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CASE NO.: Appeal (crl.)  70 of 2007

PETITIONER: Saroj Kumar Poddar

RESPONDENT: State (NCT of Delhi) & Anr

DATE OF JUDGMENT: 16/01/2007

BENCH: S.B. Sinha & Markandey Katju

JUDGMENT: J U D G M E N T (Arising out of SLP(Crl.) No. 4645 of 2006)

S.B. Sinha, J.          

       Leave granted.

       Appellant herein was a Director of a public limited company,  incorporated and registered under the Indian Companies Act, known as  VHEL Industries Limited (hereinafter referred to as "the Company").  The  Company issued three cheques bearing Nos. 138015, 138016 and 138017 for   a sum of Rs. 2,50,000/-, Rs. 2,50,000/- and Rs. 3,03,952.60, respectively in  favour of Elkay International Private Limited, Respondent No. 2 herein.

       The complainant \026 Respondent No. 2 is manufacturer and supplier of  chemical compounds of different kinds.  It supplied its product to the  Company.  Allegedly, a sum of Rs. 13,36,923/- was due and payable to the  complainant by the Company.  The Company issued three cheques, as  noticed hereinbefore, in favour of the complainant.  The said cheques were  deposited in a bank but were dishonoured.  A complaint petition came to be  filed by the complainant in the Court of Chief Metropolitan Magistrate,  Delhi against the appellant as also the said Company.  The Managing  Director of the said Company as also the other Directors were also arrayed  as accused therein.  It was alleged that Shri K.K. Pilania \026 Accused No. 3  and Shri N.K. Munjal \026 Accused No. 8 signed the said cheques for and on  behalf of the Company.

       Cognizance was taken against the appellant and other accused  persons. Inter alia on the premise that the appellant had resigned from the  Directorship of the Company before the date of issuance of the cheques and  much before the deposit thereof by the drawee with its bank, and thus, he  was not liable for the action of the Company, applications for quashing of  the orders taking cognizance of the offence in the said complaint petitions  were filed by the appellant before the High Court of Delhi which were  marked as Crl. M.C. Nos. 4583, 4580 and 4575 of 2003.  By reason of the  impugned judgment, the said petitions have been dismissed by the High  Court stating:

"The learned trial judge while dealing with the  recalling order of the petitioner made specific  mention of the fact that the cheque in question was  post dated cheque issued through letter dated 10th  May, 1997.  If that be so the matter needs further  probe by way of trial and the petitioner cannot  claim complete innocence at this stage in view of  the letter dated 10th May, 1997 prima facie

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indicating that the cheque in question was issued  on this date and the petitioner was the Director of  the Company on 10th May, 1997 as he himself  admitted that he resigned from the company with  effect from 19th June, 1997."

       The appellant is, thus, before us.

       Ms. Vanita Bhargava, learned counsel appearing on behalf of the  appellant, would contend that the averments made in complaint petitions  even if given  face value and taken to be correct in their entirety do not  constitute an offence as against the appellant in terms of Section 141 of the  Negotiable Instruments Act (for short "the Act").

       It was further submitted that in any event, the appellant having  resigned from the Directorship of the said Company, the complaint petitions  as against him were not maintainable.

       Mr. B.L. Wali, learned counsel appearing on behalf of the  respondents, on the other hand, would submit that the appellant had not  disclosed as to when the resignation purported to have been submitted by  him was accepted by the Company and in that view of the matter the  complaint petitions were maintainable.

       Section 138 of the Act reads as under:

"138. Dishonour of cheque for insufficiency, etc.,  of funds in the account -

Where any cheque drawn by a 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:"

       For creating a criminal liability in terms of the said Section, the  complainant must show:

(i)     that 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.

       Section 141 of the Act postulates constructive liability on the part of  the Directors of the Company or other persons responsible for its conduct of   the business of the company.  It reads as under:

"141. Offences by companies.\027(1) If the person  committing an offence under section 138 is a

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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 State 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 part of, any director, manager, secretary or  other officer of the company, such director,  manager, secretary or other officer shall also he  deemed to be guilty of that offence and shall be  liable to be proceeded against and punished  accordingly."

       A person would be vicariously liable for commission of an offence on  the part of a Company only in the event the conditions precedent laid down  therefor in Section 141 of the Act stand satisfied.  For the aforementioned  purpose, a strict construction would be necessary.

       The purported averments which have been made in the complaint  petitions so as to make the appellant vicariously liable for the offence  committed by the Company read as under:

"That the accused No. 1 is a public limited  company incorporated and registered under the  Companies Act, 1956, and the accused 2 to 8 are/  were its Directors at the relevant time and the said  company is managed by the Board of Directors  and they are responsible for the incharge of the  conduct and business of the company \026 Accused  No. 1.  However, cheques referred to in the  complaint have been signed by the Accused No. 3  & 8 i.e. Shri K.K. Pilania and Shri N.K. Munjal for  and on behalf of the Accused Company No. 1."

       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 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

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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.   

       Our attention, however, has been drawn to the averments made in  paragraphs 7 and 10 of the complaint petition, but on a perusal thereof, it  would appear that therein merely allegations have been made that the  cheques in question were presented before the bank and they have been  dishonoured.  Allegations to satisfy the requirements of Section 138 of the  Act might have been made in the complaint petition but the same principally  relate to the purported offence made by the Company.  With a view to make  a Director of a Company vicariously liable for the acts of the Company, it  was obligatory on the part of the complainant to make specific allegations as  are required in law.

       The question came up for consideration before a 3-Judge Bench of  this Court in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Another  [(2005) 8 SCC 89] wherein upon consideration of a large number of  decisions this Court opined:

"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 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

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Director, Manager or Secretary in a Company is  liable"....etc. The legislature is aware that it is a  case of criminal liability which means serious  consequences so far as the person sought to be  made liable is concerned. Therefore, only persons  who can be said to be connected with the  commission of a crime at the relevant time have  been subjected to action.

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."

       It was further opined:

"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 tails 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."

       This aspect of the matter has also been considered recently by this  Court in Sabitha Ramamurthy & Anr.      v. R.B.S. Channabasavaradhya [2006  (9) SCALE 212] stating:

"\005Section 141 raises a legal fiction.  By reason of  the said provision, a person although is not  personally liable for commission of such an

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offence would be vicariously liable therefor.  Such  vicarious  liability can be inferred so far as a  company registered or incorporated under the  Companies Act, 1956 is concerned only if the  requisite statements, which are required to be  averred in the complaint petition, are made so as to  make the accused therein vicariously liable for the  offence committed by the company.  Before a  person can be made vicariously liable, strict  compliance of the statutory requirements would be  insisted\005"

       For the reasons aforementioned, we have no other option but to hold  that the allegations made in the complaint petitions even if are taken to be  correct in their entirety do not disclose any offence as against the appellant  herein.  The proceedings against him, thus, should have been quashed by the  High Court.  The impugned judgment, therefore, cannot be sustained which  is set aside accordingly.  The appeal is allowed.