Dis. Cheques – Directors’
Crim. Liab – Injudicious approach so far …
- In this write up, I intend to deal with an issue
which I think is not judiciously dealt with, although there are hundreds
of precedents which otherwise have dealt with the issue.
- Recently I had happened to closely witnessed a case
of offence u/s 138 of of Negotiable Instruments Act, 1881, i.e., of
dishonoured cheque, wherein in the Complaint, it was barely averred that
the “…. are Directors of the Company and are in-charge of the day to day
affairs of the business of the accused company”, and the Magistrates Court
happily issued processes (Summons) against all those Directors.
- The Directors therein preferred Revision Application
before the Sessions Court, thereby challenging the issuance of said
Summons. The said Revision was founded on the grounds that the impugned
Order passed by the Ld. Magistrate is in breach of the mandate of Section
204 of the CrPC, 1973, and is in breach of the mandate of Section 141 of
the Negotiable Instruments Act, 1881.
- In support of the contentions, some 4-5 SC
authorities were cited. However, the Ld. Session Judge remained
unimpressed, and he happily dismissed the said Revision Application.
- In the said Revision Application, a broad principal
issue was raised before the Court, and that is – Whether the Directors of
a Company can be told to face a Criminal trial, based on the mere 2 lines
averments in the Criminal Complaint, without any other evidence of whatsoever
nature.
The said 2 lines are
….are Directors
of the Accused Company and are in-charge of the day to day affairs of the
business of the accused company.
- And whereas the impugned order is passed under
Section 204 of CrPC, 1973; under a Complaint u/s 200 of CrPC, 1973, for
having committed an offence u/s 138 read with 141 of the negotiable
Instruments Act, 1881, the Hon’ble Court were to satisfy itself as – (a)
Whether the impugned order of the Ld. Magistrate pass the test of the
mandate of law of Sections 204 of CrPC, 1973; and Section 141 of the
Negotiable Instruments Act, 1881.
- The relevant portion of Section 204 of Criminal
Procedure Code, 1973 and Section 141 of the Negotiable Instruments Act,
1881, were reproduced –
Section 204.
Issue of process: (1)If in the opinion of a Magistrate taking cognizance of an
offence there is sufficient ground for proceeding, and the case appears to be –
a summons- case, he shall issue his summons for the attendance of the accused,
or a warrant- case, he may issue a warrant, or, if he thinks fit, a summons,
for causing the accused to be brought or to appear at a certain time before
such Magistrate or (if he has no jurisdiction himself) some other Magistrate
having jurisdiction.
Section 141: -
Offence 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."
- In support of contentions, in respect of section 141
of Negotiable Instruments Act, 1881, apart from other authorities, it was strongly,
although erroneously, relied upon
SMS Pharmaceuticals judgment (three Judges Bench), which later, it was
realize that, we grossly erred in understanding the ratio of the judgment.
- Although, however, later judgments of the Apex court
on section 141, which though have relied upon the said SMS judgment, but
progressed to a more rational proposition of law.
- The said SMS Pharma judgment, in essence, laid down
that if the Complainant barely avers in his Complaint that “the said
persons are Directors of the Company and are in-charge of the day to day
affairs of the business of the accused company”, the said complainant
complies to the requirements laid down under section 141.
- The later judgments, like for example, in the case of
Ramraj Singh versus State of M.P. (2009) 6 SCC 729, also delivered by
three Judges Bench, the Apex Court, inter alia, in Para 10, cited an Apex
Court ruling, progressed to a more rational proposition, in respect of the
compliance to section 141. The said judgment also relied upon the SMS
judgment.
Para 10 In
N.K. Wahi V/s. Shekhar Singh and Ors. (2007 (9) SCC 481) it was observed as
follows:
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 incharge 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.
- In respect of section 204 of the CrPC, 1973, a very
recent ruling of the Apex Court was relied upon, and attention of the
Court was invited to the case of GHCL Employees Stock Option Trust versus
India Infoline Ltd – (2013) 4 SCC 505, which dealt with the issuance of
Summons by the Magistrates u/s 204, in the exercise of their powers u/s
200 of CrPC, 1973. The Hon’ble SC in Para 9, 18, and 19 stated as –
Para 9: Per
contra, Dr. Abhishek Manu Singhvi, learned Senior Counsel appearing for the
respondents in all the cases, at the very outset submitted that the High Court
has correctly quashed the criminal proceedings initiated against the Managing
Director, the Company Secretary, and other Directors of the Company, holding
that there cannot be vicarious liability; and moreover, needs to specifically allege the act complaint of against
the individual Director and what role such individual Director had played. The
learned Counsel submitted that the Complainant made a general averment that
Respondent Nos.2 to 7 were responsible for day-to-day affairs of the Company,
without specifying the exact role played by them in the transaction.
Para 18.From
bare perusal of the order passed by the Magistrate, it reveals that two
witnesses including one of the trustees were examined by the complainant but
none of them specifically stated as to which of the accused committed breach of
trust or cheated the complainant except general and bald allegations made
therein. While ordering issuance of summons, the learned Magistrate concluded
as under :-
“The
complainant has submitted that the accused Nos.2 to 6 are the directors of the
company and accused No.7 is the secretary of the company and were looking after
the day to day affairs of the company and were also responsible for conduct and
business of the accused No.1 and some time or the other have interacted with
the complainant.
I have heard
arguments on behalf of the complainant and perused the record. From the
allegations raised, documents placed on record and the evidence led by the
witnesses, prima facie an offence u/s 415, 409/34/120B is made out. Let all the
accused hence be summoned to face trial under the aforesaid sections on
PF/RC/Speed Post/courier for 2.12.2008.”
Para 19: In
the order issuing summons, the learned Magistrate has not recorded his
satisfaction about the prima facie case as against respondent Nos.2 to 7 and
the role played by them in the capacity of Managing Director, Company Secretary
or Directors which is sine qua non for initiating criminal action against
them.
- The Hon’ble SC in the case of Pepsi Foods
Ltd. and Anr.
v. Special Judicial
Magistrate & Ors (1998) 5 SCC 749), inter alia, observed as –
Summoning of
an accused in a criminal cases is
a serious matter. Criminal
law cannot be set
into motion as
a matter of course.
It is not
that the complainant has
to bring only two
witnesses to support
his allegations in the complaint to have
the criminal law
set into motion. The
order of the magistrate summoning the accused must
reflect that he has applied his
mind to the
facts of the case
and the law
applicable thereto. He has
to examine the nature
of allegations made
in the complaint and
the evidence both oral
and documentary in support
thereof and would
that be sufficient for
the complainant to succeed
in bringing charge home
to the accused. It
is not that
the Magistrate is a silent spectator at
the time of
recording of preliminary evidence
before summoning of the
accused. Magistrate has to
carefully scrutinize the evidence
brought on record and
may even himself put questions to the complainant
and his
witnesses to elicit answers to
find out the truthfulness of
the allegations or otherwise and
then examine if any offence is prima facie committed by
all or any
of the accused.
- There are numerous HC and SC rulings on sections 138
and 141, but there is not a single ruling I could find, which have tested
the issuance of Summons by the Magistrates at the touchstone of section
204 of CrPC, 1973, and where such Summons are challenged, the HCs and SC
were happily dismissing the Applications, after having satisfied
themselves to have tested the issuance of Summons at the touchstone of SMS
Pharma judgment.
- Surprisingly enough, it was never realized by the
Courts that whereas Summons are issued u/s 204 of CrPC, 1973, and
therefore, the requirements of section 204 has to be met with.
- Moreover, it has not been realized that, although,
however, bare averments in the Complaint “…said persons are Directors of
the Company and are in-charge of the day to day affairs of the business of
the accused company”, may satisfy the requirements of section 141, but these
averments does not satisfy the requirements of section 204, under which
the Summons / process is issued.
- Howsoever laudable objects Sections 138 to 147 of the
Negotiable Instruments Act, 1881, may be holding, the personal liberty of
an individual and rule of law is paramount. The mandate inherent in
Section 204 cannot be sacrificed / dispensed with, to serve the “laudable
objects” of Chapter 17 of the Negotiable Instruments Act.
- It is imperative that mandate of Section 204 is
scrupulously observed, so to protect the interest of a person who has no
right of representation at the stage of magistrate taking cognizance of an
offence and issuing summons / warrants against the said person; and also when,
the Magistrate has no power to recall his summons, and the aggrieved may
have to adopt independent proceedings to set aside the order of summons.
- If the processes are being issued on the basis of
bare averments in the Complaint that “the said persons are directors of
the accused company and are in charge of day to day affairs of the
business of the accused company”, without any other evidence of whatsoever
nature, the prosecution admittedly becomes speculative.
- Also, it needs to be think upon that, during the
course of trial, is it really possible to convict directors based on these
bare averments, especially when the accused has right to remain silent;
and there is no presumption of law “that Directors of the Company shall be
deemed to be in-charge of the affairs of the day-to-day business of the
Company, unless otherwise proved.
- Institution of any judicial proceedings against a
person carries an implicit degree of coercion and no judicial proceedings
should be triggered at the whims and fancies of the litigants, which
otherwise amounts to sheer harassment, embarrassment, and substantial
expenses to the person saddled with unwarranted litigation and most
importantly, causes the waste of the precious time of the court in hearing
the frivolous and meritless litigations.
- Article 21 of the Constitution of India commands that
“No person shall be deprived of his life and liberty” except according to
the procedure established by law. In Criminal jurisprudence, the only
safeguard available to an innocent person is the “scrupulous and strict
adherence” to the procedure prescribed in concluding the “guilt of the
accused person”.
- Thus, whenever, any of the “prescribed procedure” is not “duly followed and complied with”, and where such non compliance, expressly or by necessary implication, frustrate the personal liberty of the accused person, the violence to fundamental right of the concerned person enshrined under Article 21 of the Constitution, is imminent.
- And, whereas the innocent Directors of the Company
needs to be protected, unscrupulous Directors should not escape by virtue
of any interpretation of law. A solution should be devised to address this
issue.
- In my view, at the stage of issuing of statutory
notice u/s 138, to the company, the payee shall also sent notice to every
individual Director of the Company, at their residential address, inter
alia, calling upon them to show cause, why the payee should not proceed
against them, in case the company fails to pay the dishonored cheque debt.
- Further, the Magistrate, before issuing summons u/s
204, may exercise the power conferred to them u/s 202, and by taking such
steps, may ascertain who are the Directors who are in-charge of the
affairs of the day-to-day business of the Company.
- The measures suggested hereinbefore in paras 26 and 27
may not inspire satisfaction, nevertheless, the personal liberty of
directors cannot be jeopardized, or else, the persons may be afraid of
taking up the Directorship of a Company, and credible Directors may end up
defending their innocence in the court of law, for long years, in multiple
litigations, that may spread over throughout India. This will not be a healthy
climate for the development of the business and the economy.
Thanking you.
Sandeep Jalan
Advocate
Mumbai
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Comments
I read this after you told me. Pretty horrifying.