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Negotiable Instruments Act, 1881: ss.138, 141 – Vicarious liability of Directors of a Company – Held: Director of a Company who is not in-charge of and is not responsible for the conduct of the business of the company would not be liable for a criminal offence under s.138 – s.141 is a penal provision creating vicarious liability, and must be strictly construed – Complaint under s.138 must spell out as to how and in what manner the accused-director was in-charge of or was responsible to the accused company for the conduct of its business – If averments made against accused- Directors are unspecific and general and no particular role is assigned to them, then vicarious liability in accordance with s.141 cannot be fastened on them – On facts, in the absence of specific averment as to the role of the respondents and particularly since they were in no way connected with the affairs of the company, the summoning orders against them were rightly quashed by High Court – Companies Act, 1956 – s.291. The question which arose for consideration in these appeals was whether High Court was justified in quashing the summoning orders passed by trial court against accused-Directors under Section 138 of the Negotiable Instruments Act, 1881, on the ground that the averments made against them were unspecific and general and no particular role was assigned to them. Dismissing the appeals, the Court HELD: 1.1. Section 141 of the Negotiable Instruments Act requires that the persons who are sought to be made vicariously liable for a criminal offence under Section 141 should be, at the time the offence was committed, were in-charge of, and were responsible to the company for the conduct of the business of the company. Every person connected with the company would not fall within the ambit of the provision. Only those persons who were in- charge of and responsible for the conduct of the business of the company at the time of commission of an offence would be liable for criminal action. 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, he would not be liable for a criminal offence under the provisions. The liability arises from being in-charge of and responsible for the conduct of the 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. [Para 9] [814-a-d] 1.2. Section 141 is a penal provision creating vicarious liability, and must be strictly construed. It is therefore, not sufficient to make a bald cursory statement in a complaint that the Director (arrayed as an accused) is in charge of and responsible to the company for the conduct of the business of the company without anything more as to the role of the Director. But the complaint should spell out as to how and in what manner the accused was in-charge of or was responsible to the accused company for the conduct of its business. This is in consonance with strict interpretation of penal statutes, especially, where such statutes create vicarious liability. A company may have a number of Directors and to make any or all the Directors as accused in a complaint merely on the basis of a statement that they are in-charge of and responsible for the conduct of the business of the company without anything more is not a sufficient or adequate fulfilment of the requirements under Section 141. In order to fasten the vicarious liability in accordance with Section 141, the averment as to the role of the concerned Directors should be specific. The description should be clear and there should be some unambiguous allegations as to how the concerned Directors were alleged to be in-charge of and was responsible for the conduct and affairs of the company. [Paras 10 and 14] [814-E-H; 815-A; 818-F-G] SMS Pharmaceuticals v. Neeta Bhalla and Anr. (2005) 8 SCC 89; Sabitha Ramamurthy v. R.B.S. Channabasavaradhya (2006) 10 SCC 581; Saroj Kumar Poddar v. State (NCT of Delhi) (2007) 3 SCC 693; N.K. Wahi v. Shekhar Singh & Ors. (2007) 9 SCC 481; Ramraj Singh v. State of M.P. & Anr. (2009) 6 SCC 729; SMS Pharmaceuticals v. Neeta Bhalla (2007) 4 SCC 70; Everest Advertising Pvt. Ltd. v. State Govt. of NCT of Delhi & Ors. (2007) 5 SCC 54; N. Rangachari v. Bharat Sanchar Nigam Ltd. (2007) 5 SCC 108; Paresh P. Rajda v. State of Maharashtra & Anr. (2008) 7 SCC 442; K.K. Ahuja v. V.K. Vora & Anr. (2009) 10 SCC 48, referred to. 2.1. Section 291 of the Companies 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 authorized 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 business of the company. [Para 24] [826-C-E] 2.2. Section 141 does not make all the Directors liable for the offence. For fastening the criminal liability, there is no presumption that every Director knows about the transaction. 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. 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 accused therein vicariously liable for offence committed by 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. Vicarious liability on the part of a person must be pleaded and proved and not inferred. If accused is Managing Director or 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. If 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. 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. [Para 25] [828-A-H] 2.3. In the appeals of National Small Industries Corporation, respondent No.1 was no more a Director of the company when the cheques alleged in the complaint were signed and the same is evidenced from the Sixth Annual Report for the year 1996-97 of the accused company. The said report is dated 30.08.1997 and the same was submitted with the Registrar of Companies on 05.12.1997 and assigned as document No. 42 dated 09.03.1998 by the Department. Those documents were placed before this Court by respondent No.1 as an additional document. In view of these particulars and in addition to the interpretation relating to Section 141, no liability could be fastened on respondent No.1. Further, it was pointed out that though he was an authorized signatory in the earlier transactions, after settlement and in respect of the present cause of action, admittedly fresh cheques were not signed by the first respondent. In the same way, respondent no.1 in the appeal of the DCM Financial Services, also filed additional documents to show that on the relevant date, namely the date of issuance of cheque he had no connection with the affairs of the company. In the absence of specific averment as to the role of the respondents and particularly in view of the acceptable materials that at the relevant time, they were in no way connected with the affairs of the company, the conclusion arrived at by the High Court is upheld. [Paras 26 and 27] [829-A-F] Case Law Reference: (2005) 8 SCC 89 referred to Para 14 (2006) 10 SCC 581 referred to Para 15 (2007) 3 SCC 693 referred to Para 16 (2007) 9 SCC 481 referred to Para 17 (2009) 6 SCC 729 referred to Para 18 (2007) 4 SCC 70 referred to Para 19 (2007) 5 SCC 54 referred to Para 20 (2007) 5 SCC 108 referred to Para 21 (2008) 7 SCC 442 referred to Para 22 (2009) 10 SCC 48 referred to Para 23 CRIMINAL APPELLATE JURISDICTION : Criminal Appeal No. 320-336 of 2010. From the Judgment & Order dated 24.10.2007 of the High Court of Delhi at New Delhi in Crl. M.C. No. 1853, 1854, 1857, 1862, 1863, 1864, 1865,1866, 1867, 1868, 1869, 1905, 1906, 2568, 2597, 2598 & 2603 of 2005. WITH Crl. Appeal No. 337/2010. Sanat Kumar, Sanjay Sharma and Sanjay Sharawat for the Appellants. P.P. Malhotra, ASG, Vikas Bansal, Sadhna Sandhu, Anil Katiyar, Vikash Mehta, Narhari and Rohit Bhat for the Respondents.

REPORTABLE

The supreme court of india. Taken about 170 m ...

The supreme court of india. Taken about 170 m from the main building outside the perimeter wall (Photo credit: Wikipedia)

IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO. 320-336 OF 2010
(Arising out of S.L.P. (Crl.) Nos. 445-461 of 2008)
National Small Industries Corp. Ltd. …. Appellant (s)

Versus

Harmeet Singh Paintal & Anr. …. Respondent(s)

WITH
CRIMINAL APPEAL NO. 337 OF 2010
(Arising out of S.L.P. (Crl.) No. 1079 of 2008)

 

JUDGMENT

P. Sathasivam, J.

1) Leave granted in all the above special leave petitions.

2) The appeals arising out of S.L.P. (Criminal) Nos. 445-

461 of 2008 have been filed by the appellant-National

Small Industries Corporation Limited against the common

judgment and order dated 24.10.2007 passed by the High

Court of Delhi at New Delhi in a batch of cases whereby

 

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the High Court quashed the summoning orders passed by

the trial Court against respondent No.1 – Harmeet Singh

Paintal, under Section 138 read with Section 141 of the

Negotiable Instruments Act, 1881 (for short “the Act”)

3) The connected criminal appeal arising out of S.L.P.

Crl. No. 1079 of 2008 is filed against the judgment and

order dated 24.05.2007 passed by the High Court of Delhi

in Criminal Revision Petition No. 163 of 2005, whereby the

High Court quashed the summoning order passed by the

trial Court against respondent No.1 – Dev Sarin under

Section 138 read with Section 141 of the Act.

4) Since all these appeals are identical and same legal

issues arise, they are being disposed of by this common

judgment.

5) The appellant – National Small Industries Corporation

Ltd. had filed 12 criminal complaints under Section 138

read with Sections 141 and 142 of the Act against M/s

Jay Rapid Roller Limited, a Company incorporated under

the Companies Act, its Managing Director – Shri Sukhbir

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Singh Paintal, and its Director – Shri Harmeet Singh

Paintal. It is the claim of the appellant that so as to make

the Managing Director and Director of the Company liable

to be prosecuted under the provisions of the Act, they had

specifically averred in the complaint that all the accused

persons approached it for financing of bill integrated

market support programme. It was also stated that the

accused persons had issued cheques which were

dishonoured on presentation against which the appellant

had filed criminal complaints under the provisions of the

Act against all the respondents herein. It is their further

case that all the accused persons accepted their liability

and delivered various cheques, which are the subject

matter of the present appeals.

6) In the connected appeal, the appellant – DCM Financial

Services Ltd., entered into a hire purchase agreement on

25.02.1996 with M/s International Agro Allied Products

Ltd. At the time of entering into contract, the Company

handed over post-dated cheques to the appellant towards

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payment of monthly hire/rental charges. Respondent

No.1 – Dev Sarin was one of the Directors of the said

Company. The cheque issued by International Agro and

Allied Products Ltd. in favour of the appellant was duly

presented for payment on 28.10.1998 and the same was

returned unpaid for the reason that the Company had

issued instructions to the bankers stopping payment of

the cheque. The appellant issued a legal notice on

05.12.1998 to the Company, Respondent No.1 and other

Directors under Section 138 of the Act informing them

about the dis-honouring of the cheque in question.

Despite the service of the notice, the Company did not

make the payment to the appellant. The appellant, on

11.01.1999, filed a complaint before the Metropolitan

Magistrate, New Delhi against respondent No.1 and others

under Section 138 read with Section 141 of the Act. By

order dated 04.02.1999, the Metropolitan Magistrate, New

Delhi, after recording evidence summoned the accused

persons including respondent No.1 herein. Respondent

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No.1 filed an application before the Additional Sessions

Judge, Delhi for dropping of proceedings against him. By

order dated 08.09.2004, the Metropolitan Magistrate

dismissed the said application. Aggrieved by the said

order, the respondent filed a petition under Section 482 of

the Criminal Procedure Code before the High Court for

quashing of the complaint. The High Court, after finding

that the averments against respondent No.1 are unspecific

and general and no particular role is assigned to the

appellant, quashed the summoning order insofar as it

concerned to him.

7) In this factual matrix, the issue which arises for

determination before this Court is whether the order of the

High Court quashing the summoning orders insofar as the

respondents are concerned is sustainable and what

should be the averments in the complaint under Section

138 read with Section 141 of the Act against the Director

of a Company before he can be subjected to criminal

proceedings.

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8) Heard learned counsel for the appellants as well as the

learned ASG and senior counsel for the respondents.

9) Section 138 of the Act refers about penalty in case of

dishonour of cheque for insufficiency of funds in the

account. We are more concerned about Section 141

dealing with offences by Companies which reads as

under:-

“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,–

 

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(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.”

It is very clear from the above provision that what is

required is that the persons who are sought to be made

vicariously liable for a criminal offence under Section

141 should be, 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. Every person

connected with the company shall not fall within the

ambit of the provision. Only those persons who were

in-charge of and responsible for the conduct of the

business of the company at the time of commission of an

offence will be liable for criminal action. It follows from

the fact 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 for a criminal offence under the provisions. The

liability arises from being in-charge of and responsible for

 

7
the conduct of the 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.

10) Section 141 is a penal provision creating vicarious

liability, and which, as per settled law, must be strictly

construed. It is therefore, not sufficient to make a bald

cursory statement in a complaint that the Director

(arrayed as an accused) is in charge of and responsible to

the company for the conduct of the business of the

company without anything more as to the role of the

Director. But the complaint should spell out as to how

and in what manner Respondent No.1 was in-charge of or

was responsible to the accused company for the conduct

of its business. This is in consonance with strict

interpretation of penal statutes, especially, where such

statutes create vicarious liability. A company may have a

number of Directors and to make any or all the Directors

as accused in a complaint merely on the basis of a

statement that they are in-charge of and responsible for

8
the conduct of the business of the company without

anything more is not a sufficient or adequate fulfillment of

the requirements under Section 141.

11) In a catena of decisions, this Court has held that for

making Directors liable for the offences committed by the

company under Section 141 of the Act, there must be

specific averments against the Directors, showing as to

how and in what manner the Directors were responsible

for the conduct of the business of the company.

12) In the light of the above provision and the language

used therein, let us, at the foremost, examine the

complainta filed by National Small Industries Corporation

Limited and the DCM Financial Services Ltd. In the case

of National Small Industries Corpn. Ltd., the High Court

has reproduced the entire complaint in the impugned

order and among other clauses, clause 8 is relevant for

our consideration which reads as under:

“8. That the accused No. 2 is the Managing Director and
accused No. 3 is the Director of the accused company. The
accused No. 2 and 3 are the in-charge and responsible for

 

9
the conduct of the business of the company accused No. 1
and hence are liable for the offences.”

13) In the case of DCM Financial Services Ltd., in complaint-

Annexure-P2 the relevant clause is 13 which reads as under:
“13. That the accused No. 1 is a Company/Firm and the
accused Nos. 2 to 9 were in charge and were responsible to
the accused No. 1 for the conduct of the business to the
accused No. 1 at the time when offence was committed.
Hence, the accused Nos. 2 to 9 in addition to the accused
No. 1, are liable to be prosecuted and punished in
accordance with law by this Hon’ble Court as provided by
section 141 of the N.I. Act, 1881. Further the offence has
been committed by the accused No. 1 with the consent and
connivance of the accused Nos. 2 to 9.”

14) Now, let us consider whether the abovementioned

complaint in both cases has satisfied the necessary

ingredients to attract Section 141 insofar as the

respondents, namely, Directors of the company are

concerned. Section 141 of the Act has been interpreted by

this Court in various decisions. As to the scope of Section

141 of the Act, a three-Judge Bench of this Court

considered the following questions which had been

referred to it by a two-Judge Bench of this Court in SMS

Pharmaceuticals vs. Neeta Bhalla and Anr. (2005) 8

SCC 89:

10
“(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.”
While considering the above questions, this Court held as

under:

“18. 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.

 
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19. In view of the above discussion, our answers to the
questions posed in the reference are as under:

(a) It is necessary to specifically aver in a complaint under
Section 141 that at the time the offence was committed, the
person accused was in charge of, and responsible for the
conduct of business of the company. This averment is an
essential requirement of Section 141 and has to be made in a
complaint. Without this averment being made in a complaint,
the requirements of Section 141 cannot be said to be satisfied.
(b) The answer to 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.”

Therefore, this Court has distinguished the case of

persons who are in-charge of and responsible for the

conduct of the business of the company at the time of the

offence and the persons who are merely holding the post

in a company and are not in-charge of and responsible for

the conduct of the business of the company. Further, in

 

12
order to fasten the vicarious liability in accordance with

Section 141, the averment as to the role of the concerned

Directors should be specific. The description should be

clear and there should be some unambiguous allegations

as to how the concerned Directors were alleged to be in-

charge of and was responsible for the conduct and affairs

of the company.

15) In Sabitha Ramamurthy vs. R.B.S.

Channabasavaradhya, (2006) 10 SCC 581, this Court

while dealing with the same issue observed as under:
“……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 with the statutory
requirements would be insisted. Not only the averments
made in para 7 of the complaint petitions do not meet the
said statutory requirements, the sworn statement of the
witness made by the son of the respondent herein, does not
contain any statement that the appellants were in charge of
the business of the Company. 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
13
compliance with the statutory requirements. In terms of
Section 200 of the Code of Criminal Procedure, the
complainant is bound to make statements on oath as to how
the offence has been committed and how the accused
persons are responsible therefor. In the event, ultimately, the
prosecution is found to be frivolous or otherwise mala fide,
the court may direct registration of case against the
complainant for mala fide prosecution of the accused. The
accused would also be entitled to file a suit for damages. The
relevant provisions of the Code of Criminal Procedure are
required to be construed from the aforementioned point of
view.”

 

16) In Saroj Kumar Poddar vs. State (NCT of Delhi)

(2007) 3 SCC 693, while following SMS Pharmaceuticals

case (supra) and Sabhita Ramamurthy case (supra),

this Court held that with a view to make the 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 under the law and

under Section 141 of the Act and further held that in the

absence of such specific averments in the complaint

showing as to how and in what manner the Director is

liable, the complaint should not be entertained. The

relevant portion of the judgment is reproduced

hereinbelow:-

 

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

13. The purported averments which have been made in the
complaint petitions so as to make the appellant vicariously
liable for the offence committed by the Company read as under:
“That 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 i.e. Shri K.K.
Pilania and Shri N.K. Munjal for and on behalf of Accused 1
Company.
14. 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 para
3, thus, in our opinion do not satisfy the requirements of
Section 141 of the Act.”
17) In a subsequent decision in N.K. Wahi vs. Shekhar

Singh & Ors., (2007) 9 SCC 481 while following the

precedents of SMS Pharmaceuticals’s case (supra),

Sabhita Ramamurthy’s case (supra) and Saroj Kumar

Poddar’s case (supra), this Court reiterated that for

launching a prosecution against the alleged Directors,
15
there must be a specific allegation in the complaint as to

the part played by them in the transaction. The relevant

portion of the judgment is as under:

“7. This provision clearly shows that so far as the companies
are concerned if any offence is committed by it then every
person who is a Director or employee of the company is not
liable. Only such person would be held liable if at the time
when offence is committed he was in charge and was
responsible to the company for the conduct of the business
of the company as well as the company. Merely being a
Director of the company in the absence of above factors will
not make him liable.
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.”
18) The said issue again came up for consideration before

a three-Judge Bench of this Court recently in Ramraj

Singh vs. State of M.P. & Anr. (2009) 6 SCC 729. In

this case, the earlier decisions were also considered in

detail. Following the decisions of SMS Pharmaceuticals’

case (supra), Sabhita Ramamurthy’s case (supra), Saroj

Kumar Poddar’s case (supra) and N.K. Wahi’s case
16
(supra) this Court held that it is necessary to specifically

aver in a complaint under Section 141 that at the time

when the offence was committed, the person accused was

in-charge of, and responsible for the conduct of the

business of the company. Furthermore, it held that

vicarious liability can be attributed only if the requisite

statements, which are required to be averred in the

complaint petition, are made so as to make the

accused/Director therein vicariously liable for the offence

committed by the company. It was further held that

before a person can be made vicariously liable, strict

compliance of the statutory requirements would be

insisted. Thus, the issue in the present case is no more

res integra and has been squarely covered by the decisions

of this Court referred above. It is submitted that the

aforesaid decisions of this Court have become binding

precedents.

19) In the case of second SMS Pharmaceuticals vs.

Neeta Bhalla, (2007) 4 SCC 70, this Court has

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categorically held that there may be a large number of

Directors but some of them may not assign themselves in

the management of the day-to-day affairs of the company

and thus are not responsible for the conduct of the

business of the company.

Para 20 of the said judgment is relevant which is

reproduced hereunder:-

“20. The liability of a Director must be determined on the
date on `which the offence is committed. Only because
Respondent 1 herein was a party to a purported resolution
dated 15-2-1995 by itself does not lead to an inference that
she was actively associated with the management of the
affairs of the Company. This Court in this case has
categorically held that there may be a large number of
Directors but some of them may not associate themselves in
the management of the day-to-day affairs of the Company
and, thus, are not responsible for the conduct of the
business of the Company. The averments must state that the
person who is vicariously liable for commission of the offence
of the Company both was in charge of and was responsible
for the conduct of the business of the Company.
Requirements laid down therein must be read conjointly and
not disjunctively. When a legal fiction is raised, the
ingredients therefor must be satisfied.”

 

20) Relying on the judgment of this Court in Everest

Advertising Pvt. Ltd. vs. State Govt. of NCT of Delhi &

Ors., (2007) 5 SCC 54, learned counsel for the appellants

argued that this Court has not allowed the recalling of

18
summons in a criminal complaint filed under sections 138

and 141. However, a perusal of the judgment would

reveal that this case was of recalling of summons by the

Magistrate for which the Magistrate had no jurisdiction.

Further, para 22 of the judgment would reveal that in the

complaint “allegations have not only been made in terms

of the wordings of section but also at more than one place,

it has categorically been averred that the payments were

made after the meetings held by and between the

representative of the Company and accused nos. 1 to 5

which would include Respondent Nos. 2 and 3.” In para

23, this Court concluded that “it is therefore, not a case

where having regard to the position held by the said

respondents in the Company, they could plead ignorance

of the entire transaction”. Furthermore, this Court has

relied upon S.M.S. Pharamaceutical’s case (three-Judge

Bench) (supra), Saroj Kumar Poddar’s case (supra) and

N.K. Wahi’s case (supra).

 
19
21) Relying on the judgment of this Court in N.

Rangachari vs. Bharat Sanchar Nigam Ltd., (2007) 5

SCC 108, learned counsel for the appellants further

contended that a payee of cheque that is dishonoured can

be expected to allege is that the persons named in the

complaint are in-charge of its affairs and the Directors are

prima facie in that position. However, it is pertinent to

note that in this case it was specifically mentioned in the

complaint that (i) accused no. 2 was a director and in

charge of and responsible to the accused Company for the

conduct of its business; and (ii) the response of accused

no. 2 to the notice issued by BSNL that the said accused

is no longer the Chairman or Director of the accused

Company was false and by not keeping sufficient funds in

their account and failing to pay the cheque amount on

service of the notice, all the accused committed an offence.

Therefore, this decision is clearly distinguishable on facts

as in the said case necessary averments were made out in

the complaint itself. Furthermore, this decision does not

20
and could not have overruled the decisions in S.M.S.

Pharmaceutical’s case (three-Judge Bench)(supra),

Ramraj Singh’s case (three-Judge Bench)(supra), Saroj

Kumar Poddar’s case (supra) and N.K. Wahi’s case

(supra) wherein it is clearly held that specific averments

have to be made against the accused Director.

22) Learned counsel for the appellants after elaborately

arguing the matter, by inviting our attention to Paresh P.

Rajda vs. State of Maharashtra & Anr., (2008) 7 SCC

442 contended that a departure/digression has been

made by the Court in the case of N. Rangachari vs.

BSNL (supra). However, in this case also the Court has

observed in para 4 that the High Court had noted that an

overall reading of the complaint showed that specific

allegations had been leveled against the accused as being

a responsible officer of the accused Company and

therefore, equally liable. In fact, the Court recorded the

allegations in the complaint that the Complainant knew

all the accused and that accused no. 1 was the Chairman

21
of the accused Company and was responsible for day to

day affairs of the Company. This Court though has only

noted the decision in N. Rangachari’s case (supra) and

observed that an observation therein showed a slight

departure vis-`-vis the other judgments (i.e. S.M.S.

Pharmaceuticals first case and S.M.S.

Pharmaceutical’s second case), but then Court went on

to record that in N.K. Wahi’s case (supra) this Court had

reiterated the view in S.M.S. Pharmaceutical’s case

(supra). The Court then concluded in para 11 that it was

clear from the aforequoted judgments that the entire

matter would boiled down to an examination of the nature

of averments made in the complaint. On facts, the Court

found necessary averments had been made in the

complaint.

23) Though, the learned counsel for the appellants relying

on a recent decision in K.K. Ahuja vs. V.K. Vora & Anr.,

(2009) 10 SCC 48, it is clearly recorded that in the

complaint it was alleged that the accused were in-charge

22
of and was responsible for the conduct of the day-to-day

business of the accused Company and further all the

accused were directly and actively involved in the financial

dealings of the Company and the same was also reiterated

in the pre-summoning evidence. Furthermore, this

decision also notes that it is necessary to specifically aver

in a complaint that the person accused was in-charge of

and responsible for the conduct of the business of the

Company. After noting Saroj Kumar Poddar’s case

(supra) and N.K. Wahi’s case (supra), this Court further

noted in para 9 that “……the prevailing trend appear 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…..”.

In Para 11, this Court has further recorded that “…..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

23
implied compliance. Therefore, a specific averment

complying with the requirements of Section 141 is

imperative…” Though the Court then said that an

averment in the complaint that the accused is a Director

and in-charge of and responsible for the conduct of the

business may be sufficient but this would not take away

from the requirement that an overall reading of the

complaint has to be made to see whether the requirements

of Section 141 have been made out against the accused

Director or not. Furthermore, this decision cannot be said

to have overruled the various decisions of this Court.

24) Section 291 of the Companies 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 authorized 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

24
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

business of the company. A combined reading of Sections

5 and 291 of Companies Act, 1956 with the definitions in

clauses 24, 26, 30, 31 and 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;

(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;

 
25
(f) any person charged by the Board of Directors with the

responsibility of complying with that provision;

Provided that the person so charged has given his

consent in this behalf to the Board;

(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:

Provided that where the Board exercises any power

under clause (f) or clause (g), it shall, within thirty days of

the exercise of such powers, file with the Registrar a

return in the prescribed form.

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”

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

 

26
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. To put it clear that 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 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.

25) From the above discussion, the following principles

emerge :

(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

 
27
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

accused therein vicariously liable for offence committed by

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.

 

28
(v) If accused is Managing Director or 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 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.

26) Apart from the legal position with regard to

compliance of Section 141 of the Act, in the appeals of

National Small Industries Corporation, respondent No.1-

Harmeet Singh Paintal was no more a Director of the

company when the cheques alleged in the complaint were

 

29
signed and the same is evidenced from the Sixth Annual

Report for the year 1996-97 of the accused company. The

said report is of dated 30.08.1997 and the same was

submitted with the Registrar of Companies on 05.12.1997

and assigned as document No. 42 dated 09.03.1998 by

the Department. Those documents have been placed

before this Court by respondent No.1 as an additional

document. In view of these particulars and in addition to

the interpretation relating to Section 141 which we arrived

at, no liability could be fastened on respondent No.1.

Further, it was pointed out that though he was an

authorized signatory in the earlier transactions, after

settlement and in respect of the present cause of action,

admittedly fresh cheques were not signed by the first

respondent. In the same way, in the appeal of the DCM

Financial Services, the respondent therein, namely, Dev

Sarin also filed additional documents to show that on the

relevant date, namely the date of issuance of cheque he

had no connection with the affairs of the company.

30
27) In the light of the above discussion and legal

principles, we are in agreement with the conclusion

arrived at by the High Court and in the absence of specific

averment as to the role of the respondents and

particularly in view of the acceptable materials that at the

relevant time they were in no way connected with the

affairs of the company, we reject all the contentions raised

by learned counsel for the appellants. Consequently, all

the appeals fail and are accordingly dismissed.

 

……………………………………J.
(P. SATHASIVAM)

 

……………………………………J.
(H.L. DATTU)
NEW DELHI;
FEBRUARY 15, 2010.

 
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