Companies Act Case Law Harshendra Kumar D Vs Rebatilata Koley Etc

 Companies Act Case Law

Harshendra Kumar D Vs Rebatilata Koley Etc

 

IN THE SUPREME COURT OF INDIA
CRIMINAL APPELLATE JURISDICTION
CRIMINAL APPEAL NOS.360-377 OF 2011

(Arising out of SLP (Criminal) Nos. 3008-3025 of 2008)
Harshendra Kumar D. …. Appellant
Versus
Rebatilata Koley Etc. ….Respondents

 

 

JUDGMENT

 

 

R.M. Lodha, J.
Leave granted.
2. These 18 appeals, by special leave, are directed against
the common judgment and order dated September 6, 2007 passed by
Calcutta High Court whereby 18 criminal revision applications filed by
the appellant for quashing the proceedings initiated by the
1
complainants in 18 complaint cases under Section 138 read with
Section 141 of Negotiable Instruments Act, 1881 ( for short, `NI Act’)
against him have been dismissed.
3. The brief facts are these. The complainants were
interested in business relationship with Rifa Healthcare (India) Pvt.
Ltd. (for short, `the Company’) for the sale of bio-ceramic products.
The complainants, for the orders they had placed, issued demand
drafts in favour of the Company. It appears that the Company had not
delivered the products ordered by the complainants and accordingly
they asked the Company for return of their money. On April 30, 2004,
the Company issued 18 cheques bearing Nos. (i) 000843 for Rs.
30,000/-; (ii) 00870 for Rs. 40,000/-; (iii) 000845 for Rs. 30,000/-; (iv)
000852 for Rs. 3,00,000/-; (v) 00842 for Rs. 60,000/-; (vi) 000862 for
Rs. 40,000/-; (vii) 000834 for Rs. 60,000/-; (viii) 000572 for Rs.
40,000/-; (ix) 000827 for Rs. 30,350/-; (x) 000854 for Rs. 3,00,000/-;
(xi) 000826 for Rs. 60,000/-; (xii) 000855 for Rs. 3,00,000/-; (xiii)
000857 for Rs. 3,00,000/-; (xiv) 000858 for Rs. 3,00,000/-; (xv)
000841 for Rs. 60,000/-; (xvi) 000871 for Rs. 40,000/-; (xvii) 000568
for Rs. 40,000/- and (xviii) for Rs. 60,130/- drawn on UTI Bank Ltd.,

 

 

2
Jayanagar, Bangalore in favour of the complainants. These 18
cheques were dishonoured by the Bank/s on presentation.
4. In the month of December, 2004, the complainants filed
18 complaints under Section 138 read with Section 141 of the NI Act.
For the sake of brevity and convenience, we shall refer to the
complaint no. 14512 of 2004. In the complaint, besides the Company,
the appellant was arraigned as accused No. 3. It was alleged in the
complaint that the Managing Director and the two Directors (including
the appellant) were responsible for day-to-day affairs of the Company
and that it was on their assurance that the complainant issued
demand draft in favour of the Company and when the products of the
Company were not received by the complainant, she contacted the
accused persons and told them that she could not continue business
with them and asked for return of her money. Accordingly, for and on
behalf of the Company, in discharge of the existing liability, an
account payee cheque was issued but the cheque was returned by
the complainant’s banker on presentation with the endorsement
`insufficient fund’. The complainant then sent legal notice asking the
accused persons to pay the amount of cheque within 15 days from

 

 

3
the date of the receipt of the notice but despite service of notice, no
payment has been made.
5. The concerned Metropolitan Magistrate issued summons
to all the accused persons including the appellant.
6. The appellant challenged the proceedings initiated by the
complainants against him by filing 18 revision applications under
Section 397 read with Section 401 of the Criminal Procedure Code,
1973 (for short, `Code’) before the Calcutta High Court. In these
revision applications, notices were issued to the complainants. On
behalf of the appellant, the principal contention canvassed was that
the appellant was appointed as Director of the Company on August
27, 2003. He resigned from the directorship on March 2, 2004 which
was accepted by the Board of Directors on that day itself with
immediate effect. The factum of his resignation is also recorded in
Form No. 32 filed by the Company with the Registrar of Companies
on March 4, 2004. The 18 cheques which were issued on behalf of
the Company to the complainants were issued after his resignation.
The dishonour of these cheques through the complainants’ bankers’
was also subsequent to his resignation. In other words, it was
submitted by the counsel for the appellant before High Court that at

 

 

4
the time when the cheques were issued or when the cheques were
dishonoured, the appellant had no concern or connection with the
Company.
7. The High Court, however, relying upon a decision of
Single Judge of that Court in Fateh Chand Bhansali v. M/s.
Hindustan Development Corporation Ltd.1, held that resignation by
the petitioner as Director of the Company is a defence of the
accused and the defence is a matter for consideration at the trial on
the basis of evidence which cannot be decided by the Court in
revisional jurisdiction. The High Court considered the matter thus:

 

“The question of the learned Advocate for the petitioner

is that the petitioner was not director of a company at

the material point of time because there is form 32

which shows the date when the petitioner was

appointed a director and when there came to be a

change of directorship of the company. According to Mr.

Trivedi learned Advocate for the petitioner, a Hon’ble

Judge of this Court in Saroj Kumar Jhunjhunwala Vs.

State of West Bengal and Anr. (2007) 1 C Cr.LR (Cal)

793 was pleased to hold that if before the issuance of

cheques, the accused-petitioner had resigned from the

directorship, then he cannot be held liable for the

offence. This decision which favours the petitioner has

been pitted against the decision in Fateh Chand

Bhansali Vs. M/s. Hindustan Development Corporation

Ltd., (2005) 1 C Cr. LR (Cal) 581 wherein another

Hon’ble Single Judge of this court with reference to a

good number of decisions including the decision in

State of M.P. Vs. Awadh Kishore Gupta & Ors., 2004

 

1 (2005) 1 C Cr.LR (Cal) 581

 

 

5
SCC (Cr.) 352 held that the High Court while

considering the revisional application cannot look into

the papers and documents annexed to such application

as those were neither verified nor tested. In that

decision also the point was raised with reference to form

32 and His Lordship held that the decision of State of

M.P. Vs. Awadh Kishore Gupta and Ors. (Supra) is an

authority regarding permissibility of the High Court to

look into the papers and documents annexed to the

revisional application and the story of the petitioner that

they resigned from the company by submitting Form 32

and are, in no way, responsible for the alleged offence

is a defence of the accused person and the defence is a

matter for consideration at the trial on the basis of

evidence which cannot be decided by the court. It is

worth mentioning that this decision in Fateh Chand

Bhansali was rendered on 23.3.2005 while the decision

in Saroj Kumar Jhunjhunwala was rendered on

05.04.2007 and in this decision Fateh Chand Bhansali

was not placed before his Lordship for consideration

and judicial discipline demands that I should go by the

earlier decision, namely, Fateh Chand Bhansali

(Supra).”
8. Section 138 and Section 141 were brought in the NI Act
by the Banking, Public Financial Institutions and Negotiable
Instruments Laws (Amendment) Act, 1988 (Act 66 of 1988) with effect
from April 1, 1989. These provisions as amended from time to time
read as under :
“S.138. Dishonour of cheque for insufficiency, etc., of

funds in the accounts.–Where any cheque drawn by a

person on an account maintained by him with a banker

for payment of any amount of money to another person

 

 

6
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 extend 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–
(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 is 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 amount 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.–For the purposes of this section, “debt or

other liability” means a legally enforceable debt or other

liability.
S. 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
7
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.]

 

9. The legal position concerning the vicarious liability of a
director in a company which is being prosecuted for the offence under
Section 138, NI Act has come up for consideration before this Court

 

 

8
on more than one occasion. In the case of S.M.S. Pharmaceuticals
Ltd. v. Neeta Bhalla and Another2, the following questions were
referred to a 3-Judge Bench for determination :
“(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 fulfil 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 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.”
10. The 3-Judge Bench of this Court answered the aforesaid
questions thus:
“(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

 

2 2005 (8) SCC 89

 

 

9
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.”

 

 

11. In N. Rangachari v. Bharat Sanchar Nigam Ltd.3, a 2-
Judge Bench of this Court discussed and considered S.M.S.
Pharmaceuticals Ltd.2 and observed as follows :
“…….The scope of Section 141 has been

authoritatively discussed in the decision in S.M.S.

 

3 2007 (5) SCC 108

 

 

10
Pharmaceuticals Ltd. [2005 (8) SCC 89] binding on us

and there is no scope for redefining it in this case.

Suffice it to say, that a prosecution could be launched

not only against the company on behalf of which the

cheque issued has been dishonoured, but it could also

be initiated against every person who at the time the

offence was committed, was in charge of and was

responsible for the conduct of the business of the

company. In fact, Section 141 deems such persons to

be guilty of such offence, liable to be proceeded against

and punished for the offence, leaving it to the person

concerned, to prove that the offence was committed by

the company without his knowledge or that he has

exercised due diligence to prevent the commission of

the offence. Sub-section (2) of Section 141 also roped

in Directors, Managers, Secretaries or other officers of

the company, if it was proved that the offence was

committed with their consent or connivance.
………………………………………………………………………
But as has already been noticed, the decision in S.M.S.

Pharmaceuticals Ltd. [2005 (8) SCC 89] binding on us,

has postulated that a Director in a company cannot be

deemed to be in charge of and responsible to the

company for the conduct of his business in the context

of Section 141 of the Act. Bound as we are by that

decision no further discussion on this aspect appears to

be warranted.”
12. In the case of K.K. Ahuja v. V.K. Vora & Another.4, a 2-
Judge Bench of this Court had an occasion to consider the earlier
decisions of this Court including the decision in the case of S.M.S.
Pharmaceuticals Ltd.2 It was held that mere fact that at some point of
time an officer of a company had played some role in the financial
4 (2009) 10 SCC 48

 

 

11
affairs of the company, that will not be sufficient to attract the
constructive liability under Section 141 of the NI Act. The Court
summarized the legal position as follows:
“(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 also be made liable under

Section 141(2) by making necessary averments relating

 

 

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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.”
13. In K.K. Ahuja4, this Court observed that if a mere
reproduction of the wording of Section 141(1) in the complaint was
sufficient to make a person liable to face prosecution, virtually every
officer/employee of a company without exception could be impleaded
as accused by merely making an averment that at the time when the
offence was committed they were in charge of and were responsible
to the company for the conduct and business of the company.
14. In a recent decision in the case of National Small
Industries Corporation Limited v. Harmeet Singh Paintal and
Another5, after survey of earlier decisions wherein legal position
concerning Section 138 and Section 141 of the NI Act was
considered, this Court culled out the following principles:

 

“(i) The primary responsibility is on the complainant to

make specific averments as are required under the law

 

5 2010 (3) SCC 330

 

 

13
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 the 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 the 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 the 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.”

 

 

14
15. Every company is required to keep at its registered office
a register of its directors, managing director, manager and secretary
containing the particulars with respect to each of them as set out in
clauses (a) to (e) of sub-section (1) of Section 303 of the Companies
Act, 1956. Sub-section (2) of Section 303 mandates every company
to send to the Registrar a return in duplicate containing the particulars
specified in the register. Any change among its directors, managing
directors, managers or secretaries specifying the date of change is
also required to be furnished to the Registrar of Companies in the
prescribed form within 30 days of such change. There is, thus,
statutory requirement of informing the Registrar of Companies about
change among directors of the company. In this view of the matter, in
our opinion, it must be held that a director – whose resignation has
been accepted by the company and that has been duly notified to the
Registrar of Companies – cannot be made accountable and fastened
with liability for anything done by the company after the acceptance of
his resignation. The words `every person who, at the time the offence
was committed’, occurring in Section 141 (1) of the NI Act are not
without significance and these words indicate that criminal liability of

 

 

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a director must be determined on the date the offence is alleged to
have been committed.
16. On March 2, 2004, the appellant sent a letter of
resignation to the Managing Director of the Company, the relevant
part of that reads as follows:
“Subject : Resignation to the Post of Director
With reference to the above subject I

hereby resign to the post of Director in your company

(sic.) immediate effect as I am pre-occupied with my

other business activities and unable to concentrate,

participate in the affairs of the company.
Therefore it is kind request with you to

accept my resignation and intimate the R.O.C. by filing

necessary applications to comply the legal formality.”

 

17. The Board of Directors held the meeting on March 2,
2004 and accepted the appellant’s resignation on that day itself. The
extract of resolution to that effect reads as follows :
“Mr. Harshendra Kumar D S/o Rathnavarma Hegde

residing at No. -55, Vittal Mallya Road, Bangalore. Due

to his personal inconivenceses (sic.) he requested to

accept his resignation for the Director, and the Board

accepted the resignation and it will be effected

immediately on the date of resignation.”
18. On March 4, 2004, the Company informed the Registrar
of Companies in the prescribed form (Form no. 32) about the

 

 

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resignation of the appellant from the post of Director of the Company
and, thus, change among directors.
19. The above documents placed on record by the appellant
have not been disputed nor controverted by the complainants. As a
matter of fact, it was not even the case of the complainants before the
High Court that the change among Directors of the Company, on
resignation of the appellant with effect from March 2, 2004, has not
taken place. The argument on behalf of the complainants before the
High Court was that it was not permissible for the High Court to look
into the papers and documents relating to the appellant’s resignation
since these are the matters of defence of the accused person and
defence is a matter for consideration at the trial on the basis of
evidence which cannot be decided by the High Court. The
complainants in this regard relied upon a decision of Single Judge of
that Court in the case of Fateh Chand Bhansali1 . The counsel for the
present appellant (revision petitioner therein) on the other hand
referred to a later decision of a Single Judge of the Calcutta High
Court in the case of Saroj Kumar Jhunjhunwala v. State of West
Bengal and Anr.6 wherein it was held that if before the issuance of
cheques, the accused had resigned from the directorship, then he
6 (2007) 1 C Cr. LR (Cal) 793

 

 

17
cannot be held liable for the offence. Confronted with two Single
Bench decisions of that Court in Fateh Chand Bhansali1 and Saroj
Kumar Jhunjhunwala6, the Single Judge held that the judicial
discipline demanded that he should go by the earlier decision,
namely, Fateh Chand Bhansali1 and, accordingly, refused to take into
consideration the documents relating to the appellant’s resignation as
Director from the Company with effect from March 2, 2004. While
relying upon Fateh Chand Bhansali1, the Single Judge referred to a
decision of this Court in State of Madhya Pradesh v. Awadh Kishore
Gupta and Others7 which was referred in Fateh Chand Bhansali1 .
20. In Awadh Kishore Gupta7, this Court while dealing with
the scope of power under Section 482 of the Code observed :
“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……….”
21. 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,
7 (2004) 1 SCC 691

 

materials relied upon by the accused which are in the nature of public
documents or the materials which 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 accused, the accusations against him cannot
stand, it would be travesty of justice if 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.

 

22. 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 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. As noticed above, the appellant resigned from the post of
Director on March 2, 2004. The dishonoured cheques were issued by
the Company on April 30, 2004, i.e., much after the appellant had
resigned from the post of Director of the Company. The acceptance
of appellant’s resignation is duly reflected in the resolution dated
March 2, 2004. Then in the prescribed form (Form No. 32), the
Company informed to the Registrar of Companies on March 4, 2004
about appellant’s resignation. It is not even the case of the
complainants that the dishonoured cheques were issued by the
appellant. These facts leave no manner of doubt that on the date the
offence was committed by the Company, the appellant was not the
Director; he had nothing to do with the affairs of the Company. In this
view of the matter, if the criminal complaints are allowed to proceed
against the appellant, it would result in gross injustice to the appellant
and tantamount to an abuse of process of the court.

 

23. These appeals are, accordingly, allowed. The judgment of
the Calcutta High Court dated September 6, 2007 and the summons
issued by the Metropolitan Magistrate, Calcutta to the appellant are
set aside. The complaints as against the appellant stand quashed.

 

 

…………………….J.

(Aftab Alam)

 

 

…………………… J.

(R.M. Lodha)

NEW DELHI,

FEBRUARY 8, 2011.

 

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