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CASE NO.: Writ Petition (crl.)  592 of 2007

PETITIONER: N. RANGACHARI

RESPONDENT: BHARAT SANCHAR NIGAM LTD

DATE OF JUDGMENT: 19/04/2007

BENCH: TARUN CHATTERJEE & P.K. BALASUBRAMANYAN

JUDGMENT: J U D G M E N T  CRIMINAL APPEAL NO 592           OF 2007 (Arising out of SLP (Cri.) No. 1844 of 2006)

P.K. BALASUBRAMANYAN, J.

1.              Leave granted. 2.              Heard both sides. 3.              On behalf of the Data Access (India) Limited, two  cheques were issued to the respondent \026 Bharat Sanchar  Nigam Limited (hereinafter referred to as, "B.S.N.L.").  The  cheques were dated 31.8.2004.  The cheques were duly  presented by the B.S.N.L. but were dishonoured for  insufficiency of funds. B.S.N.L. thereupon issued requisite  notices calling upon the Data Access (India) Limited to pay the  amounts due under the cheques.  The payments not having  been made, B.S.N.L. filed a compliant under Section 138 of the  Negotiable Instruments Act.

4.              In the complaint, B.S.N.L. alleged that the cheques  were issued to it by the Data Access (India) Limited in  discharge of a pre-existing liability based on the business  transactions between the companies.  The appellant herein  and respondent No. 2 in the complaint were the Directors of  respondent No. 1 Company and they were in charge of and  responsible for the conduct of the business of Data Access  (India) Limited.  The relevant statement in the complaint read: "That accused No. 1 is a company incorporated  under the Companies Act.  Accused Nos. 2 and  3 are its Directors. They are incharge of and  responsible to accused No.1 for conduct of  business of accused No. 1 Company.  They are  jointly and severally liable for the acts of  accused No. 1."

The complaint also stated that in response to the notice issued  by B.S.N.L., a reply had been sent claiming that the appellant  was no longer the Chairman or Director of Data Access (India)  Limited and accused No. 2 was not aware of the issuance of  the cheques. These statements were false and by not keeping  sufficient funds in their account and failing to pay the cheque  amount on the service of the notice, all the accused committed  an offence as contemplated in Section 138 of the Negotiable  Instruments Act and they were liable to be proceeded against.  The complaint also asserted that all the accused were guilty of  the offence in terms of Section 138 of the Negotiable  Instruments Act and were liable to be punished therefor.  

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5.              The appellant herein moved the High Court under  Section 482 of the Code of Criminal Procedure seeking the  quashing of the complaint insofar as it related to him.  The  appellant pleaded that he was nominated as Honorary  Chairman without any remuneration, sitting fee etc. by the  investors and promoters of the Company of Data Access (India)  Limited on 24.7.2004 and he was designated as Chairman of  the Company.  Being a nominated Chairman and holding an  Honorary post in the Company, he was never assigned with  any of the Company’s financial or other business activities.   He was the Chairman for name sake and was never entrusted  with any job or business or constituted a signing authority.   He had resigned effectively on 26.8.2004 when problems  between the promoters and investors of Data Access (India)  Limited started developing.  The two cheques that were the  subject matter of the complaint, were dated 31.8.2004, after  the appellant had effectively resigned.  He had not signed  those cheques.  He was not liable.  According to him, the Data  Access (India) Limited had two Managing Directors at the  relevant time and they were the ones who were invested with  substantial powers of management of the Company and as  such the Managing directors were involved in the day to day  affairs of the Company and not himself, who had only acted  for a short period as Honorary Chairman.  The complaint did  not contain adequate averments to justify initiation of a  criminal proceeding against him and hence the complaint was  liable to be quashed.

6.              On behalf of B.S.N.L., it was contended that the  Petition under Section 482 of the Code of Criminal Procedure  was not maintainable and that the questions sought to be  raised by the appellant were questions that had to be decided  at the trial. The complaint disclosed sufficient materials  justifying the commencement of the proceedings against Data  Access (India) Limited and the other two accused including the  appellant.  The appellant who was the Chairman of the Data  Access (India) Limited was incharge of and responsible to the   Company for the conduct of its business, and no occasion had  arisen for quashing the complaint.  The question whether a  person is incharge of and responsible for the conduct of the  business of the Company, is to be adjudged during the trial on  the basis of the materials to be placed on record by the  parties.  That could not be decided at the stage of a motion  under Section 482 of the Code of Criminal Procedure.   

7.              The High Court, on going through the complaint in  the context of Sections 138 and 141 of the Negotiable  Instruments Act, came to the conclusion that the court could  not decide the pleas put forward by the appellant in dealing  with a petition filed under Section 482 of the Code of Criminal  Procedure and that the defences sought to be put forward by  the accused had to be established at the trial.  Taking the view  that the complaint disclosed adequate material for proceeding  against the appellant in terms of Section 138 read with  Section 141 of the Negotiable Instruments Act, the High Court  refused to accede to the prayer of the appellant and dismissed  the application filed under Section 482 of the Code of Criminal  Procedure.  Challenging the said order of the High Court, this  appeal is filed by the appellant.

8.              Learned Senior Counsel for the appellant brought to

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our notice a number of decisions of this Court on what should  constitute sufficient allegations in a complaint under Section  138 of the Negotiable Instrument Act when a prosecution is  sought against a Company and its officers, in terms of Section  141 of the said Act.  Learned counsel placed considerable  reliance on the decision of this Court in S.M.S.  Pharmaceuticals Ltd. Vs. Neeta Bhalla & Anr. [(2005) 8  S.C.C. 89].  Therein, this Court observed: "In the present case, we are concerned with  criminal, liability on account of dishonour of  cheque. It primarily falls on the drawer  company and is extended to officers of the  Company. The normal rule in the cases  involving criminal liability is against vicarious  liability, that is, no one is to be held criminally  liable for an act of another. This normal rule  is, however, subject to exception on account of  specific provision being made in statutes  extending liability to others. Section 141 of the  Act is an instance of specific provision which  in case an offence under Section 138 is  committed by a Company, extends criminal  liability for dishonour of cheque to officers of  the Company. Section 141 contains conditions  which have to be satisfied before the liability  can be extended to officers of a company.  Since the provision creates criminal liability,  the conditions have to be strictly complied  with. The conditions are intended to ensure  that a person who is sought to be made  vicariously liable for an offence of which the  principal accused is the Company, had a role  to play in relation to the incriminating act and  further that such a person should know what  is attributed to him to make him liable. In  other words, persons who had nothing to do  with the matter need not be roped in. A  company being a juristic person, all its deeds  and functions are result of acts of others.  Therefore, officers of a Company who are  responsible for acts done in the name of the  Company are sought to be made personally  liable for acts which result in criminal action  being taken against the Company. It makes  every person who at the time the offence was  committed, was incharge of and was  responsible to the Company for the conduct of  business of the Company, as well as the  Company, liable for the offence. The proviso to  the sub-section contains an escape route for  persons who are able to prove that the offence  was committed without their knowledge or that  they had exercised all due diligence to prevent  commission of the offence."

After referring to a number of earlier decisions, this Court  summed up the legal position and laid down: "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

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complaint. Without this averment being made  in a complaint, the requirements of Section  141 cannot be said to be satisfied."

Dealing with the question whether a Director of a Company  would be deemed to be in charge of, or 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, this Court held: "The answer to question posed in sub- para (b) has to be in 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 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."

Answering the question whether even in the absence of  averments the signatory of the cheque or the managing  directors could be taken to be in charge of the Company and  responsible to the Company for the conduct of its business  and could be proceeded against, the answer was as follows: "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 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 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."

9.              It was submitted by learned Senior Counsel for the  appellant that the allegations in the complaint against the  appellant did not contain sufficient averments to justify the  issue of process to the appellant and therefore the complaint  ought to be quashed.   Learned counsel also relied heavily on  the decision in Saroj Kumar Poddar Vs. State (NCT of Delhi)  & Anr. [2007 (2) SCALE 36], wherein two learned judges of  this Court held that the complaint in that case did not satisfy  the requirements of Section 138 read with Section 141 of the  Negotiable Instruments Act.  Learned counsel referred us to  paragraphs 13 to 18 of that decision with particular reference  to the allegations in the complaint in that case and submitted  that in the case on hand also, the complaint was along the  same lines and read in the context of that decision, it must be  held that no adequate material was disclosed for proceeding

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against the appellant on the complaint.  

10.             Learned counsel for B.S.N.L., on the other hand,  submitted that the complaint contained adequate averments  justifying the initiation of prosecution against the appellant for  the offence under Section 138 of the Negotiable Instruments  Act and the High Court was right in refusing to quash the  complaint under Section 482 of the Code of Criminal  Procedure leaving it to the appellant to establish his defence at  the trial.  Learned counsel relied on S.V. Muzumdar & Ors.  Vs. Gujarat State Fertilizer Co. Ltd. & Anr. [(2005) 4 S.C.C  173] in support.  In his reply, learned Senior Counsel for the  appellant referred to Pepsi Foods Ltd. & Anr. Vs. Special  Judicial Magistrate & Ors. [(1998) 5 S.C.C. 749] and  submitted that an application of mind was needed before the  issuance of process and on the averments in the complaint in  this case no process could have been issued against the  appellant.  He therefore reiterated that the complaint was  liable to be quashed.

11.             The Law Merchant treated negotiable instruments  as instruments that oiled the wheels of commerce and  facilitated quick and prompt deals and transactions.  This  continues to be the position as now recognized by legislation,  though possibly a change is taking place with the advent of  credit cards, debit cards and so on.  It was said that negotiable  instruments are merely instruments of credit, readily  convertible into money and easily passable from one hand to  another.  With expanding commerce, growing demand for  money could not be met by mere supply of coins and the  instrument of credit took the function of money which they  represented and thus became by degrees, articles of traffic.  A  man dared not dishonour his own acceptance of a bill of  exchange, lest his credit be shaken in the commercial world.   The Negotiable Instruments Act, 1881 is understood to be an  enactment codifying the law on the subject.  A cheque is an  acknowledged bill of exchange that is readily accepted in lieu  of payment of money and it is negotiable.   

12.             By the fall in moral standards, even these  negotiable instruments like cheques issued, started losing  their creditability by not being honoured on presentment.  It  was found that an action in the civil court for collection of the  proceeds of a negotiable instrument like a cheque tarried, thus  defeating the very purpose of recognizing a negotiable  instrument as a speedy vehicle of commerce.  It was in that  context that Chapter VII was inserted in the Negotiable  Instruments Act by the Banking, Public Financial Institutions  and Negotiable Instruments Laws (Amendment) Act, 1988 (Act  66 of 1988) with effect from 1.4.1989. The said Act inserted  Sections 138 and 142 in the Negotiable Instruments Act.   The  objects and reasons for inserting the Chapter was: "to enhance the acceptability of cheques in  settlement of liabilities by making the drawer  liable for penalties in case of bouncing of  cheques due to insufficiency of funds in the  accounts or for the reason that it exceeds the  arrangements made by the drawer, with  adequate safeguards to prevent harassment of  honest drawers"

While Section 138 made a person criminally liable on  dishonour of a cheque for insufficiency of funds or the  circumstances referred to in the Section and on the conditions

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mentioned therein, Section 141 laid down a special provision  in respect of issuance of cheques by companies and  commission of offences by companies under Section 138 of the  Negotiable Instruments Act. Therein, it was provided that if  the person committing an offence under Section 138 of the Act  was 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.  The scope of Section 141 has been  authoritatively discussed in the decision in S.M.S.  Pharmaceuticals Ltd. (supra) binding on us and there is no  scope for redefining it in this case.  Suffice it to say, that a  prosecution could be launched not only against the company  on behalf of which the cheque issued has been dishonoured,  but it could also be initiated against every person who at the  time the offence was committed, was in charge of and was  responsible for the conduct of the business of the company.   In fact, Section 141 deems such persons to be guilty of such  offence, liable to be proceeded against and punished for the  offence, leaving it to the person concerned, to prove that the  offence was committed by the company without his knowledge  or that he has exercised due diligence to prevent the  commission of the offence.  Sub-section (2) of Section 141 also  roped in Directors, Managers, Secretaries or other officers of  the company, if it was proved that the offence was committed  with their consent or connivance.

13.             A Company, though a legal entity, cannot act by  itself but can only act through its directors.  Normally, the  Board of Directors act for and on behalf of the company. This  is clear from Section 291 of the Companies Act which 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  authorized to exercise and do.  Palmer described the position  thus: "A company can only act by agents, and  usually the persons by whom it acts and by  whom the business of the company is carried  on or superintended are termed directors\005 \005.  \005"

It is further stated in Palmer that: "Directors are, in the eye of the law, agents of  the company for which they act, and the  general principles of the law of principal and  agent regulate in most respects the  relationship of the company and its directors."

The above two passages were quoted with approval in R.K.  Dalmia & ors. Vs. The Delhi Administration [(1963) 1 S.C.R.  253 at page 300].  In Guide to the Companies Act by A.  Ramaiya (Sixteenth Edition) this position is summed up thus:   "All the powers of management of the affairs of  the company are vested in the Board of  Directors. The Board thus becomes the  working organ of the company.  In their  domain of power, there can be no interference,  not even by shareholders.  The directors as a  board are exclusively empowered to manage  and are exclusively responsible for that  management."

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Therefore, a person in the commercial world having a  transaction with a company is entitled to presume that the  directors of the company are incharge 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 incharge 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 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 incharge of the company.  In  Gower and Davies’ Principles of Modern Company Law  (Seventh Edition), the theory behind the idea of identification  is traced as follows:

"It is possible to find in the cases varying  formulations of the under-lying 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  the Lennard’s Carrying Company case 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 the Meridian Global case 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."

But as has already been noticed, the decision in S.M.S.  Pharmaceuticals Ltd. (supra) binding on us, has postulated  that a director in a company cannot be deemed to be incharge  of and responsible to the company for the conduct of his  business in the context of Section 141 of the Act.  Bound as  we are by that decision, no further discussion on this aspect  appears to be warranted.  

14.             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 incharge 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

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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.  

15.             In fact, in an earlier decision in Monaben  Ketanbhai Shah & Anr. Vs. State of Gujarat & Ors. [(2004) 7  S.C.C. 15], two learned judges of this Court noticed that: "The laudable object of preventing bouncing of  cheques and sustaining the credibility of  commercial transactions resulting in  enactment of Sections 138 and 141 has to be  borne in mind."

16.             In the light of the ratio in S.M.S. Pharmaceuticals  Ltd. (supra) what is to be looked into is whether in the  complaint, in addition to asserting that the appellant and  another are the directors of the company, it is further alleged  that they are incharge of and responsible to the company for  the conduct of the business of the company.  We find that  such an allegation is clearly made in the complaint which we  have quoted above.  Learned Senior Counsel for the appellant  argued that in Saroj Kumar Poddar case (supra), this Court  had found the complaint unsustainable only for the reason  that there was no specific averment that at the time of  issuance of the cheque that was dishonoured, the persons  named in the complaint were incharge of the affairs of the  company.  With great respect, we see no warrant for assuming  such a position in the context of the binding ratio in S.M.S.  Pharmaceuticals Ltd. (supra) and in view of the position of  the Directors in a company as explained above.   

17.             In Rajesh Bajaj Vs. State of NCT of Delhi & Ors.  [A.I.R. 1999 S.C. 1216], two learned judges of this Court  stated: "For quashing an FIR (a step which is  permitted only in extremely rare cases) the  information in the complaint must be so bereft  of even the basic facts which are absolutely  necessary for making out the offence."

In M/s Bilakchand Gyanchand Co. Vs. A Chinnaswami  [A.I.R. 1999 S.C. 2182], this Court held that a complaint  under Section 138 of the Act was not liable to be quashed on  the ground that the notice as contemplated by Section 138 of  the Act was addressed to the Director of the Company at its  office address and not to the Company itself.  The view was  reiterated in Rajneesh Aggarwal Vs. Amit J. Bhalla [A.I.R.  2001 S.C. 518].  These decisions indicate that too technical an  approach on the sufficiency of notice and the contents of the  complaint is not warranted in the context of the purpose  sought to be achieved by the introduction of Sections 138 and  141 of the Act.  

18.             In the case on hand, reading the complaint as a  whole, it is clear that the allegations in the complaint are that  at the time at which the two dishonoured cheques were issued  by the company, the appellant and another were the Directors  of the company and were incharge of the affairs of the  company.  It is not proper to split hairs in reading the  complaint so as to come to a conclusion that the allegations as  a whole are not sufficient to show that at the relevant point of  time the appellant and the other are not alleged to be persons  incharge of the affairs of the company.  Obviously, the  complaint refers to the point of time when the two cheques  were issued, their presentment, dishonour and failure to pay

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in spite of notice of dishonour.  We have no hesitation in  overruling the argument in that behalf by the learned Senior  Counsel for the appellant.   

19.             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 incharge 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 incharge 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 of the  trial.  

20.             We therefore affirm the decision of the High Court  and dismiss this appeal.  We make it clear that the case will  have to be tried and disposed of in accordance with law on the  basis of the evidence that may be adduced.