Companies Act Corporate Case Law K.K. Ahuja Vs V.K. Vora

Companies Act Corporate Case Law K.K. Ahuja Vs V.K. Vora

Reportable

IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NOS.1130-31 OF 2003
K.K. Ahuja … Appellant

Vs.

V.K. Vora & Anr. … Respondents
JUDGMENT
R. V. RAVEENDRAN, J.
The question as to who can be said to be persons “in-charge of, and

was responsible to the company for the business of the company” referred

to in section 141 of the Negotiable Instruments Act, 1881 (for short ‘the

Act’) arises for consideration in this appeal by special leave by a

complainant.

 

2. The appellant filed two complaints (Crl. Comp.No.58/2001 and

59/2001) in the Court of the Metropolitan Magistrate, Delhi, against M/s.

Motorol Speciality Oils Ltd. (`the Company’ for short) and eight others

under section 138 of the Act. The first complaint was in regard to dishonour
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of five cheques (each for Rs.5,00,000/-, all dated 28.2.2001). The second

complaint was in regard to dishonour of three cheques (for Rs.3 lakhs, 3

lakhs and 10 lakhs dated 31.10.2000, 30.11.2000 and 20.12.2000

respectively). The cheques were alleged to have been drawn in favour of the

appellant’s proprietary concern (M/s Delhi Paints & Oil Traders) by the

company represented by its Chairman. In the said complaints, the appellant

had impleaded nine persons as accused, namely, the company (A-1), its

Chairman (A-2), four Directors (A-3 to A-6) as also its Vice-President

(Finance), General Manager and Deputy General Manager (A-7, A-8 and A-

9 respectively). In the complaint the complainant averred that “at the time of

the commission of offence, accused 2 to 9 were in-charge of and responsible

for the conduct of day to day business of accused No.1” and that therefore

they were deemed to be guilty of offence under section 138 read with

section 141 of the Act and section 420 of the Indian Penal Code. The

appellant also alleged that respondents 2 to 9 were directly and actively

involved in the financial dealings of the company and that the accused had

failed to make payment of the cheques which were dishonoured. In the pre-

summoning evidence, the appellant reiterated that accused 2 to 9 were

responsible for the conduct of day to day business of first accused company

at the time of commission of offence. The learned Magistrate by order dated

3.10.2001 directed issue of summons to all the accused.
3

 

3. Accused no. 9 (first respondent herein) filed two petitions under

section 482 Cr.P.C. for quashing the proceedings against him on the ground

that as “Deputy General Manager”, he was not “in-charge of and was

responsible to the company for the conduct of the business of the company”.

He also contended that merely stating that he was directly and actively

involved in the financial dealings of the accused or was responsible for the

conduct of day to day business would not be sufficient to fasten criminal

liability on him. He submitted that neither the complaint nor the sworn

statement gave any particulars of the part played by him or part attributed to

him in the alleged offence. At the hearing before the High Court, the

Learned counsel for the appellant-complainant conceded that details as to

how the first respondent could be said to be “in charge of, and was

responsible to the company for the conduct of the business of the company”

were not given in the complaint or the statement on oath. It was also

conceded that the averments necessary to make out an offence under section

420 IPC were not contained in the complaint. The High Court by order dated

10.10.2002 allowed the said petitions and quashed the orders summoning

the first respondent on the ground that he was not a signatory to the cheques

nor was a party to the decision to allow the cheques to be dishonoured. The

said order is under challenge.
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4. The appellant contends that having regard to the specific averment in

the complaint that the accused 2 to 9 were in charge of and responsible for

the conduct of day to day business of the company, the order summoning the

first respondent could not have been quashed under section 482 Cr.P.C. It is

also submitted that at the stage of summoning the accused, when evidence

was yet to be led by the parties, the High Court committed an error in

quashing the order summoning the first respondent, on the basis of an

unwarranted assumption that the first respondent was not responsible for or

involved in the conduct of the business of the company. Reliance is placed

on the decision of this Court in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla

& Anr. [2005 (8) SCC 89 for short `SMS Pharma (I)’].
5. Section 141 of the Act deals with offences by companies. Relevant

portions of the said section are extracted below :
“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:

xxxxx

(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
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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.
6. A three-Judge Bench of this Court considered the scope of section

141 of the Act in SMS Pharma (I) and held that it is necessary to specifically

aver in a complaint under Sections 138 and 141 of the Act, that at the time

when the offence was committed, the person accused was in charge of, and

responsible for the conduct of business of the company and that in the

absence of such averment, section 141 cannot be invoked . This Court held:

“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 Director, Manager or
Secretary in a Company is liable”….etc. The legislature is aware that it is a
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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.”
“To sum up, there is almost unanimous judicial opinion that necessary
averments ought to be contained in a complaint before a person 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 the respondent falls within the
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.”

(emphasis supplied)

This Court then proceeded identified the nature of allegations required to be

made against members of Board of Directors and person signing the cheque

as follows :
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(i) Managing Director/Joint Managing Director: By virtue of the office
they hold, these persons are in charge of and responsible for the conduct
of business of the company. Therefore, they would fall under Section
141(1), even though there is no specific averment against them.
(ii) Person signing the cheque: The signatory of a cheque which is
dishonoured, is clearly responsible for the act and will be covered under
sub-section (2) of Section 141. Therefore, no special averment would be
necessary to make him liable.
(iii) Director: The fact that a person is a director of a company is not by
itself sufficient to make him 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 there is no
deemed liability upon a director .
7. In Sabitha Ramamurthy vs. RBS Channabasavaradhya – 2006 (10)

SCC 581, this Court re-stated the requirements of section 141 of Act thus, in

the context of a petition for quashing the process under Sec.482 Cr PC:

“It may be true that it is not necessary for the complainant to specifically
reproduce the wordings of the section but what is required is a clear
statement of fact so as to enable the court to arrive at a prima facie opinion
that the accused are vicariously liable. Section 141 raises a legal fiction.
By reason of the said provision, a person although is not personally liable
for commission of such an 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……….. In a case where the court is required to issue summons
which would put the accused to some sort of harassment, the court should
insist strict compliance with the statutory requirements.”

[emphasis supplied]
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8. In Saroj Kumar Poddar v State (NCT of Delhi) – 2007 (3) SCC 693,

while dealing with an appeal against the refusal to quash the order taking

cognizance, by an Ex-Director who had resigned from the Board prior to the

date of issuance of the cheque, this Court held that making some bald

averment was not sufficient. In that case, the complaint contained the

following averments:

“That Accused 1 is a public limited company incorporated and registered
under the Companies Act, 1956, and 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 and in charge of the conduct and
business of the Company, Accused 1. However, cheques referred to in the
complaint have been signed by Accused 3 and 8 for and on behalf of
Accused 1 Company.”
In spite of the averment that accused were Directors at the relevant time and

were responsible for and in charge of the conduct of the business of the

company, this Court held that allegations in the complaint, even if taken to

be correct in their entirety, did not disclose any offence by the appellant, on

the following reasoning :

“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
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.”
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[emphasis supplied]
9. In two subsequent decisions – SMS Pharmaceuticals v. Neeta Bhalla –

2007 (4) SCC 70 [for short ‘SMS Pharma (II)’] and Everest Advertising (P)

Ltd. v. State, Govt. of NCT of Delhi – 2007 (5) SCC 54, relating to

complaints against Directors of a company, the very same two-Judge Bench

which decided Saroj Kumar Poddar, clarified that the observations therein

that `the complaint should contain averments as to how and in what manner

the accused was responsible for the conduct of the business of the company,

or otherwise responsible for its functioning’ were with reference to the

particular facts of that case and should not be considered as a general

proposition of law. But latter decisions dealing with liability of directors –

N. K. Wahi vs. Shekhar Singh – 2007 (9) SCC 481, DCM Financial

Services Ltd. vs. J. N. Sareen – 2008 (8) SCC 1, and Ramraj Singh vs. State

of MP (a decision of a Bench of three Judges) – 2009 (5) SCALE 670, have

reiterated the principle laid down in Saroj Kumar Poddar. The prevailing

trend appears to require the complainant to state how a Director who is

sought to be made an accused, was in charge of the business of the company,

as every director need not be and is not in charge of the business of the

company. If that is the position in regard to a director, it is needless to

emphasise that in the case of non-director officers, there is all the more the
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need to state what his part is with regard to conduct of business of the

company and how and in what manner he is liable.

 

10. Having regard to section 141, when a cheque issued by a company

(incorporated under the Companies Act, 1956) is dishonoured, in addition to

the company, the following persons are deemed to be guilty of the offence

and shall be liable to be proceeded against and punished :
(i) 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;
(ii) any Director, Manager, Secretary or other officer of the company with
whose consent and connivance, the offence under section 138 has been
committed; and
(iii) any Director, Manager, Secretary or other officer of the
company whose negligence resulted in the offence under section 138 of
the Act, being committed by the company.

While liability of persons in the first category arises under sub-section (1) of

Section 141, the liability of persons mentioned in categories (ii) and (iii)

arises under sub-section (2). The scheme of the Act, therefore is, that a

person who is responsible to the company for the conduct of the business of

the company and who is in charge of business of the company is

vicariously liable by reason only of his fulfilling the requirements of sub-

section (1). But if the person responsible to the company for the conduct of

business of the company, was not in charge of the conduct of the business of
11
the company, then he can be made liable only if the offence was committed

with his consent or connivance or as a result of his negligence.

 

11. The criminal liability for the offence by a company under section 138,

is fastened vicariously on the persons referred to in sub-section (1) of section

141 by virtue of a legal fiction. Penal statutes are to be construed strictly.

Penal statutes providing constructive vicarious liability should be construed

much more strictly. When conditions are prescribed for extending such

constructive criminal liability to others, courts will insist upon strict literal

compliance. There is no question of inferential or implied compliance.

Therefore, a specific averment complying with the requirements of section

141 is imperative. As pointed out in K. Srikanth Singh vs. North East

Securities Ltd – 2007 (12) SCC 788, the mere fact that at some point of time,

an officer of a company had played some role in the financial affairs of the

company, will not be sufficient to attract the constructive liability under

section 141 of the Act.

 

12. Sub-section (2) of section 141 provides that a Director, Manager,

Secretary or other officer, though not in charge of the conduct of the

business of the company will be liable if the offence had been committed

with his consent or connivance or if the offence was a result of any
12
negligence on his part. The liability of persons mentioned in sub-section (2)

is not on account of any legal fiction but on account of the specific part

played – consent and connivance or negligence. If a person is to be made

liable under sub-section (2) of section 141, then it is necessary to aver

consent and connivance, or negligence on his part.

 

13. This takes us to the next question under sub-section (1) of section 141,

as to (i) who are the persons who are responsible to the company for the

conduct of the business of the company, and (ii) who could be said to be in

charge and was responsible to the company for the conduct of the business

of the company.
14. The words “every person who, at the time of the offence was

committed, was in charge of, and was responsible for the conduct of the

business of the company” occurs not only in section 141(1) of the Act but in

several enactments dealing with offences by companies, to mention a few –

Section 278 B of the Income Tax Act, 1961, Section 22C of Minimum

Wages Act, 1948, Section 86A of the Employees State Insurance Act, 1948,

Section 14A of Employees Provident Fund and Miscellaneous Provisions

Act, 1952, Section 29 of Payment of Bonus Act, 1965, Section 40 of The Air
13
(Prevention and Control of Pollution) Act, 1981 and section 47 of Water

(Prevention and Control of Pollution) Act, 1974. But neither section 141(1)

of the Act, nor the pari materia provisions in other enactments give any

indication as to who are the persons responsible to the company, for the

conduct of the business of the company. Therefore, we will have to fall back

upon the provisions of Companies Act, 1956 which is the law relating to and

regulating companies. Section 291 of the said Act provides that subject to

the provisions of that Act, the Board of Directors of a company shall be

entitled to exercise all such powers, and to do all such acts and things, as the

company is authorised to exercise and do. A company though a legal entity

can act only through its Board of Directors. The settled position is that a

Managing Director is prima facie in charge of and responsible for the

company’s business and affairs and can be prosecuted for offences by the

company. But insofar as other directors are concerned, they can be

prosecuted only if they were in charge of and responsible for the conduct of

the company’s business. A combined reading of Sections 5 and 291 of

Companies Act, 1956 with the definitions in clauses (24), (26), (30), (31),

(45) of section 2 of that Act would show that the following persons are

considered to be the persons who are responsible to the company for the

conduct of the business of the company : —

(a) the managing director/s;
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(b) the whole-time director/s;
(c) the manager;
(d) the secretary;
(e) any person in accordance with whose directions or instructions the Board
of directors of the company is accustomed to act;
(f) any person charged by the Board with the responsibility of complying
with that provision (and who has given his consent in that behalf to the
Board); and
(g) where any company does not have any of the officers specified in clauses
(a) to (c), any director or directors who may be specified by the Board in this
behalf or where no director is so specified, all the directors.
It follows that other employees of the company, cannot be said to be persons

who are responsible to the company, for the conduct of the business of the

company.

 

15. Section 141 uses the words “was in charge of, and was responsible to

the company for the conduct of the business of the company”. It is evident

that a person who can be made vicariously liable under sub-section (1) of

Section 141 is a person who is responsible to the company for the conduct of

the business of the company and in addition is also in charge of the business

of the company. There may be many directors and secretaries who are not

in charge of the business of the company at all. The meaning of the words

“person in charge of the business of the company” was considered by this

Court in Girdhari Lal Gupta v. D.N. Mehta [1971 (3) SCC 189] followed in

State of Karnataka v. Pratap Chand [1981 (2) SCC 335] and Katta Sujatha
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vs. Fertiliser & Chemicals Travancore Ltd. [2002 (7) SCC 655]. This Court

held that the words refer to a person who is in overall control of the day to

day business of the company. This Court pointed out that a person may be a

director and thus belongs to the group of persons making the policy

followed by the company, but yet may not be in charge of the business of

the company; that a person may be a Manager who is in charge of the

business but may not be in overall charge of the business; and that a person

may be an officer who may be in charge of only some part of the business.

 

16. Therefore, if a person does not meet the first requirement, that is

being a person who is responsible to the company for the conduct of the

business of the company, neither the question of his meeting the second

requirement (being a person in charge of the business of the company), nor

the question of such person being liable under sub-section (1) of section 141

does not arise. To put it differently, to be vicariously liable under sub-

section (1) of Section 141, a person should fulfill the ‘legal requirement’ of

being a person in law (under the statute governing companies) responsible to

the company for the conduct of the business of the company and also fulfill

the ‘factual requirement’ of being a person in charge of the business of the

company.
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17. Therefore, the averment in a complaint that an accused is a director

and that he is in charge of and is responsible to the company for the conduct

of the business of the company, duly affirmed in the sworn statement, may

be sufficient for the purpose of issuing summons to him. But if the accused

is not one of the persons who falls under the category of ‘persons who are

responsible to the company for the conduct of the business of the company’

(listed in para 14 above), then merely by stating that ‘he was in charge of the

business of the company’ or by stating that ‘he was in charge of the day to

day management of the company’ or by stating that he was in charge of, and

was responsible to the company for the conduct of the business of the

company’, he cannot be made vicariously liable under section 141(1) of the

Act.
18. It should, however, be kept in view that even an officer who was not

in charge of and was responsible to the company for the conduct of the

business of the company can be made liable under sub-section (2) of Section

141. For making a person liable under Section 141(2), the mechanical

repetition of the requirements under Section 141(1) will be of no assistance,

but there should be necessary averments in the complaint as to how and in
17
what manner the accused was guilty of consent and connivance or

negligence and therefore, responsible under sub-section (2) of section 141 of

the Act.
19. Another aspect that requires to be noticed is that only a Director,

Manager, Secretary or other officer can be made liable under sub-section (2)

of section 141. But under sub-section (1) of section 141, it is theoretically

possible to make even a person who is not a director or officer, liable, as for

example, a person falling under category (e) and (f) of section 5 of

Companies Act, 1956. When in SMS Pharma (I), this Court observed that

‘conversely, a person not holding any office or designation in a company

may be liable if he satisfies the requirement of being in charge of and

responsible for conduct of the business of the company’, this Court

obviously had in mind, persons described in clauses (e) and (f) of section 5

of Companies Act. Be that as it may.
20. The position under section 141 of the Act can be summarized 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
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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 Sec. 2(24)
of the Companies Act) or a person referred to in clauses (e) and (f) of
section 5 of 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).
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 to consent and connivance
or negligence, in the complaint, to bring the matter under that sub-section.

 

(iv)Other Officers of a company can not 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, be 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. If a mere reproduction of the wording of section 141(1) in the

complaint is 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
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for the conduct and business of the company. This would mean that if a

company had 100 branches and the cheque issued from one branch was

dishonoured, the officers of all the 100 branches could be made accused by

simply making an allegation that they were in charge of and were

responsible to the company for the conduct of the business of the company.

That would be absurd and not intended under the Act. As the trauma,

harassment and hardship of a criminal proceedings in such cases, may be

more serious than the ultimate punishment, it is not proper to subject all and

sundry to be impleaded as accused in a complaint against a company, even

when the requirements of section 138 read and section 141 of the Act are not

fulfilled.

 

22. A Deputy General Manger is not a person who is responsible to the

company for the conduct of the business of the company. He does not fall

under any of the categories (a) to (g) listed in section 5 of the Companies

Act (extracted in para 14 above). Therefore the question whether he was in

charge of the business of the company or not, is irrelevant. He cannot be

made vicariously liable under Section 141(1) of the Act. If he has to be

made liable under Section 141(2), the necessary averments relating to

consent/connivance/negligence should have been made. In this case, no such

averment is made. Hence the first respondent, who was the Deputy General
20
Manger, could not be prosecuted either under sub-section (1) or under sub-

section (2) of Section 141 of the Act.

 

23. Thus, we find no error/infirmity in the order quashing the summons as

against the first respondent who was the Deputy General Manager of the

company which issued the dishonoured cheque. The appeals are therefore

dismissed.
……………………….J.
(R V Raveendran)
New Delhi; ………………………..J.
July 6, 2009. (Dr. Mukundakam Sharma)

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