GUNMALA SALES PVT. LTD. Vs. ANU MEHTA & ORS.

Tags Dishonour Of Cheque

Supreme Court of India (Division Bench (DB)- Two Judge)

Appeal (Crl.), 2228 of 2014, Judgment Date: Oct 17, 2014

REPORTABLE

IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO.2228 OF 2014
[Arising out of Special Leave Petition (Crl.) No.1724 of 2013]

Gunmala Sales Private Ltd. ... Appellants

Vs.

Anu Mehta & Ors. … Respondents

WITH
CRIMINAL APPEAL Nos.2261-2265 OF 2014
[Arising out of Special Leave Petition (Crl.) Nos.5500-5504 of 2013]

Gunmala Sales Private Ltd., etc. ... Appellants

Vs.

Navkar Infra Projects Pvt. Ltd. & etc. … Respondents

WITH
CRIMINAL APPEAL NOs. 2250-2260 OF 2014
[Arising out of Special Leave Petition (Crl.) Nos.5460-5470 of 2013]

Gunmala Sales Private Ltd., etc. … Appellants

Vs.

Navkar Buildhome Pvt. Ltd. & etc. … Respondents

WITH
CRIMINAL APPEAL NOs. 2229-2241 OF 2014
[Arising out of Special Leave Petition (Crl.) Nos.5377-5389 of 2013]

Gunmala Sales Private Ltd., etc. ... Appellants

Vs.

Navkar Buildestates Pvt. Ltd. & etc. … Respondents

WITH
CRIMINAL APPEAL Nos.2242-2249 OF 2014
[Arising out of Special Leave Petition (Crl.) Nos.5437-5444 of 2013]

Gunmala Sales Private Ltd., etc. ... Appellants

Vs.

Navkar Promoters Pvt. Ltd. & Ors etc. … Respondents

J U D G M E N T

(SMT.) RANJANA PRAKASH DESAI, J.

1. Leave granted.

2. In these appeals, we are concerned with the question as to whether
the High Court was justified in quashing the proceedings initiated by the
Magistrate on the ground that there was merely a bald assertion in the
complaint filed under Section 138 read with Section 141 of the Negotiable
Instruments Act, 1881 (“the NI Act”) that the Directors were at the time
when the offence was committed in charge of and responsible for the conduct
and day-to-day business of the accused-company which bald assertion was not
sufficient to maintain the said complaint.

3. These appeals arise out of several complaints filed under Section 138
read with Section 141 of the NI Act. The complaints were filed by Gunmala
Sales Private Limited or Rooprekha Sales Private Limited or by both. In
the complaints, the respondents herein and others were arrayed as accused.
After the process was issued, the respondents filed various applications
under Section 482 of the Code of Criminal Procedure, 1973 (“the code”) in
the High Court. The High Court disposed of one application being C.R.R.
No.4099 of 2011 by a reasoned order. As the same issue was involved in all
the applications, the other applications were disposed of in terms of
judgment in C.R.R. No.4099 of 2011. Special Leave Petition (Crl.) No.1724
of 2013 was filed challenging the said judgment in C.R.R. No.4099 of 2011.
We may, therefore, for the disposal of these appeals, refer to the facts in
civil appeal arising out of Special Leave Petition No.1724 of 2013,
treating the same as the lead case.

4. It is the case of the appellant that in or about February, 2008, one
Navkar Buildestates Private Limited (“the said Company”) through its
Directors - respondents 1 to 3 approached the appellant for certain
financial assistance to meet the working capital requirement of the said
Company. Accordingly, at the request of respondents 1 to 3, the appellant
lent and advanced certain amount of money to the said Company. The said
amount carried interest at the rate of 6% per annum. Respondents 1 to 3
along with the Managing Director of the said Company agreed and undertook
to pay the said amount on or before 31/7/2011. It was further agreed by
the respondents that on their failure to pay the amount on or before
31/7/2011, the appellant would be entitled to claim interest at the rate of
18% per annum. The respondents failed to repay the entire amount on or
before 31/7/2011.

5. On 31/7/2011, in acknowledgment of their liability and towards
repayment of the amount due, the said Company issued cheques in favour of
the appellant. On 2/8/2011, when the appellant presented the said cheques
to its banker – Canara Bank, the same were returned unpaid with the remark
“Insufficient Funds”. On 20/8/2011, the appellant sent a statutory demand
notice to respondents 1 to 4 under Section 138 of the NI Act. The said
notice was received by respondents 1 to 4 on 27/8/2011. As respondents 1
to 4 failed to repay the amount as demanded in the said notice, on
26/9/2011, the appellant filed a complaint in the Court of the Chief
Metropolitan Magistrate at Calcutta. Learned Magistrate accepted the said
complaint and passed the summoning order.

6. Respondents 1 to 4 filed an application before the High Court of
Calcutta under Section 482 of the Code for quashing the proceedings pending
before the learned Magistrate. The High Court framed two questions as
under:

“(i) Whether the Directors can be prosecuted on the bald assertion made in
the complaint, that “the Directors thereof and were at the time when the
offence committed in charge of and were responsible for the conduct and day
to day business of the said accused No.1 company”.

(ii) Whether the Director who has resigned can be prosecuted after his
resignation has been accepted by the Board of the Directors of the
Company”.

So far as the first question is concerned, the High Court, after referring
to certain judgments of this Court, held that except the averment that the
Directors were in-charge of and responsible for the conduct and day to day
business of the Company, nothing has been stated in the complaint as to
what part was played by them and how they were responsible for the finances
of the company, issuance of cheques and whether they had control over the
funds of the company. The High Court observed that the complaint lacked
material averments. The High Court quashed the proceedings on this
ground. So far as the second question is concerned, the High Court held
that it is not necessary to answer it because the first question is
answered in favour of respondents 1 to 4. The High Court quashed the
complaint. Being aggrieved by the said order, the appellant has approached
this Court by way of this appeal.

7. We have heard Mr. Gurukrishna Kumar, learned senior counsel appearing
for the appellant as well as Dr. Abhishek Manu Singhvi, learned senior
counsel appearing for the respondents. We have perused the written
submissions filed by the parties.

8. Gist of the written submissions of the appellants.

a) It is settled law that a specific averment in the complaint that
he/she is in charge of and is responsible to the company for the conduct of
the business of the company is sufficient to maintain the complaint under
Section 138 of the NI Act. It is not incumbent upon the complainant to
elaborate in the complaint the role played by each of the Directors in the
transaction forming the subject matter of the complaint. A Director is, in
law, in charge of and is responsible to the company for the business of the
company in view of the various provisions of the Companies Act and,
therefore, his position is different from that of other officers when
arrayed as a co-accused in a complaint under Section 138 of the NI Act.
The vicarious liability of Director/secretary/manager/other officers of a
company under Section 141 of the NI Act has to be understood in the light
of the statutory language employed in Section 141(1) and Section 141(2) of
the NI Act. At any rate, the individual role of a Director is exclusively
in the realm of internal management of a company and at the initial stage
of a complaint, it would be unreasonable to expect a complainant to
elaborate the specific role played by a Director in the transactions
forming the subject matter of the complaint. In the present case, the
appellant has pleaded that “the accused 2, 3, 4 and 5 are the directors of
accused 1 and were at the time when the offence committed in charge of and
were responsible for the conduct and day to day business of the said
accused-company”.” The High Court on a complete misconstruction of legal
position enunciated by this Court in various judgments, quashed the
complaint on the ground that “nothing has been stated as to what part was
played by the Directors petitioners and how they were responsible regarding
the finances of the company, issuance of cheques and control over the funds
of the company.” In this connection, it is necessary to turn to K.K. Ahuja
v. V.K. Arora and anr.[1] where this Court has referred to relevant
provisions of the Companies Act and observed that in case of a Director,
Secretary or Manager [as defined in Section 2(24) of the Companies Act], or
a person referred to in Clauses (e) and (f) of Section 5 of the Companies
Act, an averment in the complaint that he was in charge of and was
responsible to the company, for the conduct of the business of the company
is necessary to bring the case under Section 141(1) of the NI Act and no
further averment would be necessary in the complaint though some
particulars would be desirable. In SMS Pharmaceuticals Limited v. Neeta
Bhalla and anr.[2] (“SMS Pharma-(1)”), this Court has observed that 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 the Director in such cases. Reference may
also be made to Mannalal Chamaria v. State of West Bengal[3], A.K.
Singhania v. Gujarat State Fertilizer Company Ltd.[4], Rallis India
Limited v. Poduru Vidya Bhushan and ors.[5], Paresh P. Rajda v. State of
Maharashtra and anr.[6], Malwa Cotton and Spinning Mills Ltd. v. Virsa
Singh Sidhu and ors.[7] and N. Rangachari v. Bharat Sanchar Nigam
Ltd.[8]

b) So far as the decisions cited by the respondents are concerned, all
these decisions purported to follow the law laid down in SMS Pharma-(1),
which does not lay down any general proposition of law that the specific
role of a Director sought to be arrayed as an accused has to be elaborated
in the complaint itself.

c) The doctrine of ‘Indoor Management’ would be a relevant factor to be
considered while assessing the averments to be made to satisfy the
requirements of Section 141 of the NI Act. A complainant to whom a cheque
is issued by a company may not be aware of the functions performed by a
particular Director in the company. The responsibility of each of the
Directors is exclusively the internal management of the company itself. In
this connection, it would be useful to refer to Rangachari and Delhi High
Court’s judgment in Shree Raj Travels and Tours Ltd. v. Destination of
the World (subcontinent) Pvt. Ltd.[9] .

d) Finally, it must be noted that vicarious liability is contemplated in
the NI Act to ensure greater transparency in commercial transactions. This
object has to be kept in mind while considering individual cases and
hardship arising out of a particular case cannot be the basis for Directors
to try to wriggle out of prosecution. Section 482 of the Code can be
invoked where it is clear from documents on record, such as Form-32, that
the Director is wrongly arraigned and not in any other case. The High
Court clearly fell into an error in quashing the proceedings and, hence,
impugned order deserves to be set aside.

Mr. Gurukrishna Kumar, learned senior counsel for the appellant
reiterated the above submissions.

9. Gist of the written submissions of the respondents:

a) The main accused Shantilal Mehta is facing trial in all matters. The
present appeal is limited to other family members of Shantilal Mehta i.e.
his father Kanhaiyalal Mehta and his mother Shobha Mehta, who are over 70
years of age, his wife who is 52 years of age and his son who is 24 years
of age. They are dragged in to harass them.

b) Mere bald statement that the Director is in charge of responsible to
the company is not sufficient to maintain prosecution [G.N. Verma v.
State of Jharkhand and anr.[10]].

c) Reproduction of statutory language of Section 141 is not sufficient.
The necessary requirements of the complaint which need to be indicated in
the complaint are “how”, “in what manner”, “the role”, “description” and
“specific allegation” as to the part played by a person before he could be
made an accused. In this connection, reliance is placed on National Small
Industries Corporation Limited v. Harmeet Singh Paintal and anr.[11],
Anita Malhotra v. Apparel Export Promotion Council and anr.[12], N.K.
Wahi v. Shekhar Singh and ors.[13]. These conditions are intended to
ensure that a person who is sought to be made vicariously liable for an
offence of which the principle 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.

d) The appellants’ plea of Indoor Management is totally misconceived.
This doctrine is limited to protecting outsiders regarding internal
infirmities of Memorandum of Articles. Its real application in a cheques
bouncing case would have been if a plea was taken that the company never
had a power to incur debt and hence there is no legal liability. This
doctrine cannot be invoked to give a carte blanche to an outsider to list
all Directors for prosecution without even giving their “role” or “part
played”. In this connection, reliance is placed on MRF Limited etc. v.
Manohar Parrikar and ors. etc.[14]. The judgment of Delhi High Court in
Shree Raj Travels & Tours is in teeth of the law laid down by this Court
and, hence, does not appear to be correct. Moreover, in commercial world,
whether a person deals with a company at the company’s office or enters
into a commercial transaction by e-mail, in both cases, there is an
awareness of the persons responsible for the act of giving a cheques,
without the intention of honouring it. There is, therefore, complete non-
applicability of the doctrine of Indoor Management in such cases.

e) It would be against the interest of justice to prosecute all
Directors. Such approach would delay trials and would be against the very
scheme of NI Act. If all Directors are unnecessarily prosecuted, it would
hinder good persons to come forward and become Directors. It would have
adverse effect on corporate well being.

Dr. A.M. Singhvi, learned senior counsel for the respondents reiterated the
above submissions.

10. It is necessary to first reproduce Section 141 of the NI Act because
the issue involved in this matter revolves around it. Section 141 of the NI
Act 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 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 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.]”

11. It is also necessary to quote the relevant paragraphs of the
complaint which relate to the Directors of the accused company. They read
as under:

“2. The Accused No.1 is a company within the meaning of the Companies
Act, 1956, having its registered office at 103-104, Shubh Apartment, 99-L,
Bhopalpura, Udaipur, P.S. Bhupalpura, Rajasthan – 313001 and the Accused
Nos.2, 3, 4 and 5 are the Directors thereof and were at the time when the
offence committed in charge of and were responsible for the conduct and day
to day business of the said accused No.1 company.

3. In discharge of the accused persons’ existing legal debt and/or
liability, the accused No.1 company had, issued and made over to the
complainant an account payee cheque signed by the accused No.2 being
No.008049 dated 31st July, 2011 for Rs.40,00,000/- drawn on The Rajsamand
Urban Co-Op. Bank Limited, Udaipur Branch, Rajasthan – 313001.”

It must be noted here that the complaint is quashed by the High Court
against all other accused except accused 2 who has signed the cheques.

12. Several judgments have been cited before us. It is necessary to
refer to them in brief to get an idea as to how different Benches of this
Court have dealt with this issue. We must begin with SMS Pharma-(1), which
is a decision of three-Judge Bench of this Court. All subsequent
decisions are of two-Judge Benches. The three-Judge Bench was dealing with
the reference made by a two-Judge Bench for determination of the following
questions:

“(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 person 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 [pic]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 or 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.”

13. After considering Sections 138 and 141 of the NI Act, Sections 203 &
204 of the Code and the relevant provisions of the Companies Act, this
Court answered the questions posed in the reference 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.”

14. In Saroj Kumar Poddar v. State (NCT of Delhi) and anr.[15], the
appellant therein was the Director of a public limited company which had
issued three cheques in favour of respondent 2, who was manufacturer and
supplier of chemical compounds. The cheques having been dishonoured, the
complaint came to be filed. Application for quashing of the complaint was
filed by the appellant in the High Court. The High Court dismissed the
said application. While setting aside the High Court’s order and after
referring to SMS Pharma-(1), a two-Judge Bench of this Court observed as
under:

“14. … … … 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 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 para 3, thus, in our opinion do not satisfy
the requirements of Section 141 of the Act.”

This Court further observed that with a view to making 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.

15. The reference having been answered in SMS Pharma-(1) individual cases
were directed to be listed before an appropriate Bench for disposal
according to law. Pursuant to this order the appeal was placed before a
two-Judge Bench of this Court. The two-Judge Bench of this Court in SMS
Pharmaceuticals Ltd. (2) v. Neeta Bhalla[16] (“SMS Pharma-(2)”) noted
that the High Court had quashed the complaint against respondent 1 holding
that the allegations contained in the complaint as against respondent are
vague and indefinite. The two-Judge Bench observed that on a plain reading
of the averments made in the complaint it was satisfied that the statutory
requirements as contemplated under Section 141 of the NI Act were not
satisfied, and, therefore, the High Court judgment cannot be faulted. It
must be noted that when the attention of this Court was drawn to
observations made in Saroj Kumar Poddar that the complaint must not only
contain averments justifying the requirements of Section 141 of the NI Act
but must also show as to how and in what manner the appellant therein was
responsible for the conduct of the business of the company or otherwise
responsible to it in regard to its functioning, this Court observed that a
plain reading of the said judgment would show that no such general law was
laid down therein and the observations were made in the context of the said
case as it was dealing with the contention that although no direct averment
was made as against the appellant therein fulfilling the requirements of
Section 141 of the NI Act, but, there were other averments which would show
that the appellant therein was liable therefor.

16. In N.K. Wahi it was pleaded by the appellants therein in the
complaint that M/s. Western India Industries Limited is a limited company
and the respondents therein and some others were the Directors/persons
responsible for carrying on the business of the company and their liability
shall be joint and several. The respondents therein filed an application
invoking Section 482 of the Code. The High Court quashed the order issuing
summons on the ground that the evidence does not establish that the
respondents were either in charge of or were responsible to the company for
the conduct of business. In the appeal, following SMS Pharma-(1), Sabitha
Ramamurthy v. R.B.S. Channabaasavaradhya[17] and Saroj Kumar Poddar, a
two-Judge Bench of this Court reiterated what is stated in the said
judgments that Section 141 raises a legal fiction by reason of which a
person, although is not personally liable for commission of such an
offence, would be vicariously liable therefor. Such vicarious liability
can be inferred against the company only if the requisite statement is made
in the complaint. It was further observed that before a person can be made
vicariously liable, strict compliance with the statutory requirements would
be insisted. It is clear that this is a case where the basic averments in
terms of Section 141 were absent and the two-Judge Bench followed SMS
Pharma-(1) and confirmed the quashing of the complaint. The relevant
paragraph of this judgment needs to be quoted.

“8. To launch a prosecution, therefore, against the alleged Directors there
must be a specific allegation in the complaint as to the part played by
them in the transaction. There should be clear and unambiguous allegation
as to how the Directors are in-charge and responsible for the conduct of
the business of the company. The description should be clear. It is true
that precise words from the provisions of the Act need not be reproduced
and the court can always come to a conclusion in facts of each case. But
still, in the absence of any averment or specific evidence the net result
would be that complaint would not be entertainable.”

17. In N. Rangachari a two-Judge Bench of this Court was again dealing
with the same question. Averments made in the complaint before the two-
Judge Bench were similar in nature as the averments made in the complaint
in the present case. The complainant therein was Bharat Sanchar Nigam
Limited (BSNL). Its case was that the cheques issued by the Data Access
(India) Limited in discharge of their pre-existing liabilities were
dishonoured for insufficiency of funds. A petition was filed for quashing
the complaint by the appellant-Data Access (India) Limited stating that he
was nominated as a honorary chairman of the company without any
remuneration and was holding an honorary post in the company. He was never
assigned with the financial and business activities. The complaint did not
contain adequate averments to justify initiation of criminal proceedings
against him. The High Court dismissed the petition on the ground that the
court cannot decide the pleas raised by the appellant in a petition filed
under Section 482 of the Code. Those please will have to be established in
trial. This Court referred to the relevant extracts from Palmer’s Company
Law[18], Guide to the Companies Act by A. Ramaiya[19] and Principles of
Modern Company Law by Gower and Davies[20] and expressed that in the
commercial world, a person 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 and it is for the Directors to prove to the contrary at the
trial. This Court also observed that a person having business dealings
with the company may not be aware of the arrangement within the company in
regard to its management. Pertinently, this Court expressed that the
decision of the three-Judge Bench in SMS Pharma-(1) was binding on it. The
two-Judge Bench understood SMS Pharma-(1) as laying down the law that what
is to be looked into is whether in the complaint, in addition to asserting
that accused are the Directors of the company, it is further alleged that
they are in charge of and responsible to the company for the conduct of the
business of the company. This Court observed that reading the complaint,
as a whole, it was clear that the allegations in the complaint were that at
the time when two dishonoured cheques were issued by the company, the
appellants therein were the Directors of the company and were in charge of
the affairs of the company, and, therefore, the High Court had rightly
dismissed the petition.

18. In Paresh P. Rajda v. State of Maharashtra and anr.[21], similar
question arose before a two-Judge Bench of this Court. The High Court had
refused to quash the complaint on the ground that an overall reading of the
complaint showed that specific allegations had been levelled against the
appellant that he being a responsible officer of the company was equally
liable and that if it is ultimately found that he had, in fact, no role to
play, he would be entitled to an acquittal. It appears that thereafter
accused 2 and 4, the Chairman and a Director respectively of the company
approached this Court. This Court referred to SMS Pharma-(1) and N.
Rangachari and noted a slight departure in N. Rangachari in favour of the
complainant from the view taken in SMS Pharma-(1) and further noted that
ultimately the entire matter would boil down to an examination of the
nature of averments made in the complaint. The two-Judge Bench quoted the
relevant paragraphs of the complaint in which it was stated that accused 2
was the Chairman of the company and was responsible for the day-to-day
affairs of the company and was, therefore, liable to repay the amounts of
dishonoured cheques. It was further stated in the complaint that accused 3
being Joint Managing Director and accused 4, 5 and 6 being Directors of the
company are responsible officers of the company and, therefore, they are
liable to repay the amounts of the dishonoured cheques. This Court
observed that from the High Court judgment, it appears that the question as
to whether accused 2 was responsible for the business of the company had
not been seriously challenged. This Court observed that there were clear
allegations against both the appellants-accused; that they were officers of
the company and were responsible for the affairs of the company and that at
a stage where the trial had not yet started, it is inappropriate to quash
the proceedings against them.

19. In Malwa Cotton & Spinning Mills Ltd., the High Court had accepted
the prayer of respondent 1 for quashing the proceedings initiated against
him under Section 138 of the NI Act on the ground that he had resigned from
the Directorship before the cheques were issued. This Court was of the
view that whether respondent 1 had resigned before the cheques were issued
involves factual dispute. Referring to N. Rangachari, where it is observed
that 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 and if any restriction on their powers is placed
by the Memorandum of Articles of the Company, it is for the Directors to
establish that in the trial this Court allowed the appeal filed by the
complainant holding that the High Court was not justified in quashing the
proceedings against respondent 1.

20. In K.K. Ahuja, where this Court was considering a similar question
after referring to SMS Pharma-(1), SMS Pharma-(2), Saroj Kumar Poddar and
N.K. Wahi and other relevant judgments and after referring to the relevant
provisions of the Companies Act, this Court summarized the position under
Section 141 of the NI Act as under:

“27. The position under Section 141 of the Act can be summarised thus:

(i) If the accused is the Managing Director or a Joint Managing Director,
it is not necessary to make an averment in the complaint that he is in
charge of, and is responsible to the company, for the conduct of the
business of the company. It is sufficient if an averment is made that the
accused was the Managing Director or Joint Managing Director at the
relevant time. This is because the prefix “Managing” to the word “Director”
makes it clear that they were in charge of and are responsible to the
company, for the conduct of the business of the company.

(ii) In the case of a Director or an officer of the company who signed the
cheque on behalf of the company, there is no need to make a specific
averment that he was in charge of and was responsible to the company, for
the conduct of the business of the company or make any specific allegation
about consent, connivance or negligence. The very fact that the dishonoured
cheque was signed by him on behalf of the company, would give rise to
responsibility under sub-section (2) of Section 141.

(iii) In the case of a Director, secretary or manager [as defined in
Section 2(24) of the Companies Act] or a person referred to in clauses (e)
and (f) of Section 5 of the Companies Act, an averment in the complaint
that he was in charge of, and was responsible to the company, for the
conduct of the business of the company is necessary to bring the case under
Section 141(1) of the Act. No further averment would be necessary in the
complaint, though some particulars will be desirable. They can [pic]also be
made liable under Section 141(2) by making necessary averments relating to
consent and connivance or negligence, in the complaint, to bring the matter
under that sub-section.

(iv) Other officers of a company cannot be made liable under sub-section
(1) of Section 141. Other officers of a company can be made liable only
under sub-section (2) of Section 141, by averring in the complaint their
position and duties in the company and their role in regard to the issue
and dishonour of the cheque, disclosing consent, connivance or negligence.”

21. In National Small Industries Corporation Limited, this Court was
dealing with the same question. After referring to SMS Pharma-(1), SMS
Pharma-(2), Saroj Kumar Poddar, N.K. Wahi, N. Rangachari, Paresh P. Rajda,
K.K. Ahuja and other relevant judgments, this Court laid down the following
principles:

“(i) The primary responsibility is on the complainant to make specific
averments as are required under the law in the complaint so as to make the
accused vicariously liable. For fastening the criminal liability, there is
no presumption that every Director knows about the transaction.

(ii) Section 141 does not make all the Directors liable for the offence.
The criminal liability can be fastened only on those who, at the time of
the commission of the offence, were in charge of and were responsible for
the conduct of the business of the company.

(iii) Vicarious liability can be inferred against a company
registered or incorporated under the Companies Act, 1956 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 offence committed by the company along with averments in the
petition containing that accused were in-charge of and responsible for the
business of the company and by virtue of their position they are liable to
be proceeded with.

(iv) Vicarious liability on the part of a person must be pleaded and
proved and not inferred.

(v) If accused is a Managing Director or a Joint Managing Director then
it is not necessary to make specific averment in the complaint and by
virtue of their position they are liable to be proceeded with.

(vi) If the accused is a Director or an Officer of a company who signed
the cheques on behalf of the company then also it is not necessary to make
specific averment in complaint.

(vii) 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.”

22. In Rallis India Limited, this Court was dealing with a similar issue.
The High Court had allowed application filed under Section 482 of the Code
and discharged the applicants therein. While setting aside the High
Court’s order, this Court found that there were averments in the complaint
that the respondents were partners of the firm at the relevant point of
time and were looking after the day-to-day affairs of the partnership firm.
This averment had been specifically mentioned by the appellant in the
complaint even though denied by the respondents but the burden of proof
that at the relevant point of time, the respondents were not the partners,
lies specifically on them and this onus is required to be discharged by
them by leading evidence. This Court observed that where there are several
disputed facts involved for instance when the partnership came into being
and when the respondents had actually retired from the partnership, etc.
the ratio of SMS Pharma-(1) can be followed only, after the factum that the
accused were the Directors or partners of a company or a firm respectively
at the relevant point of time stands fully established. In cases, where
there are allegations and counter-allegations between the parties regarding
the very composition of the firm, the rule of ‘specific averment’ laid down
in SMS Pharma-(1) must be broadly construed.

23. In Anita Malhotra, the High Court had dismissed the petition filed
praying for quashing of the criminal complaint instituted against the
appellant under Section 138 of the NI Act. The appellant claimed to be a
non-executive Director of the company which had issued the cheques. The
appellant claimed that she had resigned from the company on 20/11/1998
while the cheques were issued in the year 2004. A two-Judge Bench of this
Court held that though it is not proper for the High Court to make a roving
enquiry and consider the defence of the accused at the stage of a petition
filed for quashing the complaint, if any documents, which are beyond
suspicion or doubt, are placed, it can take them into account. This Court
looked into the certified copy of the annual return, which was a public
document as per the Companies Act read with Section 74(2) of the Evidence
Act and held that the appellant had resigned from the Directorship of the
company much prior to the issuance of the cheques. While setting aside the
High Court’s order, this Court reiterated that in case of a Director, the
complaint should specifically spell out how and in what manner the Director
was in charge of or was responsible to the company for conduct of its
business and mere bald statement that he or she was in charge of and was
responsible to the company for conduct of its business is not sufficient.
This Court observed that in the case before it except the mere bald and
cursory statement with regard to the appellant, the complainant had not
specified her role in the day-to-day affairs of the company and on this
ground alone, the appellant was entitled to succeed.

24. In A.K. Singhania, while dealing with the same issue a two-Judge
Bench of this Court observed that it is necessary for a complainant to
state in the complaint that the person accused was in charge of and
responsible for the conduct of the business of the company. Although, no
particular form for making such an allegation is prescribed, and it may not
be necessary to reproduce the language of Section 138 of the NI Act, but a
reading of the complaint should show that the substance of the accusation
discloses that the accused person was in charge of and responsible for the
conduct of the business of the company at the relevant time.

25. In Mannalal Chamaria, this Court reiterated the above observations
and observed that in the averments made before it there was no specific or
even a general allegation made against the appellants. This Court,
therefore, dismissed the complaint filed against the appellants under
Section 138 of the NI Act.

26. It is clear from a perusal of the above decisions that SMS Pharma-
(1), which is a three-Judge Bench decision, still holds the field. In all
subsequent decisions, two-Judge Benches of this Court have followed SMS
Pharma-(1). No doubt that there is a slight deviation in N. Rangachari in
favour of the complainant, but, even in that decision, the two-Judge Bench
accepts that SMS Pharma-(1) has a binding force. In SMS Pharma-(1), KK
Ahuja and National Small Industries Ltd. this Court summarized its
conclusions. We are concerned in this case with Directors who are not
signatories to the cheques. So far as Directors who are not signatories to
the cheques or who are not Managing Directors or Joint Managing Directors
are concerned, it is clear from the conclusions drawn in the above-
mentioned cases that it is necessary to aver in the complaint filed under
Section 138 read with Section 141 of the NI Act that at the relevant time
when the offence was committed, the Directors were in charge of and were
responsible for the conduct of the business of the company. This is a
basic requirement. There is no deemed liability of such Directors.

27. This averment assumes importance because it is the basic and
essential averment which persuades the Magistrate to issue process against
the Director. That is why this Court in SMS Pharma-(1) observed that 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 NI Act
read in the light of the powers of a Magistrate referred to in Sections 200
to 204 of the Code which recognize the Magistrate’s discretion to reject
the complaint at the threshold if he finds that there is no sufficient
ground for proceeding. Thus, if this basic averment is missing the
Magistrate is legally justified in not issuing process. But here we are
concerned with the question as to what should be the approach of a High
Court when it is dealing with a petition filed under Section 482 of the
Code for quashing such a complaint against a Director. If this averment is
there, must the High Court dismiss the petition as a rule observing that
the trial must go on? Is the High Court precluded from looking into other
circumstances if any? Inherent power under Section 482 of the Code is to
be invoked to prevent abuse of the process of any court or otherwise to
secure ends of justice. Can such fetters be put on the High Court’s
inherent powers? We do not think so.

28. SMS Pharma-(1), undoubtedly, says that it is necessary to
specifically aver in the complaint that the Director was in charge of and
responsible for the conduct of the company’s business at the relevant time
when the offence was committed. It says that this is a basic requirement.
And as we have already noted, this averment is for the purpose of
persuading the Magistrate to issue process. If we revisit SMS Pharma-(1),
we find that after referring to the various provisions of the Companies Act
it is observed that those provisions show that what a Board of Directors is
empowered to do in relation to a particular company depends upon the roles
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. 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 the day-to-day functions of the company. This Court further observed
that 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 and that
there is no universal rule that a Director of a company is in charge of its
everyday affairs. What follows from this is that it cannot be concluded
from SMS Pharma-(1) that the basic requirement stated therein is
sufficient in all cases and whenever such an averment is there, the High
Court must dismiss the petition filed praying for quashing the process.
It must be remembered that the core of a criminal case are its facts and in
factual matters there are no fixed formulae required to be followed by a
court unless it is dealing with an entirely procedural matter. We do not
want to discuss ‘the doctrine of Indoor Management’ on which submissions
have been advanced. Suffice it to say, that just as the complainant is
entitled to presume in view of provisions of the Companies Act that
the Director was concerned with the issuance of the cheque, the Director
is entitled to contend that he was not concerned with the issuance of
cheque for a variety of reasons. It is for the High Court to
consider these submissions. The High Court may in a given case on an
overall reading of a complaint and having come across some unimpeachable
evidence or glaring circumstances come to a conclusion that the
petition deserves to be allowed despite the presence of the basic
averment. That is the reason why in some cases, after referring to SMS
Pharma-(1), but considering overall circumstances of the case, this Court
has found that the basic averment was insufficient, that something more was
needed and has quashed the complaint.

29. When a petition is filed for quashing the process, in a given case,
on an overall reading of the complaint, the High Court may find that the
basic averment is sufficient, that it makes out a case against the
Director; that there is nothing to suggest that the substratum of the
allegation against the Director is destroyed rendering the basic averment
insufficient and that since offence is made out against him, his further
role can be brought out in the trial. In another case, the High Court may
quash the complaint despite the basic averment. It may come across some
unimpeachable evidence or acceptable circumstances which may in its opinion
lead to a conclusion that the Director could never have been in charge of
and responsible for the conduct of the business of the company at the
relevant time and therefore making him stand the trial would be abuse of
the process of court as no offence is made out against him.

30. When in view of the basic averment process is issued the complaint
must proceed against the Directors. But, if any Director wants the process
to be quashed by filing a petition under Section 482 of the Code on the
ground that only a bald averment is made in the complaint and that he is
really not concerned with the issuance of the cheque, he must in order to
persuade the High Court to quash the process either furnish some sterling
uncontrovertible material or acceptable circumstances to substantiate his
contention. He must make out a case that making him stand the trial would
be abuse of the process of court. He cannot get the complaint quashed
merely on the ground that apart from the basic averment no particulars are
given in the complaint about his role, because ordinarily the basic
averment would be sufficient to send him to trial and it could be argued
that his further role could be brought out in the trial. Quashing of a
complaint is a serious matter. Complaint cannot be quashed for the asking.
For quashing of a complaint it must be shown that no offence is made out at
all against the Director.

31. In this connection, it would be advantageous to refer to Harshendra
Kumar D v. Rebatilata Koley & Ors.,[22] where process was issued by the
Magistrate on a complaint filed under Section 138 read with Section 141 of
the NI Act. The appellant therein challenged the proceeding by filing
revision application under Section 397 read with Section 401 of the Code.
The case of the appellant-Director was that he had resigned from
Directorship. His resignation was accepted and notified to the Registrar
of Companies. It was averred in the complaint that the appellant was
responsible for the day-to-day affairs of the company and it was on his and
other Directors assurance those demand drafts were issued. Despite this
averment, this Court quashed the complaint taking into account resolution
passed by the company, wherein it was reflected that the appellant had
resigned from the post of Director much prior to the issuance of cheque and
the fact that the company had submitted Form-32. It was argued before this
Court that the documents furnished by the accused could not have been taken
into account. Repelling this submission this Court observed as under:

“24. In Awadh Kishore Gupta3 this Court while dealing with the scope of
power under Section 482 of the Code observed: (SCC p. 701, para 13)

“13. It is to be noted that the investigation was not complete and at that
stage it was impermissible for the High Court to look into materials, the
acceptability of which is essentially a matter for trial. While exercising
jurisdiction under Section 482 of the Code, it is not permissible for the
court to act as if it was a trial Judge.”

25. In our judgment, the above observations cannot be read to mean that in
a criminal case where trial is yet to take place and the matter is at the
stage of issuance of summons or taking cognizance, materials relied upon by
the accused which are in the nature of public documents or the materials
which [pic]are beyond suspicion or doubt, in no circumstance, can be looked
into by the High Court in exercise of its jurisdiction under Section 482 or
for that matter in exercise of revisional jurisdiction under Section 397 of
the Code. It is fairly settled now that while exercising inherent
jurisdiction under Section 482 or revisional jurisdiction under Section 397
of the Code in a case where complaint is sought to be quashed, it is not
proper for the High Court to consider the defence of the accused or embark
upon an enquiry in respect of merits of the accusations. However, in an
appropriate case, if on the face of the documents — which are beyond
suspicion or doubt — placed by the accused, the accusations against him
cannot stand, it would be travesty of justice if the accused is relegated
to trial and he is asked to prove his defence before the trial court. In
such a matter, for promotion of justice or to prevent injustice or abuse of
process, the High Court may look into the materials which have significant
bearing on the matter at prima facie stage.

26. Criminal prosecution is a serious matter; it affects the liberty of a
person. No greater damage can be done to the reputation of a person than
dragging him in a criminal case. In our opinion, the High Court fell into
grave error in not taking into consideration the uncontroverted documents
relating to the appellant’s resignation from the post of Director of the
Company. Had these documents been considered by the High Court, it would
have been apparent that the appellant has resigned much before the cheques
were issued by the Company.”

32. As already noted in Anita Malhotra, relying on Harshendra Kumar, this
Court quashed the complaint filed under Section 138 read with Section 141
of the NI Act relying on the certified copy of the annual return which was
a public document as per the Companies Act read with Section 74(2) of the
Evidence Act, which established that the appellant/Director therein had
resigned from the Directorship much prior to the issuance of cheques. This
was done despite the fact that the complaint contained the necessary
averments. In our opinion, therefore, there could be a case where the High
Court may feel that filing of the complaint against all Directors is abuse
of the process of court. The High Court would be justified in such cases
in quashing the complaint after looking into the material furnished by the
accused. At that stage there cannot be a mini trial or a roving inquiry.
The material on the face of it must be convincing or uncontrovered or there
must be some totally acceptable circumstances requiring no trial to
establish the innocence of the Directors.

33. We may summarize our conclusions as follows:

a) Once in a complaint filed under Section 138 read with Section 141 of
the NI Act the basic averment is made that the Director was in charge of
and responsible for the conduct of the business of the company at the
relevant time when the offence was committed, the Magistrate can issue
process against such Director;

b) If a petition is filed under Section 482 of the Code for quashing of
such a complaint by the Director, the High Court may, in the facts of a
particular case, on an overall reading of the complaint, refuse to quash
the complaint because the complaint contains the basic averment which is
sufficient to make out a case against the Director.

c) In the facts of a given case, on an overall reading of the complaint,
the High Court may, despite the presence of the basic averment, quash the
complaint because of the absence of more particulars about role of the
Director in the complaint. It may do so having come across some
unimpeachable, uncontrovertible evidence which is beyond suspicion or doubt
or totally acceptable circumstances which may clearly indicate that the
Director could not have been concerned with the issuance of cheques and
asking him to stand the trial would be abuse of the process of the court.
Despite the presence of basic averment, it may come to a conclusion that no
case is made out against the Director. Take for instance a case of a
Director suffering from a terminal illness who was bedridden at the
relevant time or a Director who had resigned long before issuance of
cheques. In such cases, if the High Court is convinced that prosecuting
such a Director is merely an arm-twisting tactics, the High Court may quash
the proceedings. It bears repetition to state that to establish such case
unimpeachable, uncontrovertible evidence which is beyond suspicion or doubt
or some totally acceptable circumstances will have to be brought to the
notice of the High Court. Such cases may be few and far between but the
possibility of such a case being there cannot be ruled out. In the absence
of such evidence or circumstances, complaint cannot be quashed;

d) No restriction can be placed on the High Court’s powers under Section
482 of the Code. The High Court always uses and must use this power
sparingly and with great circumspection to prevent inter alia the abuse of
the process of the Court. There are no fixed formulae to be followed by
the High Court in this regard and the exercise of this power depends upon
the facts and circumstances of each case. The High Court at that stage
does not conduct a mini trial or roving inquiry, but, nothing prevents it
from taking unimpeachable evidence or totally acceptable circumstances into
account which may lead it to conclude that no trial is necessary qua a
particular Director.

34. We will examine the facts of the present case in light of the above
discussion. In this case, the High Court answered the first question
raised before it in favour of the respondents. The High Court held that
“in the complaint except the averments that the Directors were in charge of
and responsible to the company at the relevant time, nothing has been
stated as to what part was played by them and how they were responsible
regarding the finances of the company, issuance of cheque and control over
the funds of the company”. After so observing, the High Court quashed the
proceedings as against the respondents. In view of this conclusion, the
High Court did not go into the second question raised before it as to
whether the Director, who has resigned can be prosecuted after his
resignation has been accepted by the Board of Directors of the company.
Pertinently, in the application filed by the respondents, no clear case was
made out that at the material time, the Directors were not in charge of and
were not responsible for the conduct of the business of the company by
referring to or producing any uncontrovertible or unimpeachable evidence
which is beyond suspicion or doubt or any totally acceptable circumstances.
It is merely stated that Sidharth Mehta had resigned from the Directorship
of the company on 30/9/2010 but no uncontrovertible or unimpeachable
evidence was produced before the High Court as was done in Anita Malhotra
to show that he had, in fact, resigned long before the cheques in question
were issued. Similar is the case with Kanhaiya Lal Mehta and Anu Mehta.
Nothing was produced to substantiate the contention that they were not in
charge of and not responsible for the conduct of the business of the
company at the relevant time. In the circumstances, we are of the opinion
that the matter deserves to be remitted to the High Court for fresh
hearing. However, we are inclined to confirm the order passed by the High
Court quashing the process as against Shobha Mehta. Shobha Mehta is stated
to be an old lady who is over 70 years of age. Considering this fact and
on an overall reading of the complaint in the peculiar facts and
circumstances of the case, we feel that making her stand the trial would be
an abuse of process of the court. It is however, necessary for the High
Court to consider the cases of other Directors in light of the decisions
considered by us and the conclusions drawn by us in this judgment. In the
circumstances, we confirm the impugned order to the extent it quashes the
process issued against Shobha Mehta, an accused in C.C. No.24035 of 2011.
We set aside the impugned order to the extent it quashes the process issued
against other Directors viz. Kanhaiya Lal Mehta, Anu Mehta and Siddharth
Mehta. We remit the matter to the High Court. We request the High Court
to hear the parties and consider the matter afresh. We are making it clear
that we have not expressed any opinion on the merits of the case and
nothing said by us in this order should be interpreted as our expression of
opinion on the merits of the case. The High Court is requested to consider
the matter independently. Considering the fact that the complaints are of
2011, we request the High Court to dispose of the matter as expeditiously
as possible and preferably within six months.
35. The criminal appeals are disposed of in the afore-stated terms.

...………………………….J.
[Ranjana Prakash Desai]

…………………………….J.
[N.V. Ramana]
New Delhi
October 17, 2014.

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[1] (2009) 10 SCC 48
[2] (2005) 8 SCC 89
[3] (2014) 4 SCALE 55
[4] 2013(12) SCALE 673
[5] (2011) 13 SCC 88
[6] (2008) 7 SCC 442
[7] (2008) 17 SCC 147
[8] (2007) 5 SCC 108
[9] 66 Comp Cas 26 (Delhi)
[10] (2014) 4 SCC 282
[11] (2010) 3 SCC 330
[12] (2012) 1 SCC 520
[13] (2007) 9 SCC 481
[14] (2010) 11 SCC 374
[15] (2007) 3 SCC 693
[16] (2007) 4 SCC 70
[17] (2006) 10 SCC 581
[18] 20th Edition
[19] 16th Edition
[20] 17th Edition
[21] (2008) 7 SCC 442
[22] (2011) 3 SCC 351

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