REPORTABLE IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO.1265  OF 2008 (Arising out of SLP (Crl.) No. 6049 of 2005)

Malwa Cotton & Spinning Mills Ltd. .. Appellant

Versus

Virsa Singh Sidhu and Ors. ..Respondents

WITH

Criminal Appeal No. 1266  of 2008 @ SLP (Crl.) No.408 of 2006 Criminal Appeal No.  1267  of 2008 @ SLP (Crl.) No.409 of 2006 Criminal Appeal No.  1268  of 2008 @ SLP (Crl.) No.410 of 2006 Criminal Appeal No.  1269  of 2008 @ SLP (Crl.) No.411 of 2006 Criminal Appeal No.  1270 of 2008 @ SLP (Crl.) No.412 of 2006 Criminal Appeal No.  1271  of 2008 @ SLP (Crl.) No.413 of 2006 Criminal Appeal No.  1272  of 2008 @ SLP (Crl.) No.414 of 2006

J U D G M E N T

Dr. ARIJIT PASAYAT, J.

SLP (Crl.) 6049/2005

1. Leave granted.  

2. Challenge  in  this  appeal  is  to  the  order  passed  by  a

learned Single Judge of the Punjab and Haryana High Court

accepting  the  prayer  of  respondent  No.1  for  quashing  the

proceedings  pending  before  the  Judicial  Magistrate,  First

Class,  Ludhiana.  The  proceedings  related  to  the  complaint

filed  by  the  appellant   alleging  commission  of  offence

punishable under Section 138 of the Negotiable Instruments

Act,  1881 (in  short  the ‘Act’).   In  all,  8  petitions were  filed

which were disposed of by the common judgment.  

3. The  present  appeals  relate  to  Criminal  Miscellaneous

No.52153  of  2002  and  connected  cases.  The  High  Court

quashed  the  proceedings  primarily  on  the  ground  that

respondent  No.1-Virsa  Singh  Sidhu  in  the  first  case  had

resigned  from  the  Directorship  before  the  cheques  were

issued.  The other petitions were allowed on the ground that

there  were  some  general  allegations  that  all  Directors  were

responsible.   

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4. Learned  counsel  for  the  appellant  submitted  that  the

High  Court’s  judgment  is  clearly  unsustainable.  So  far  as

respondent No.1 is concerned he claims to have resigned on

2.4.1999 whereas cheques were issued on various dates vis in

December 2000 and February 2001.  It is pointed out that the

Form No.32 which was required to be filed with the Registrar

of  Companies  was  filed  on  5.7.2001  i.e.  much  after  the

cheques were issued. Whether in fact the respondent No.1’s

claim to have resigned was factually correct would have been

established in trial and the High Court  could not have passed

the  impugned  judgment  while  dealing  with  the  application

under Section 482 of the Code of Criminal Procedure, 1973 (in

short the ‘Code’)? It is further pointed out that the High Court

was  not  justified  in  holding  that  there  was  no  specific

allegation  against  other  accused  persons.  With reference  to

the complaint it was pointed out that specific allegation is to

the effect that the accused persons were in charge of day to

day management work. In any event,  this is not a question

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which  could  have  been  gone  into  in  a  proceeding  under

Section 482 of Code.  It is a matter of trial.  

5. Learned counsel for respondent No.1 on the other hand

submitted that the High Court was justified in its view that

respondent No.1 had intimated the company about his desire

to resign. If the company delayed in submitting the requisite

form before the Registrar of Companies, he cannot be made to

suffer.  

6. As rightly contended by learned counsel for the appellant

factual disputes are involved. What was the effect of delayed

presentation before the Registrar of Companies is essentially a

matter  of  trial.  Whether  respondent No.1 had intimated the

company and whether there was any resolution accepting his

resolution  are matters in respect of which evidence has to be

led.  Therefore, the High Court was not justified in its view.  

7. So far as allegations against the Directors are concerned

about their position in the company the complaint specifically

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contained the averments regarding the position of the accused

Directors in the company.  

8. At  this  juncture,  it  would  be  relevant  to  take  note  of

certain observations made by this Court in various cases.  

9. In  S.V. Muzumdar v.   Gujarat  State Fertilizer  Co. Ltd.

and Anr. (2005 (4)  SCC 173),  it  was inter-alia  observed  as

follows:

“3. The facts as projected by the respondents in  the  complaint  were  to  the  effect  that  the respondent no.1 (hereinafter referred to as the ‘complainant’) supplied goods on credit to M/s Garware Nylons Ltd. (hereinafter referred to as the  ‘Company’)  (accused  no.14).  Cheques issued by the company were not honoured by the drawee bank on the ground of insufficient funds.   Payments  were  not  made  even  after legal notices.  There were 14 accused persons including  the  company  named  in  the complaint. Some of the accused persons were Directors  and  while  others  were  employees. Learned  Chief  Judicial  Magistrate,  Vadodara after  recording  statement  of  marketing manager  who  had  filed  the  complaint  for himself  and  on  behalf  of  the  complainant- company, issued summons to all the accused persons for facing trial for alleged commission

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of  offences  punishable  under  Section  138 of the Act read with Sections 420 and 114 of the Indian Penal  Code,  1860 (in short the ‘IPC’). The order issuing summons was challenged by filing criminal revision applications which were dismissed  by  order  dated  21.3.1996.   Said common judgment  and order was challenged before the High Court by filing special criminal applications  and  these  applications  were permitted  to  be  withdrawn  to  enable  the appellants  to  move  applications  before  the learned Chief Judicial Magistrate as stated by the  petitioners.  Application  was  filed  with prayer  to  drop  proceedings.  That  application was rejected by order dated 21.8.1997. Same was  questioned  before  the  High  Court.   The challenge before the High Court was primarily on the ground that there  was no material  to show that the accused persons at the time of offence as allegedly committed were in charge and/or  responsible  to  the  company  for  the conduct  of  the  business  as  required  under Section  141(1)  of  the  Act.   It  was  also submitted  that  the  deeming  provision  under sub-section  (2)  of  Section  141  which  covers persons with whose consent or connivance or any attributable negligence for commission of the  offence  by  the  company  was  also  not applicable.  The High Court did not accept the pleas and held that the controversy was to be adjudicated  at  the  trial.  It  considered  the petition to be unacceptable attempt to stall the criminal proceedings at the threshold.  

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8. We find that the prayers before the courts below essentially were to drop the proceedings on the ground that the allegations would not

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constitute a foundation for action in terms of Section 141 of the Act.  These questions have to  be  adjudicated  at  the  trial.  Whether  a person is in charge of or is responsible to the company  for  conduct  of  business  is  to  be adjudicated  on  the  basis  of  materials  to  be placed  by  the  parties.   Sub-section  (2)  of Section 141 is a deeming provision which as noted  supra  operates  in  certain  specified circumstances.  Whether the requirements for the application of the deeming provision exist or  not  is  again  a  matter  for  adjudication during trial. Similarly, whether the allegations contained are sufficient to attract culpability is a matter for adjudication at the trial.

9. Under Scheme of  the Act,  if  the person committing  an  offence  under  Section  138  of the Act is a company, by application of Section 141  it is deemed that every person who is in charge of and responsible to the company for conduct  of  the  business  of  the  company  as well as the company are guilty of the offence. A  person  who  proves  that  the  offence  was committed  without  his  knowledge  or  that  he had  exercised  all  due  diligence  is  exempted from  becoming  liable  by  operation  of  the proviso to sub-section (1). The burden in this regard has to be discharged by the accused.  

10. The  three  categories  of  persons covered by Section 141 are as follows:

(1) The company who committed the offence.

(2) Everyone who was in charge of and was responsible  for  the  business  of  the company.

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(3) Any other person who is a director or a manager  or a secretary or officer  of  the company with whose connivance or due to  whose  neglect  the  company  has committed the offence.

11. Whether  or  not  the  evidence  to  be  led would establish the accusations is a matter for trial.  It  needs  no  reiteration  that  proviso  to sub-section  (1)  of  Section  141  enables  the accused to prove his innocence by discharging the burden which lies on him.”  

10. In N. Rangachari v. Bharat Sanchar Nigam Ltd. (2007 (5)

SCC 108), it was observed as follows:

 “19. Therefore,  a  person  in  the  commercial world having a transaction with a company is entitled to presume that the Directors of the company  are  in  charge  of  the  affairs  of  the company.  If  any  restrictions  on their  powers are placed by the memorandum or articles of the company, it is for the Directors to establish it at the trial. It is in that context that Section 141 of the Negotiable Instruments Act provides that  when  the  offender  is  a  company,  every person, who at the time when the offence was committed  was  in  charge  of  and  was responsible to the company for the conduct of the  business  of  the  company,  shall  also  be deemed to be guilty of the offence along with the  company.  It  appears  to  us  that  an

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allegation  in  the  complaint  that  the  named accused  are  Directors  of  the  company  itself would usher in the element of their acting for and  on  behalf  of  the  company  and  of  their being in charge of the company. In Gower and Davies’  Principles  of  Modern  Company  Law (17th  Edn.),  the  theory  behind  the  idea  of identification is traced as follows:

“It is possible to find in the cases varying formulations of the underlying principle, and the most  recent  definitions suggest that the courts are prepared today to give the  rule  of  attribution  based  on identification a somewhat broader scope. In the original  formulation in  Lennard’s Carrying  Company  case  (1915  AC  705 (HL) Lord Haldane based identification on a person ‘who is really the directing mind and will of the corporation, the very ego and  centre  of  the  personality  of  the corporation’. Recently, however, such an approach  has  been  castigated  by  the Privy Council through Lord Hoffmann in Meridian  Global  case  (1995  (2)  AC  500 (PC) as a misleading ‘general metaphysic of companies’. The true question in each case was who as a matter of construction of the statute in question, or presumably other rule of law, is to be regarded as the controller of the company for the purpose of the identification rule.”

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11. Therefore, the High Court was not justified in quashing

the proceedings so far as respondent No.1 in the first case is

concerned.  The appeal is allowed.  

12. In view of the order passed in Criminal  Appeal  arising

out  of  SLP  (Crl.)  No.6049/2005,  where  details  have  been

indicated,  other  appeals  are  deserved  to  be  allowed.   The

impugned order of the High Court in each case is set aside.      

…….....................................J. (Dr. ARIJIT PASAYAT)

   ………………..........................J.

(DR. MUKUNDAKAM SHARMA) New Delhi, August 13, 2008

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