20 September 2005
Supreme Court
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S.M.S. PHARMACEUTICALS LTD. Vs NEETA BHALLA

Bench: Y.K. SABHARWAL,ARUN KUMAR,B.N. SRIKRISHNA
Case number: Crl.A. No.-000664-000664 / 2002
Diary number: 6383 / 2002
Advocates: S. CHANDRA SHEKHAR Vs GUNTUR PRABHAKAR


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CASE NO.: Appeal (crl.)  664 of 2002

PETITIONER: S.M.S. Pharmaceuticals Ltd.              

RESPONDENT: Neeta Bhalla and anr.

DATE OF JUDGMENT: 20/09/2005

BENCH: Y.K. Sabharwal,Arun Kumar & B.N. Srikrishna

JUDGMENT: J   U    D   G   M   E   N   T With

S.L.P.(Crl.)Nos. 2286/2002, 1926-1927/2003,   2090- 2091/ 2003, 2214/2003,   4795/2004,  4992/ 2004,

5073/2004, 5097/2004, 5130/2004, 612/2005, 613/2005,

614/2005, 615/2005 and 616/2005

ARUN KUMAR, J:

        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 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. "  

       The controversy has arisen in the context of prosecutions launched  against officers of Companies under Sections 138 and 141 of the Negotiable  Instruments Act of 1881 (hereinafter referred to as the "Act"). The relevant  part of the provisions are quoted as under :

"Section 138 :

Dishonour of cheque for insufficiency, etc., of funds in  the account \026

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Where  any cheque drawn by a persons on an account  maintained by him with a banker for payment of any  amount of money to another persons 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,  without prejudice to any other provisions of this Act, be  punished with imprisonment for a term which may be  extended to two years, or with fine which may extend to  twice the amount of the cheque, or with both:

       Provided that nothing contained in this section shall  apply unless \026

(a)  the cheque has been presented to the bank within a       period of six months from the date on which it is    drawn or within the period of its validity, whichever us  earlier.

(b)     the payee or the holder in due course of the cheque, as  the case may be, makes a demand for the payment of  the said account of money by giving a notice in  writing, to the drawer of the cheque, within thirty days   of the receipt of information by him from the bank  regarding the return of the cheque as unpaid; and

( c )the drawer of such cheque fails to make the payment  of the said amount of money to the payee or, as the  case may be, to the holder in due course of the cheque,  within fifteen days of the receipt of the said notice.   Explanation \026 For the purposes of this section, "debt or  other liability" means a legally enforceable debt or other  liability.  

Section 141 :

Offences by companies \026  

[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 \005\005\005\005\005     

[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 part of, any director,

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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."   

       It will be seen from the above provisions that Section 138 casts  criminal liability punishable with imprisonment or fine or with both on a  person who issues a cheque towards discharge of a debt or liability as a  whole or in part and the cheque is dishonoured by the Bank on presentation.  Section 141 extends such criminal liability in case of a Company to every  person who at the time of the offence, was incharge of, and was responsible  for the conduct of the business of the Company.  By a deeming provision  contained in Section 141 of the Act, such a person is vicariously liable to be  held guilty for the offence under Section 138 and punished accordingly.   Section 138 is the charging section creating criminal liability in case of  dishonour of a cheque and its main ingredients are : (i)     Issuance of a cheque. (ii)    Presentation of the cheque (iii)   Dishonour of the cheque   (iv)    Service of statutory notice on the person sought to be made liable,  and (v)     Non-compliance or non-payment in pursuance of the notice within  15 days of the receipt of the notice.

Sections 138 and 141 of the Act form part of Chapter XVII introduced  in the Act by way of an amendment carried out by virtue of Act 66 of 1988  effective from 1st April, 1989.   These provisions were introduced with a  view to encourage the culture of use of cheques and enhancing the  credibility of the instruments. The legislature has sought to inculcate faith in  the efficacy of banking operations and use of negotiable instruments in  business transactions.  The penal provision is meant to discourage people  from not honouring their commitments by way of payment through cheques.     Section 139, occurring in the same Chapter of the Act creates a presumption  that the holder of a cheque receives the cheque in discharge, in whole or in  part, of any debt or other liability.

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

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knowledge or that they had exercised all due diligence to prevent   commission of  the offence. Section 203 of the Code empowers a Magistrate to dismiss a  complaint without even issuing a process. It uses the words "after  considering" and "the Magistrate is of opinion that there is no sufficient  ground for proceeding".  These words suggest that the Magistrate has to  apply his mind to a complaint at the initial stage itself and see whether a case  is made out against the accused persons before issuing process to them on  the basis of the complaint.  For applying his mind and forming an opinion as  to whether there is sufficient ground for proceeding, a complaint must make  out a prima facie case to proceed. This, in other words, means that a  complaint must contain material to enable the Magistrate to make up his  mind for issuing process.  If this were not the requirement, consequences  could  be far reaching.  If a Magistrate had to issue process in every case,   the burden of work before Magistrates as well as  harassment caused to the  respondents to whom process is issued would be tremendous.  Even Section  204 of the Code starts with the words "if in the opinion of the Magistrate  taking cognizance of an offence there is sufficient ground for  proceeding\005\005"  The words "sufficient ground for proceeding" again  suggest that ground should be made out in the complaint for proceeding  against the respondent.  It is settled law that at the time of issuing of the  process the Magistrate is required to see only the allegations in the  complaint and where allegations in the complaint or the chargesheet do not  constitute an offence against a person, the complaint is liable to be  dismissed.

As the points of reference will show, the question for consideration is  what should be the averments in a complaint under Sections 138 and 141.   Process on a complaint under  Section 138  starts  normally on basis of a  written complaint which is placed before a Magistrate.  The Magistrate  considers the complaint as per provisions of Sections 200 to 204 of the Code  of Criminal Procedure. The question of requirement of averments in a  complaint has to be considered on the basis of provisions contained in  Sections 138 and 141 of the Negotiable Instruments Act read in the light of  powers of a Magistrate referred to in Sections 200 to 204 of the Code of  Criminal Procedure.  The fact that a Magistrate has to consider the complaint  before issuing process and he has power to reject it at the threshold, suggests  that a complaint should make out a case for issue of process. As to what should be the averments in a complaint, assumes   importance in view of the fact that, at the stage of issuance of process, the  Magistrate will have before him only the complaint and the accompanying  documents.  A person who is sought to be made accused has no right to  produce any documents or evidence in defence at that stage.  Even at the  stage of framing of charge the accused has no such right and a Magistrate  cannot be asked to look into the documents produced by an accused at that  stage,  State of Orissa vs. Debendra Nath Padhi  [2005 (1) SCC 568].  The officers responsible for conducting affairs of companies are  generally referred to as Directors, Managers, Secretaries, Managing  Directors etc.  What is required to be considered is: is it sufficient to simply  state in a complaint that a particular person was a director of the Company at  the time the offence was committed and nothing more is required to be said?   For this, it may be worthwhile to notice the role  of a director in a company.   The word ’director’ is defined in Section 2 (13) of the Companies Act, 1956  as under: "     "director" includes any person occupying the position of director,  by whatever name called" ; There is a whole chapter in the Companies Act on directors, which is  Chapter II.  Sections 291 to 293 refer to powers of Board of Directors.  A  perusal of these provisions shows that what a Board of Directors is  empowered to do in relation to a particular company depends upon the role  and functions assigned to Directors as per the Memorandum and Articles of  Association of the company.  There is nothing which suggests that simply by  being a director in a Company, one is supposed to discharge particular  functions on behalf of a company. It happens that a person may be a director  in a company but he may not know anything about day-to-day functioning of

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the company.  As a director he may be attending meetings of the Board of  Directors of the Company where usually they decide policy matters and  guide the course of business of a company.  It may be that a Board of  Directors may appoint sub-committees consisting of one or two directors   out of the Board of the Company who may be made responsible for day-to- day functions of the Company. These are matters which form part of  resolutions of Board of Directors of a Company. Nothing is oral.  What  emerges from this is that the role of a director in a company is a question of  fact depending on the peculiar facts in each case.  There is no universal rule  that a  director of a company is in charge of its everyday affairs.  We have  discussed about the position of a Director in a company in order to illustrate  the point that there is no magic as such in  a particular word, be it Director,  Manager or Secretary. It all depends upon respective roles assigned to the    officers in a company.  A company may have Managers or Secretaries for  different departments, which means, it may have more than one Manager or  Secretary.  These officers may also be authorised to issue cheques under  their signatures with respect to affairs of their respective departments.  Will  it be possible to prosecute a Secretary of Department-B regarding a cheque  issued by the Secretary of Department-A which is dishonoured?  The  Secretary of Department-B may not be knowing anything about issuance of  the cheque in question. Therefore, mere use of a particular designation of an  officer without more, may not be enough by way of an averment in a  complaint.  When the requirement in Section 141, which extends the liability  to officers of a company, is that such a person should be in charge of and  responsible to the company for conduct of business of the company, how can  a person be subjected to liability of criminal prosecution without it being  averred in the complaint that he satisfies those requirements ?  Not every  person connected with a Compnay is made liable under Section 141.   Liability is cast on persons who may have something to do with the  transaction complained of.  A person who is in charge of and responsible for  conduct of business of a Company would naturally know why the cheque in  question was issued and why it got dishonoured.  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.

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 provision.  It is only those persons who  were in charge of and responsible for 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 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 conduct of business of

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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"\005..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.   A reference to sub-section (2) of Section 141 fortifies the above  reasoning because sub-section (2) envisages direct involvement of any  Director, Manager, Secretary or other officer of a company in commission of  an offence.  This section operates when in a trial it is proved that the offence  has been committed with the consent or connivance or is attributable to  neglect on the part of any of the holders of these offices in a company. In  such a case, such  persons are to be held liable.  Provision has been made for  Directors, Managers, Secretaries and other officers of a company to cover  them in cases of their proved involvement.  The conclusion is inevitable that the liability arises on account of  conduct , act or omission on the part of a person and not merely on account  of holding an office or a position in a company.  Therefore, in order to bring  a case within Section 141 of the Act the complaint must disclose the  necessary facts which make a person liable.  The question of what should be averments in a criminal complaint has  come up for consideration before various High Courts in the country as also  before this Court.  Secunderabad Health Care Ltd. and others v.  Secunderabad Hospitals Pvt. Ltd. and others  [1999 (96) C.C.(AP) 106]  was a case under the Negotiable Instruments Act specifically dealing with  Sections 138 and 141 thereof.  The Andhra Pradesh High Court held that  every Director of a company is not automatically vicariously liable for the  offence committed by the company.  Only such Directors or Director who  were in charge of or responsible to the company for the conduct of business  of the company at the material time when the offence was committed  alone  shall be deemed to be guilty of the offence.  Further it was observed that the  requirement of law is that "there must be clear, unambiguous and specific  allegations against the persons who are impleaded as accused that they were  in charge of and responsible to the company in the conduct of its business in  the material time when the offence was committed."  The same High Court  in v. Sudheer Reddy v. State of Andhra Pradesh and others [2000 (99) CC  (AP)107] held  that "the purpose of Section 141 of the Negotiable  Instruments Act would appear to be that a person who appears to be merely  a director of the Company cannot be fastened with criminal liability for an  offence under Section 138 of the Negotiable Instruments Act unless it is  shown that he was involved in the day-today affairs of the company and was  responsible to the company."  Further, it was held that allegations in this  behalf have to be made in a complaint before  process can be issued against  a person in a complaint.  To same effect is the judgment of the Madras High  Court in R. Kannan v. Kotak Mahindra Finance Ltd. 2003 (115) CC (Mad)  321.    In Lok Housing and Constructions Ltd. v. Raghupati Leasing and  Finance Ltd. and another [2003 (115) CC (Del) 957], the Delhi High Court  noticed that there were clear averments about  the fact that accused No.2 to  12 were officers in charge of and responsible to the company in the conduct  of day-to-day business at the time of commission of offence. Therefore, the  Court refused to quash the complaint.   In Sunil Kumar Chhaparia v.  Dakka Eshwaraiah and another [2002 (108) CC (AP) 687, the Andhra  Pradesh High Court noted that there was a consensus of judicial opinion that  " a director of a company cannot be prosecuted for an offence under Section  138 of the Act in the absence of  a specific allegation in the complaint that  he was in charge of and responsible to the company in the conduct of its  business at the relevant time or that the offence was committed with his  consent or connivance."   The Court has quoted several judgments of various  High Courts in support of this proposition.  We do not feel it necessary to  recount them all. Cases have arisen under other Acts where similar provisions are  contained creating vicarious liability for officers of a company in cases

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where primary liability is that of a company.  State of Karnataka v. Pratap  Chand and others 1981 (2) SCC 335 was a case under the Drugs and  Cosmetics Act, 1940.  Section 34 contains a similar provision making every  person in charge of and responsible to the company for conduct of its  business liable for offence committed by a company.  It was held that a  person liable for criminal action under that provision  should be a person in  overall control of day-to-day affairs of the company or a firm.  This was a  case of a partner in a firm and it was held that a partner who was not in such  overall control of the firm could not be held liable.  In Municipal  Corporation of Delhi v. Ram Kishan Rohtagi and others [1983 (1) SCC 1],  the case was under the Prevention of Food Adulteration Act. It was first  noticed that under Section 482 of the Criminal Procedure Code  in a  complaint, the order of a Magistrate issuing process against the accused can  be quashed or set aside in a case where the allegation made in the complaint  or the statements of the witnesses recorded in support of the same taken at  their face value make out absolutely no case against the accused or the  complaint does not disclose the essential ingredients of an offence which is  arrived at against accused.  This emphasises the need for proper averments  in a complaint before a person can be tried for the offence alleged in the  complaint.   In State of Haryana v. Brij Lal Mittal and others 1998 (5) SCC 343  it was held that vicarious liability of a person for being prosecuted for an  offence committed under the Act by a company arises if at the material time  he was in charge of and was also responsible to the company for the conduct  of its business.  Simply because a person is a director of a company, it does  not necessarily mean that he fulfils both the above requirements so as to  make him liable.  Conversely, without being a director a person can be in  charge of and responsible to the company for the conduct of its business. K.P.G. Nair v. Jindal Menthol India Ltd. [2001 (10) SCC 218]  was a  case under the Negotiable Instruments Act.  It was found that the allegations  in the complaint did not in express words or with reference to the allegations  contained therein make out a case that at the time of commission of the  offence, the appellant was in charge of and was responsible to the company  for the conduct of its business.  It was held that requirement of Section 141  was not met and the complaint against the accused was quashed.  Similar  was the position in Katta Sujatha v. Fertilizers & Chemiucals Travancore  Ltd. and another [ 2002 (7 SCC 655].  This was a case of a partnership.  It  was found that no allegations were contained in the complaint regarding the  fact that the accused was a partner in charge of and was responsible to the  firm for the conduct of business of the firm nor was there any allegation that  the offence was made with the consent and connivance or that it was  attributable to any  neglect on the part of the accused.  It was held that no  case was made out against the accused who was a partner and the complaint  was quashed.  The latest in the line is the judgment of this Court in  Monaben Ketanbhai Shah and another v. State of Gujarat and others  [2004 (7) SCC 15].   It was observed as under: "4.     .It is not necessary to reproduce the language of Section  141 verbatim in the complaint since the complaint is required to  be read as a whole.  If the substance of the allegations made in  the complaint fulfil the requirements of Section 141, the  complaint has to proceed and is required to be tried with.  It is  also true that in construing a complaint a hypertechnical  approach should not be adopted so as to quash the same.  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.   These provisions create a statutory presumption of dishonesty,  exposing a person to criminal liability if payment is not made  within the statutory period even after issue of notice.  It is also  true that the power of quashing is required to be exercised very  sparingly and where, read as a whole, factual foundation for the  offence has been laid in the complaint, it should not be quashed.   All the same, it is also to be remembered that it is the duty of  the court to discharge the accused if taking everything stated in

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the complaint as correct and construing the allegations made  therein liberally in favour of the complainant, the ingredients of  the offence are altogether lacking.  The present case falls in this  category as would be evident from the facts noticed  hereinafter."

It was further observed:

"6      ..The criminal liability has been fastened on those who, at   the time of the commission of the offence, were in charge of  and were responsible to the firm for the conduct of the business  of the firm.  These may be sleeping partners who are not  required to take any part in the business of the firm; they may  be ladies and others who may not know anything about the  business of the firm.  The primary responsibility is on the  complainant to make necessary averments in the complaint so  as to make the accused vicariously liable.  For fastening the  criminal liability, there is no presumption that every partner  knows about the transaction.  The obligation of the appellants to  prove that at the time the offence was committed they were not  in charge of and were not responsible to the firm for the  conduct of the business of the firm, would arise only when first  the complainant makes necessary averments in the complaint  and establishes that fact.  The present case is of total absence of  requisite averments in the complaint."

       To sum up, there is almost unanimous judicial opinion that necessary  averments ought to be contained in a complaint before a persons can be  subjected to criminal process.  A liability under Section 141 of the Act is  sought to be fastened vicariously on a person connected with a Company,  the principal accused being the company itself.  It is a departure from the  rule in criminal law against vicarious liability.  A clear case should be  spelled out in the complaint against the person sought to be made liable.   Section 141 of the Act contains the requirements for making a person liable  under the said provision.  That respondent falls within parameters of Section  141 has to be spelled out.  A complaint has to be examined by the Magistrate  in the first instance on the basis of averments contained therein.  If the  Magistrate is satisfied that there are averments which bring the case within  Section 141 he would issue the process.  We have seen that merely being  described as a director in a company is not sufficient to satisfy the  requirement of Section 141.  Even a non director can be liable under Section  141 of the Act.  The averments in the complaint would also serve the  purpose that the person sought to be made liable would know what is the  case which is alleged against him.  This will enable him to meet the case at  the trial.         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 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. (c)     The answer to question (c ) has to be in affirmative. The question  notes that the Managing Director or Joint Managing Director

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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. The Reference having been answered, individual cases may be listed  before appropriate Bench for disposal in accordance with law.