S.M.S. Pharmaceuticals Ltd (supra) would be deemed to be aware  thereof.  A Chairman or a Director of a Company need not be.  But, without  going into the finer question raised by Mr. Tulsi, we may notice that  allegations have not only been made in terms of the  wordings of section but  also at more than one place, it has categorically been averred that the  payments were made after the meetings held by and between the  representative of the Company and Accused Nos. 1 to 5 which would  include Respondent Nos. 2 and 3.   

       It is, therefore,  not a case where having regard to the position held by  the said respondents in the Company, they could plead ignorance of the  entire transaction.

       Not only cheques were issued having regard to the huge amount  payable by Accused No. 6 to the Company but also as a result of fall out of  non-payment thereof,  negotiations were held between the parties wherein  Respondent Nos. 2 and 3 took part, and, thus,  in our opinion, there cannot  be any doubt that the ingredients of the provisions of Section 141 of the Act  stand  satisfied.

       Reliance placed by Mr. Tulsi on a decision of a Division Bench of this  Court in Pepsi Foods Ltd. and Another v. Special Judicial Magistrate and  Others [(1998) 5 SCC 749], in our opinion, is not apposite.   

       One of the questions which fell for consideration therein was as to  whether the order of the Magistrate summoning the accused reflected that he  had applied the mind to the fact of the case and the law applicable thereto.   In that case, the Company was proceeded against under Section 7/16 of the  Prevention of Food Adulteration Act, 1954.  The Managing Director was  also made an accused along with the Company.  This Court examined the  allegations made in the complaint petition and noticed there were as many as  12 accused named in the complaint.  The Court pointed out the duties of the  public authorities specified therein including the public analyst.  This Court  also took into consideration the nature of the complaint as also the  circumstances in which the complaint petition came to be filed.  In that case,

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bottle containing the soft drink was said to have been purchased from a shop  known as "The Flavours Fast Food and Cool Corner" and not directly from  the manufacturer.   In  the complaint petition, it was alleged that only upon  inquiry, the complainant came to learn that the manufacturer of the bottle of  sample was Appellant No. 1 therein and the other accused were their  Managing Directors, Directors and Executive Director and Others Officers.

       It was, in the aforementioned situation, observed:

"28. Summoning of an accused in a criminal case is a  serious matter. Criminal law cannot be set into motion as  a matter of course. It is not that the complainant has to  bring only two witnesses to support his allegations in the  complaint to have the criminal law set into motion. The  order of the Magistrate summoning the accused must  reflect that he has applied his mind to the facts of the  case and the law applicable thereto. He has to examine  the nature of allegations made in the complaint and the  evidence both oral and documentary in support thereof  and would that be sufficient for the complainant to  succeed in bringing charge home to the accused. It is not  that the Magistrate is a silent spectator at the time of  recording of preliminary evidence before summoning of  the accused. The Magistrate has to carefully scrutinise  the evidence brought on record and may even himself put  questions to the complainant and his witnesses to elicit  answers to find out the truthfulness of the allegations or  otherwise and then examine if any offence is prima facie  committed by all or any of the accused."           The said decision, therefore, does not lay down any general  proposition in regard to the allegations required to be made in a complaint  petition so as to fasten vicarious liability upon the holders of the office of the  Company.  On the other hand, the three-Judge bench decision of this  Court  in S.M.S. Pharmaceuticals Ltd. (supra) is binding on us.

       For the reasons aforementioned, the impugned judgment cannot be  sustained and is set aside accordingly.  The appeal is allowed.