Sashi Kumar Nagaraji & Ors. v. M/S Magnifico Minerals Pvt Ltd & Ors.

4. The court has heard Mr. Mukul Gupta, learned senior counsel appearing for the petitioners and Mr. Ayush Jindal, learned counsel for respondent No. 1. Submissions on behalf of the petitioners

5. Mr. Gupta submits that the petitioners were mere directors of respondent No. 2 company and were neither in-charge of the company nor were they responsible for the conduct of the affairs of the company at any point in time. Senior counsel submits that the mandate of section 141 of the NI Act clearly is that not every director or employee of an accused company is liable for the offence under section 138 of the NI Act. Such person is liable only if, at the time when the offence was committed, the person was in charge-of and responsible for the conduct of the business of the company. It is submitted that merely being a director of the company does not affix liability on a person by virtue of their position in the company. To buttress this submission, reliance is primarily placed on the seminal CRL.M.C. 2480/2017 and connected matters decision of the Supreme Court in S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla.[1]

6. Furthermore, it is submitted that there is no specific averment whatsoever in the complaints ascribing any role to the petitioners or to show that the petitioners were in-charge of the day-to-day affairs of the accused company. Learned senior counsel submits that to initiate prosecution against a director of a company, there must be a specific allegation in a criminal complaint with regard to the role played by that individual in the alleged offence; and that in absence of any specific allegation in the complaint, no prosecution can lie against a director. To support this assertion, reliance is placed on Sabitha Ramamurthy vs. R.B.S. Channabasavaradhya 2, Saroj Kumar Poddar vs. State (NCT of Delhi)3 and N.K. Wahi vs. Shekhar Singh & Ors.[4]

7. Attention in this behalf is drawn to the following paragraphs the 05 criminal complaints filed in Bangalore, which read substantially the same, and which refer to the persons who the complainant holds liable for the dishonour of the cheques:

12. Furthermore, counsel places reliance on a decision of the Supreme Court in Sunil Todi vs. State of Gujarat[9], in which case, relying on Sunil Bharti Mittal vs. CBI10 and S.M.S. Pharmaceuticals (supra), it was held that the determination of whether the conditions stipulated in section 141 of the NI Act have been fulfilled is a matter of trial and recourse to the proviso to section 141 cannot be taken at the stage of issuance of process. Therefore, it is argued that the question whether a director was in-charge of and responsible for the affairs of the company; or what the role of a given director was in relation to such affairs, is a question for trial. It is further argued that all the directors of the company are liable since the statutory regime itself attracts the doctrine of vicarious liability by specifically incorporating such provision in section 141 NI Act.

13. For whatever it is worth, in the context of the statutory notice issued to the petitioners, as directors of respondent No. 2 company, counsel has also cited the „doctrine of indoor management‟ and „doctrine of constructive notice‟, to argue that people in the business world would be shy to enter into transactions with a company if they were to be required to check in-depth into the internal workings of the company. The decision in Morris vs. Kanssen11 has also been relied-upon for this purpose. It would appear that the essential point sought to be made by citing the said doctrines, is to say that since no reply was

(1946) 1 All ER 586 at 592 CRL.M.C. 2480/2017 and connected matters sent by the petitioners to the statutory notice, denying their role as directors, it can safely be presumed that the petitioners were also responsible for the dishonour of the cheques.

14. Lastly, on the strength of the decision of the Supreme Court in Kanti Bhadra Shah vs. State of West Bengal12, it is submitted that the learned Magistrate is not required to write detailed orders at the stage of issuing summons to an accused person.

15. Counsel for respondent No. 1 also relies on the following judgments in support of their contentions: Col. B.S. Sarao vs. Securities and Exchange Board of India 13, Gunmala Sales (P) Ltd. vs. Anu Mehta14, Standard Chartered Bank vs. State of Maharashtra15, Ambica Plastopack Pvt. Ltd. vs. State16, Kusum Ingots & Alloys Ltd. vs. Pennar Peterson Securities Ltd.17. Brief re-cap of legal landscape

16. Expatiating on section 141 of the NI Act, in one of its earlier decisions in S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla (supra), the Supreme Court had this to say in answer to a reference made to a 3- Judge Bench: “10. While analysing Section 141 of the Act, it will be seen that it operates in cases where an offence under Section 138 is committed

2008 SCC OnLine Del 158 at para 15 and 16 (2015) 1 SCC 103 at paras 34.[1] to 34.[3]

(2000) 2 SCC 745 at paras 10, 12, 13 and 14 CRL.M.C. 2480/2017 and connected matters by a company. The key words which occur in the section are “every person”. These are general words and take every person connected with a company within their sweep. Therefore, these words have been rightly qualified by use of the words: “Who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence, etc.” What is required is that the persons who are sought to be made criminally liable under Section 141 should be, at the time the offence was committed, in charge of and responsible to the company for the conduct of the business of the company. Every person connected with the company shall not fall within the ambit of the provision. It is only those persons who were in charge of and responsible for the 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 the 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 the 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 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. “11. A reference to sub-section (2) of Section 141 fortifies the above reasoning because sub-section (2) envisages direct involvement of any director, manager, secretary or other officer of a company in the commission of an offence. This section operates when in a trial it is proved that the offence has been committed with the consent or connivance or is attributable to neglect on the part of any of the holders of these offices in a company. In such a case, such persons are to be held liable. Provision has been made for directors, managers, secretaries and other officers of a company to cover them in cases of their proved involvement. “12. The conclusion is inevitable that the liability arises on account of conduct, act or omission on the part of a person and not merely on account of holding an office or a position in a company. Therefore, in order to bring a case within Section 141 of the Act the complaint must disclose the necessary facts which make a person liable. * * * * * “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 CRL.M.C. 2480/2017 and connected matters 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. “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) * * * * * ”

17. Again, in Sabitha Ramamurthy vs. R.B.S. Channabasavaradhya (supra) the Supreme Court reiterated that to fasten vicarious liability upon a director for an offence committed by a company, requisite statements have to be made in the complaint and in the complainant‟s evidence, before the criminal process can be initiated against a director: “7. A bare perusal of the complaint petitions demonstrates that the statutory requirements contained in Section 141 of the Negotiable Instruments Act had not been complied with. 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 therefore. 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. Not only the averments made in paragraph 7 of the complaint petitions does not meet the said statutory requirements, the sworn statement of the witness made by the son of Respondent herein, does not contain any statement that 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 compliance of 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 therefore. 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.”

18. In its decision in Saroj Kumar Poddar (supra) the Supreme Court said this: “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. “15. Our attention, however, has been drawn to the averments made in paras 7 and 10 of the complaint petition, but on a perusal thereof, it would appear that therein merely allegations have been made that the cheques in question were presented before the bank and they have been dishonoured. Allegations to satisfy the requirements of Section 138 of the Act might have been made in the complaint petition but the same principally relate to the purported offence made by the company. With a view to make a Director of a company vicariously liable for the acts of the company, it was obligatory on the part of the complainant to make specific allegations as are required in law.”

19. The same principle has been reiterated by the Supreme Court in N.K. Wahi (supra):

20. The observations of the Supreme Court in Gunmala Sales (P) Ltd. vs. Anu Mehta (supra), also address the circumstance where process has been issued based on foundational averments contained in the complaint against a director, explaining the satisfaction required for quashing a complaint at the instance of such director. The following paragraphs of the judgement are instructive:

22. Clearly, therefore, for summons to be sustained and for trial to continue, it is absolutely essential that the basic or foundational averments must be contained in a criminal complaint against a director in relation to his alleged role in the offence.

23. As to the need for application of mind by the courts, and for not passing summoning orders in criminal complaints mechanically, one of the leading decisions of the Supreme Court in Pepsi Foods Ltd. vs. Special Judicial Magistrate (supra), may be cited for reference:

24. The above-referred principle has been reiterated by the Supreme Court in Sunil Todi vs. State of Gujarat (supra), observing that:

25. For completeness, it may be recorded that counsel for the respondent No. 1 has also placed reliance upon the decision of Supreme Court in Col. B.S. Sarao (supra) to substantiate his contention that the stage for a director of a company to show that he was not associated with the company at all or that he had ceased to be a director at the time of commission of offence, would be available at the stage of leading his defence (cf. paras 15 and 16 of that judgment). But to be sure, in the same decision the Supreme Court has also observed that the stage for a director to lead his defence would arise (only) after the complainant has discharged the initial burden; and that in order to invoke the deeming provision in the statute (which was section 27 of the SEBI Act in that matter), it will have to be averred in the complaint that the person who has been arraigned in his capacity as director of such company was in-charge of the affairs of the company and was responsible to it for the conduct of its business at the time of the commission of offence (cf. para 11). In the opinion of this court therefore, respondent No. 1 is selectively reading the decision of the Supreme Court in Col. B.S. Sarao (supra), which judgment does not support respondent No.1‟s submission.

26. Furthermore, counsel for respondent No.1 has also cited the decision of Supreme Court in Kanti Bhadra Shah (supra), to submit that it is not necessary for a Magistrate to write detailed orders at the stage of issuing summons (cf. para 12 of the judgment). A meaningful reading of the said judgment would show that the Supreme Court has expressed that it is quite unnecessary to write “detailed orders” at stages such as when issuing process, which is not to say that the need for at least briefly stating the reasons for issuing summons sufficient to disclose that the Magistrate has applied his mind, is to be dispensed with completely. It is not the purport of the Supreme Court observation in Kanti Bhadra Shah (supra) that summoning order can be passed mechanically without even a barebones reference or reasoning as to how a prima-facie case is made-out against a given accused.

27. Lastly, counsel for respondent No. 1/complainant has objected to the petitioner having invoked the remedy under section 482 Cr.P.C. at a belated stage, also urging that the present petition ought not to be entertained since the petitioners have an efficacious statutory remedy of filing a criminal revision petition under section 397 Cr.P.C. to challenge the summoning orders. This objection requires to be addressed briefly. Though there is no cavil with the position that the summoning orders were originally passed by the learned ACMM, Bangalore on 10.09.2014 and 19.02.2015, which were amenable to challenge by way of a criminal revision petition before the competent court, by reason of the chequered history of the case, another set of summoning orders came to be passed by the learned MM, Delhi on 08.03.2017. Principally it is these orders dated 08.03.2017 passed by the learned MM, Delhi that have been impugned by way of the present petitions before this court, which petitions were filed on 03.07.2017. Considering the manner in which the criminal complaints filed in the matter have been transferred to-and-from the court in Bangalore, the petitioners cannot be blamed for any undue delay in invoking the remedy under section 482 Cr.P.C. To address the other facet of the submission, viz. the existence of a statutory remedy by way of a criminal revision petition, though the complainant/respondent No. 1 is not wrong in arguing that ordinarily where there is a statutory remedy, the inherent powers of the High Court ought not to be lightly invoked or exercised, it is also the settled position of law that the existence of a statutory remedy does not legally bar the invocation of the inherent powers of the High Court under section 482 Cr.P.C. in an appropriate case.19 The existence of a statutory remedy most certainly does not detract from the invocation and exercise of the inherent powers of the High Court under section 482 Cr.P.C. ex debito justitiae.20 Suffice it to say that in the facts and circumstances of the present case, this court is persuaded to exercise its inherent powers under section 482 Cr.P.C. Dhariwal Tobacco Products Ltd. vs. State of Maharashtra, (2009) 2 SCC 370 at paras 6 & 7 State of Karnataka vs. M. Devendrappa, (2002) 3 SCC 89 at para 6; Gian Singh vs. State of Punjab

28. In the backdrop of the submissions made by counsel on both sides; being guided by the legal position on relevant aspects as laid-down by the Supreme Court in the judgements cited above; and, most importantly, on a bare reading of the allegations contained in the criminal complaints (or the lack of them), based on which the impugned summoning orders have been passed, the following inferences plainly arise: 28.[1] It is not the complainant's case that any of the petitioners was signatory to the cheques that were dishonoured; 28.[2] In fact, in the body of the criminal complaints the complainant does not even aver that the petitioners, or any of them, were directors of the accused company; and if so, whether they were directors at the relevant time. Only the memorandum of parties to the criminal complaints set-out the names of the petitioners with the designation „Director‟ alongside each name; 28.[3] In all the criminal complaints there is no allegation that the petitioners were involved in issuance of the cheques; nor any allegation that they were responsible for the dishonour of the cheques. No role has been ascribed to the petitioners in that behalf; 28.[4] Though, in the two criminal complaints filed in Delhi it is narrated that all the directors of the accused company “had held discussions in finalizing purchase order”; that “the purchase order was given by accused company in discussion CRL.M.C. 2480/2017 and connected matters with all the directors”; that all the directors “had participated in finalization of purchase order”; and that hence “all other directors are involved and concerned with the business transaction”, yet again there is no specificity as to the role ascribed to the petitioners individually. At best, there is a vague and sweeping allegation claiming that all directors of the accused company had engaged with the complainant in relation to the transaction, which is insufficient to impute any criminal liability upon any of the petitioners; 28.[5] Neither the summoning orders made by the Bangalore court nor the summoning orders made by the Delhi court contain any reference, leave alone any discussion, as to any allegations against the petitioners or any of them. This is so evidently because there are no specific allegations spelt-out against the petitioners in the criminal complaints; 28.[6] Since no allegations have been spelt-out against the petitioners in relation to the commission of the alleged offence, there is no question of the learned Magistrates having applied their mind, or having satisfied themselves that the petitioners had committed the offence even on a prima-facie basis; 28.[7] In fact, as seen from the table set-out above, though some of the cheques were dishonoured for „insufficiency of funds‟ or for „exceeding arrangement‟, some other cheques have been dishonoured for „other reasons‟. The record does not reflect as to what these „other reasons‟ may have been. Even a cursory CRL.M.C. 2480/2017 and connected matters reading of section 138 of the NI Act would show that for an offence to be made-out under that provision a cheque must be returned unpaid by a bank “… 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 …”. Accordingly, insufficiency of funds in an account or the cheque amount exceeding the arrangement with the drawer‟s bank are the grounds that form the gravamen of the offence contained in section 138 of the NI Act. However, when a cheque is returned with a noting that it has been dishonoured for “other reasons”, it certainly begs the question as to what the specific reason for dishonour was. This question ought to have been raised in the course of proceedings before summons were issued, failing which it is not even clear if the basic ingredients of the offence under section 138 are made-out in relation to a given cheque.

29. Before parting with the matter, this court is constrained to observe that it appears to have become commonplace for complainants to arraign all and sundry directors of a company as accused in a criminal complaint in relation to dishonour of cheques, with the evident intention of pressurising and arm-twisting a company into paying-up a claimed debt. It is necessary to articulate that a criminal complaint under section 138 of the NI Act is not, in and of itself, a money recovery proceedings, even though fine and compensation may be imposed upon conviction. The wanton arraignment of directors CRL.M.C. 2480/2017 and connected matters without reference to their role in relation to a transaction, or to the issuance or dishonour of a cheque by the company, requires to be deprecated and discouraged, since it amounts to abuse of the salutary process of criminal law.

30. Testing the summoning orders on the touchstone of the settled law, based on the inevitable inferences as set-out above, this court is clear that for one, there are no allegations in the criminal complaints in relation to the petitioners, muchless any specific allegations as to their role in the alleged offence. In these circumstances, it cannot be said that the petitioners would incur any vicarious liability alongwith the accused company merely because they were directors of the company. Two, absent any allegations against the petitioners in the criminal complaints, the issuance of the summoning orders was evidently not informed by any application of mind, but was the outcome of a purely mechanical process.

31. In the above view of the matter, the summoning orders cannot be sustained in law; and the same are accordingly quashed. All proceedings arising from the summoning orders insofar as they relate to the petitioners are also set-aside.

32. The petitions stand disposed-of in the above terms.

33. Other pending applications, if any, are also disposed-of.