S.138 / 141 - Directors liable / not liable / liable / not liable / liable / not liable, the Apex Court judgments creating confusions, causing serious prejudice

With a view to enhance the acceptability of cheques in settlement of liabilities, the Parliament of India, in the year 1988, introduced the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, by which the dishonourment of cheque was made a punishable offence. Whereas the aforesaid Amendments failed to produce the desired results, further Amendments (Sections 143 to 147 were added) were made so as to fill the gaps found in the earlier Amendments.

1.   The entire edifice of Section 138 proceedings is founded on “Civil Liability”, i.e. “legally enforceable debt”.

2.      Section 141 of Act, among other things, provides that all persons, including directors of the Company, who were in-charge of and responsible to the Company for the conduct of the business of the Company, shall be deemed to be guilty of offence.

3.      Section 141 of the Act enacts vicarious criminal liability upon persons, including the directors of the Company, who, when the dishonoured cheque was issued, were “in-charge of and responsible to the Company for the conduct of the business of the Company”.

4. There are series of inconsistent Apex Court rulings wherein, on one hand they say that bare assertion in the complaint that "Accused directors were in-charge of and responsible to the Company for the conduct of the business of the Company, when the cheque was issued", would suffice to launch criminal prosecution against those directors. And there are rulings which says that these averments are not suffice, and the complainant is also obliged to state as "how and in what manner the Accused directors are in-charge of and responsible to the Company for the conduct of the business of the Company". I am in agreement with the latter view of the Apex Court, for reasons stated hereinafter. 

6.   I am of view that if bare averments are suffice to launch prosecution, then the mandate of Section 204, 207 and 297(2) of CrPC, 1973, are palpably frustrated. Let us look at these CrPC sections one by one; and detect their mandate in the scheme of criminal trial

(A) Section 204: among other things, mandates that, at the time of taking cognizance of the offence and before issuance of Summons / Warrant against the persons accused of, if in the opinion of the Magistrate, there is sufficient ground to proceed against the persons accused of, he may issue Summons or Warrant.

Therefore, the existence of “sufficient ground to proceed” is a condition precedent for the issuance of summons u/s 204. It is equally well settled that the nature of material or evidence which is required at this stage is, “sufficient ground to proceed” and not the material or evidence to “convict”.

“Sufficient ground to proceed” connotes that the Magistrate would found that there is “some” incriminating material (evidence) on record against the person accused of, for which he can be summoned, to answer the charge, although the said material (evidence) on record, may not be sufficient to convict him. The averments that Accused director is “in-charge of …..” is not a material / evidence. It is an allegation.

The Apex Court 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.

In 138 cases, generally and admittedly, the complainant does not have any information in his hand, nor he has any legitimate means to know, about the Persons who are involved or the involvement of directors, in the day-to-day affairs of the accused Company.

However in 138 complaints, still the Magistrate is empowered (by some judicial dicta) to issue Summons against directors of the Accused Company, on the basis of bare averments, minus any supporting evidence in support of the averments. [However there are series of Apex Court rulings which, in unambiguous terms states that, in the complaint, it should be spelled out as how and in what manner the directors are “in-charge of ……” (2006) 10 SCC 581, (2007) 3 SCC 693, (2007) 9 SCC 481, (2009) 6 SCC 729, (2010) 3 SCC 330]

Therefore, in a 138 complaint, whereas there are “sufficient ground to proceed” against the Company, against the Managing Director / whole time Director, and the Person who has signed the relevant cheque; but there are “no material or grounds to proceed” against the Directors who were merely alleged to be in-charge of…..”; but still the Magistrate is empowered (by judicial dicta) to issue Summons against those Directors.

(B) Let us now look at Section 297(2): expressly mandates that Affidavits shall state separately, such facts as the deponent is able to prove from his own knowledge and such facts as he has reasonable ground to believe to be true; and in the latter case, the deponent shall clearly state the grounds of such belief.

Before looking at mandate of Section 297(2), let us peruse the mandate of Sections 59, 60, 61 of Evidence Act, 1872.

Section 59: Proof of facts by oral evidence: All facts, except the contents of documents or electronic records, may be proved by oral evidence.

Section 60: Oral Evidence must be direct: oral evidence must, in all cases whatever, be direct; that is to say –

If oral evidence refers to a fact which could be seen, it must be the evidence of a witness who says he saw it;

If oral evidence refers to a fact which could be heard, it must be the evidence of a witness who says he heard it;

If oral evidence refers to a fact which could be perceived by any other sense or in any other manner, it must be the evidence of a witness who says he perceived it by that sense or in that manner;

If oral evidence refers to an opinion or to the grounds on which that opinion is held, it must be the evidence of the person who holds that opinion on those grounds.

Section 61: Proof of contents of documents: The contents of documents may be proved either by primary or by secondary evidence.

Now, let us look at some judgments on Section 297(2).

(I) The Punjab & Haryana High Court in a case [Harjeet Singh versus State of Haryana1987 (2) RCR(Cri) 217 : 1988 (1) Crimes(HC) 554] before it, observed to say that –

The verification of the affidavit is required to be either on knowledge or on Information and it should show specifically which part of the affidavit is verified on dependents knowledge and which part is verified all deponents information. The whole of the affidavit in this case has been verified on the basis of knowledge and information. Such affidavit cannot be taken into consideration.

(II) The Punjab & Haryana High Court in the case of Swaran Singh Versus State Of Punjab, [1999 (3) AICLR 581] observed to say that –

Para 7: The second ground on which the judgments of the court below are sought to be assailed are to the effect that affidavit of the constable carrying sample from Muchhal to Chemical Examiner is not proper. Section 297(2) of the Code of Criminal Procedure lays down as under :

"(2) Affidavits shall be confined to, and shall state separately, such facts as the deponent is able to prove from his own knowledge and such facts as he has reasonable ground be believe to be true, and in the latter case, the deponent shall clearly state the grounds of such belief."

The affidavit which did not specifically mention as to which particular fact mentioned therein was true to the knowledge and which particular fact was true on the ground of the deponent's belief would be defective as it did not comply with the provisions of Section 297 and hence it could not be used as legal evidence.

Para 8: On the basis of these provisions, judicial precedents have consistently indicated that an affidavit which does not specify which part of the statement is verified on knowledge and which part on the information received by the deponent has to be ruled out of consideration. This is so held by this Court in Kewal Singh v. State of Punjab, 1994(1) RCR 243 : [1995(2) All India Criminal Law Reporter 136 (Pb. & Hry.)]. To the same effect is the view taken in the cases of Balbir Singh v. State of Punjab, 1991(3) RCR 69 : [1991(1) All India Criminal Law Reporter 382 (Pb. & Hry.)] and State of Punjab v. Leela Singh, 1991(3) RCR 306.

(III) The Punjab & Haryana High Court again in the case of Balwinder Singh Versus State Of Punjab [2005 (3) RCR(Cri) 263 : 2005 (2) AllCriLR 870], observed to say that –

Para 7: The Ld. counsel for the petitioner pointed out that the link evidence in this case is missing. There is plausibility in his contention. The affidavits of MHC Teja Singh, Ex. PA/1 and Ex. PF of Constable Inderjit Singh have not been properly verified. The verification of an affidavit should be either on the knowledge or the information of the deponent and it should be specifically stated as to which part of the affidavit is verified on knowledge of the deponent and as to which part is verified on the information of the deponent. In this respect, the case of Harjit Singh V/s. State of Haryana, 1988(1) CLR 81 can be referred to. If these affidavits are expunged from evidence, the intactness of the case property is not proved. In view of the above discussed legal infirmities in this case, the impugned judgment passed by the appellate Court dated 7.7.1990 is set aside. The petitioner is acquitted of the charge framed against him under Section 9 of the Act and this petition is accordingly allowed.

(IV) The observations of Apex Court in the case of Amar Singh versus Union of India [(2011) 7 SCC 69]

Para 21: The purpose of Rules 5 and 13 of the Supreme Court Rules, set out above, has been explained by this Court in the case of Smt. Savitramma V/s. Cicil Naronha and another, AIR 1988 SCC 1987. This Court held, in para 2 at page 1988, as follows:

"...In the case of statements based on information the deponent shall disclose the source of his information. Similar provisions are contained in Order 19, Rule 3 of the Code of Civil Procedure. Affidavit is a mode of placing evidence before the Court. A party may prove a fact or facts by means of affidavit before this Court but such affidavit should be in accordance with Order XI, Rules 5 and 13 of the Supreme Court Rules. The purpose underlying Rules 5 and 13 of Order XI of the Supreme Court Rules is to enable the Court to find out as to whether it would be safe to act on such evidence and to enable the court to know as to what facts are based in the affidavit on the basis of personal knowledge, information and belief as this is relevant for the purpose of appreciating the evidence placed before the Court, in the form of affidavit...."

I say, the profound object of Section 297(2), therefore may be discerned, as to flush out Complaints making frivolous allegations against a person.

In 138 proceedings, in respect of Accused directors, whereas the Complainant is obliged to make only an bare averment in the Complaint that “when the offence was committed, the accused directors were in-charge of and responsible to the Company for the conduct of the business of the Company, the Complainant admittedly has no knowledge, nor has any grounds to believe to be true, in their aforesaid averment in the Complaint; and therefore violence to mandate of this section is imminent.

(C) The concept of fair hearing / trial is ingrained in the jurisprudence of any civilized country. Let us look at the mandate of section 207.

Section 207, among other things, mandates the furnishing to the accused the copy of police report, statement of witnesses recorded by the Police, confessions and other relevant documents relied upon by the Prosecution. The object is to enable the accused to defend himself, and so that he may have the notice of the charge he is to meet and can cross examine the witnesses. [AIR 1964 SC 286; AIR 1957 SC 623; (2003) 7 SCC 749; (2005) 1 SCC 608; AIR 1970 SC 962; 2005 CrLJ 2136(SC)].

The said Section thus obliges the prosecution to furnish the copy of all the evidences which they would be relyng upon. In 138 proceedings, whereas the mandate of section 204 is not complied with, the violence to the mandate of section 207 is imminent.

Let us look at one of the recent Apex Court ruling on Section 141, given in the case of Gunmala Sales Pvt. Ltd. Vs. Anu Mehta & Ors. Decided On : Oct-17-2014. Bemch: RANJANA PRAKASH DESAI and N.V. RAMANA

Para 33. We may summarize our conclusions as follows:

(a) Once in a complaint filed under Section 138 read with Section 141 of the NI Act the basic averment is made that the Director was in charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed, the Magistrate can issue process against such Director;

(b) If a petition is filed under Section 482 of the Code for quashing of such a complaint by the Director, the High Court may, in the facts of a particular case, on an overall reading of the complaint, refuse to quash the complaint because the complaint contains the basic averment which is sufficient to make out a case against the Director.

(c) In the facts of a given case, on an overall reading of the complaint, the High Court may, despite the presence of the basic averment, quash the complaint because of the absence of more particulars about role of the Director in the complaint.

It may do so having come across some unimpeachable, uncontrovertible evidence which is beyond suspicion or doubt or totally acceptable circumstances which may clearly indicate that the Director could not have been concerned with the issuance of cheques and asking him to stand the trial would be abuse of the process of the court.

Despite the presence of basic averment, it may come to a conclusion that no case is made out against the Director.

Take for instance a case of a Director suffering from a terminal illness who was bedridden at the relevant time or a Director who had resigned long before issuance of cheques.

In such cases, if the High Court is convinced that prosecuting such a Director is merely an arm-twisting tactics, the High Court may quash the proceedings.

It bears repetition to state that to establish such case unimpeachable, uncontrovertible evidence which is beyond suspicion or doubt or some totally acceptable circumstances will have to be brought to the notice of the High Court.

Such cases may be few and far between but the possibility of such a case being there cannot be ruled out.

In the absence of such evidence or circumstances, complaint cannot be quashed;

(d) No restriction can be placed on the High Court’s powers under Section 482 of the Code. The High Court always uses and must use this power sparingly and with great circumspection to prevent inter alia the abuse of the process of the Court.

There are no fixed formulae to be followed by the High Court in this regard and the exercise of this power depends upon the facts and circumstances of each case.

The High Court at that stage does not conduct a mini trial or roving inquiry, but, nothing prevents it from taking unimpeachable evidence or totally acceptable circumstances into account which may lead it to conclude that no trial is necessary qua a particular Director.

In my understanding of things, I have tried to fathom the purport of aforesaid summing of the judgment –

The said judgment contemplates and in fact permits speculative prosecution of a person / director; and the said judgment contemplates prosecution of a person / director based on mere suspicion, for, at the time of issuing Summons against the Person / director, the Ld. Magistrate may not have any evidence in his hand, in support of the allegation that when the offence was committed, the accused director was “in-charge of ….”.

Apart from unconstitutionality, the said judgment commits a serious error, wherein it does not even talks about the Revisional powers of Sessions Courts u/s 397 of the Code, to interfere with the illegal Orders of the Magistrate; and in essence it says, only HC under 482 jurisdiction may upset the process issued by the Magistrate.

There is complete misunderstanding of the issue by the Apex Court. It sought to quash only those cases where the director place on record before High Court, such material / evidence which would show that he has ceased to have or has absolutely nothing to do with the affairs of the Company when the concerned cheque was issued; but then what about bulk of the cases, raising the central issue, where the main argument of the Director before the Appellate Court is, “I am not ceased with the Company, but I am not in-charge of…”.

The question of prosecuting retired directors does not even arise, and the complainant who recklessly make such directors as accused persons, should face the music of law, in the form of heavy damages and perjury.

However, there is one Apex Court ruling which had in fact directly dealt with the expression “in-charge of……”. The Apex Court in the case of Sham Sundar versus State of Haryaya [1989 (4) SCC 630] dealt with this expression Let us appreciate the observations of the Apex Court in this ruling.

Para 5: Counsel for the appellants urged that there is no evidence adduced by the prosecution that the appellants were in charge of the business of the firm when the offence was committed and in the absence of any such evidence the conviction could not be sustained. Counsel rested his submission on the text of Section 10 of the Essential Commodities Act. This section provides:

"10. Offences by companies-

(1) If the person contravening an order made under Section 3 is a company, every person who, at the time the contravention 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 contravention and shall be liable to be proceeded against and punished accordingly:

Para 6: From explanation to Section 10 it will be seen that the company includes a firm and other association of persons. Section 10 provides that the person shall be deemed to be guilty of contravention of an order made under Section 3 if he was in-charge of and was responsible to the firm for the conduct of the business of the firm. What is of importance to note is, that the person who was entrusted with the business of the firm and was responsible to the firm for the conduct of the business, could alone be prosecuted for the offence complained of.

Para 7: Counsel for the State, however, relied upon the legal liability of partners and he argued that it would be for the accused partners to prove that the offence was committed without their knowledge or in spite of exercising due diligence on their part. He relied upon the proviso to sub-section (1) of Section 10. It is true that under the Indian Partnership Act, 1932, a 'firm' or 'partnership' is not a legal entity but is merely an association of persons agreed to carry on business. It is only a collective name for individuals, carrying on business in partnership. The essential characteristic of a firm is that each partner is a representative of other partners. Each of the partners is an agent as well as a principal. He is an agent in so far as he can bind the other partners by his acts within the scope of the partnership agreement. He is a principal to the extent that he is bound by acts of other partners. In fact every partner is liable for an act of the firm. Section 2(a) of the Partnership Act defines an "act of a firm" to mean any act or omission by all the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm.

Para 8: But we are concerned with a criminal liability under penal provision and not a civil liability. The penal provision must be strictly construed in the first place. Secondly, there is no vicarious liability in criminal law unless the statute takes that also within its fold. Section 10 does not provide for such liability. It does not make all the partners liable for the offence whether they do business or not.

Para 9: It is, therefore, necessary to add an emphatic note of caution in this regard. More often it is common that some of the partners of a firm may not even be knowing of what is going on day to day in the firm. There may be partners, better known as sleeping partners who are not required to take part in the business of the firm. There may be ladies and minors who were admitted for the benefit of partnership. They may not know anything about the business of the firm. It would be a travesty of justice to prosecute all partners and ask them to prove under the proviso to sub-section (1) that the offence was committed without their knowledge. It is significant to note that the obligation for the accused to prove under the proviso that the offence took place without his knowledge or that he exercised all due diligence to prevent such offence arises only when the prosecution establishes that the requisite condition mentioned in sub-section (1) is established. The requisite condition is that the partner was responsible for carrying on the business and was during the relevant time in-charge of the business In the absence of any such proof, no partner could be convicted. We, therefore, reject the contention urged by counsel for the State.

Now let us look at the observations made by Bombay High Court, whilst referring the aforesaid case, in the case of Homi Phiroz Ranina Versus State Of Maharashtra [(2003) 3 MhLJ 34]

Para 7: It is further contended that in the complaint filed by the Commissioner of Income Tax it was not enough for the complainant merely to state that the accused/directors are in-charge and responsible for the day-to-day management of the company. What is required is that there must be an averment showing the nature of the post, its duties and it must be indicated in the complaint how the director is in-charge of and responsible for the conduct of business of the company. In the case of (M.A. Unneerikutty and others V/s. Deputy Commissioner of Income Tax) 218 I.T.R. 606, Kerala High Court observed as follows:

"By virtue of sec. 2(35) of the Act, partners do not come within the definition of principal officer unless the Income-Tax Officer had served notice of his intention to treat them or any one of them as the principal officer of the firm connected with the management or administration. It seems necessary that the complainant must allege and show by some acceptable materials that the partners concerned were in-charge of and responsible for the conduct of the business of the firm to make them also vicariously responsible along with it.

A mere allegation to that effect will not be sufficient. There should be credible materials to show their active involvement in the conduct and management of the business of the firm. Short of stating that they were in-charge of and responsible for the conduct of the business of the firm nothing had been mentioned in the complaints either about their role or as to the extent of their liability, which should not have been left to be inferred. At any rate the allegations seem to be insufficient to make them liable for the impugned act for which perhaps the firm and the principal officer, if any, alone would be liable."

Para 8: The learned Magistrate in rejecting the application for discharge has observed that unless and until the prosecution has been given an opportunity to lead evidence, it cannot be determined at the stage prior to the framing of the charge as to whether accused 4 to 7, applicants herein were not in-charge of the conduct of the business of the company, and accordingly held that the authority referred to by the applicants viz. (Shital N. Shah and others V/s. Income Tax Officer) 188 I.T.R. 376, cannot be relied upon. In the said case the Madras High Court observed: "If the payer as a company, the company itself, including the principal officer thereof shall be the person responsible for paying."

Sec. 2(35) specifies that the principal officer with reference to a company would be any person on whom the I.T. Officer has served a notice of his intention of treating him as principal officer. Admittedly no such notice was served upon the applicants.

Despite the said observations of the Madras High Court in the case of Shital N. Shah and others V/s. Income Tax Officer, 188 page 376 of I.T.R., the learned Metropolitan Magistrate has held that unless opportunity to the prosecution is given to lead evidence to substantiate or to prove that the accused Nos. 4 to 7 were in-charge and responsible for the conduct of the business of the accused No. 1 company, this defence cannot be taken by the accused at this stage but the accused can raise this point at the time of framing of charge.

Para 9: It must be fairly stated that at the time of hearing of the said application for discharge, the attention of the Court was not drawn to the case of M.A. Unneerikutty and others V/s. Deputy Commissioner of Income tax, I.T.R. 281 and 606, Kerala High Court which clearly states that it is necessary that complainant must lead and show some acceptable materials that the partners were in-charge of and responsible for the conduct of the business of firm to make them also vicariously responsible along with it. A mere allegation to that effect will not be sufficient. There should be credible material to show their active involvement in the conduct and management of the business of the firm.

Para 10: The complaint filed by the Commissioner of Income Tax states that accused Nos. 2 to 9 at the material time were in-charge of and responsible to accused No. 1 for the conduct of its business and therefore legally liable under sec. 194(1)(2) r.w. sec. 204 of the said Act to deduct income tax and to pay the tax so deducted to the credit of the Central Government within one week from the last date of the month in which the deduction is made. Apart from the averment that accused/applicants were in-charge of and responsible to the company for the conduct of its business, there is no material what so ever which prima facie shows that the applicants/accused were in fact in-charge of the affairs of the company and responsible for the conduct of its business and day to day affairs.

Para 11: Unless the complaint disclosed a prima facie case against the applicants/accused of their liability and obligation as principal officers in the day today affairs of the company as directors of the company under sec. 278(b), the applicants cannot be prosecuted for the offences committed by the company.

In the absence of any material in the complaint itself prima facie disclosing responsibility of the accused for the running of the day to day affairs of the company, process could not have been issued against them.

The applicants cannot be made to undergo the ordeal of a trial unless it could be prima facie showed that they are legally liable for the failure of the company in paying the amount deducted to the credit of the company. Otherwise, it would be a travesty of justice to prosecute them and ask them to prove that the offence is committed without their knowledge. The Supreme Court in the case of (Shyam Sundar V/s. State of Haryana) in AIR 1984 S.C. 53 held as follows:-

-- "It would be a travesty of justice to prosecute all partners and ask them to prove under the proviso to sub-sec. (1) that the offence was committed without their knowledge. It is significant to note that the obligation for the accused to prove under the proviso that the offence took place without his knowledge or that he exercised all due diligence to prevent such offence arises only when the prosecution establishes that the requisite condition mentioned in sub-sec. (1) is established. The requisite condition is that the partner was responsible for carrying on the business and was during the relevant time in-charge of the business. In the absence of any such proof no partner could be convicted.

Now, let us look at SMS Pharma judgment, which purportedly says that, bare averments in the Complaint, that “Accused is a Director of the Accused Company and was in-charge of ….. when the relevant cheque was issued”, is sufficient to initiate criminal prosecution against directors of the Company.

This judgment came from a reference made by a two - Judge Bench, for determination of the following questions by a Larger Bench. The Court posed to itself three questions and answered it accordingly.

Reference: “(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 persons accused were in charge of, or responsible for, the conduct of the business of the company.	Answer: (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) 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.	(b) The answer to question posed in sub-para (b) has to be in 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 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) 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 of 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.	(c) The answer to question (c) has to be in 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 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 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.

It is equally essential to know as what transpired in the minds of Judges who have arrived to aforesaid conclusions. I have culled out relevant portions of the judgment, which would go on to suggest that “before the issuance of Summons against the accused directors, it must be set out in the Complaint, as how and in what manner the directors were “in-charge of …..”. Let us look at some Paras..

Para 4: Since the provision creates criminal liability, the conditions have to be strictly complied with. The conditions are intended to ensure that a person who is sought to be made vicariously liable for an offence of which the principal accused is the company, had a role to play in relation to the incriminating act and further that such a person should know what is attributed to him to make him liable.

Para 5: Section 203 of the Code empowers a Magistrate to dismiss a complaint without even issuing a process. It uses the words "after considering" and "the Magistrate is of opinion that there is no sufficient ground for proceeding". These words suggest that the Magistrate has to apply his mind to a complaint at the initial stage itself and see whether a case is made out against the accused persons before issuing process to them on the basis of the complaint. For applying his mind and forming an opinion as to whether there is sufficient ground for proceeding, a complaint must make out a prima facie case to proceed. This, in other words, means that a complaint must contain material to enable the Magistrate to make up his mind for issuing process. If this were not the requirement, consequences could be far reaching.

Para 6: As the points of reference will show, the question for consideration is what should be the averments in a complaint under Sections 138 and 141. Process on a complaint u/s 138 starts normally on basis of a written complaint which is placed before a Magistrate. The Magistrate considers the complaint as per provisions of Sections 200 to 204 of the Code of Criminal Procedure. The question of requirement of averments in a complaint has to be considered on the basis of provisions contained in Sections 138 and 141 of the Negotiable Instruments Act read in the light of powers of a Magistrate referred to in Sections 200 to 204 of the Code of Criminal Procedure. The fact that a Magistrate has to consider the complaint before issuing process and he has power to reject it at the threshold, suggests that a complaint should make out a case for issue of process.

Para 7: As to what should be the averments in a complaint, assumes importance it view of the fact that, at the stage of issuance of process, the Magistrate will have before him only the complaint and the accompanying documents. A person who is sought to be made accused has no right to produce any documents or evidence in defence at that stage. Even at the stage of framing of charge the accused has no such right and a Magistrate cannot be asked to look into the documents produced by an accused at that stage.

Para 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.

Para 13: The question of what should be averments in a criminal complaint has come up for consideration before various High Courts in the country as also before this Court.

Secunderabad Health Care Ltd. and others V/s. Secunderabad Hospitals Pvt. Ltd. and others was a case under the Negotiable Instruments Act specifically dealing with Sections 138 and 141 thereof. The Andhra Pradesh High Court held that every Director of a company is not automatically vicariously liable for the offence committed by the company. Only such Directors or Director who were in charge of or responsible to the company for the conduct of business of the company at the material time when the offence was committed alone shall be deemed to be guilty of the offence. Further it was observed that the requirement of law is that "there must be clear, unambiguous and specific allegations against the persons who are impleaded as accused that they were in charge of and responsible to the company in the conduct of its business in the material time when the offence was committed."

Para 14: The same High, Court in V. Sudheer Reddy V/s. State of Andhra Pradesh and others held that "the purpose of Section 141 of the Negotiable Instruments Act would appear to be that a person who appears to be merely a Director of the company cannot be fastened with criminal liability for an offence under Section 138 of the Negotiable Instruments Act unless it is shown that he was involved in the day-to-day affairs of the company and was responsible to the company."

Para 18: To sum up, there is almost unanimous judicial opinion that necessary averments ought to be contained in a complaint before a persons 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 respondent falls within parameters of Section 141 has to be spelled out.

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.

Judgment ends.

It may further be appreciated that the Court whilst answering the Reference have said, “This averment is an essential requirement of Section 141, and the Court did not said, “ this is sufficient requirement of Section 141”.

The prosecution if based on "Bare averments" then is speculative and is based on suspicion, because, although at the summoning stage, there are no evidences of directors’ involvement in day-to-day affairs of the Company, it is supposed that some evidence may “turn up” at the time of his trial, of his involvement.

Elementary requirements of criminal justice (mandate of sections 204, 297(2), 207) cannot be sacrificed on the premise of some unknown and undefined expediency.

(E) Prosecution based on "Bare averments" would be a “Futile trial” against directors

Section 141 of the Act (according to some rulings of Apex Court) permits criminal prosecution against any and all the Directors of the Company, on the basis of bare averments in 138 complaint that “when the offence was committed, the concerned person was a director and was in-charge of and responsible to the Company for the conduct of the business of the Company”, notwithstanding the fact that the director concerned may not be in-charge of and responsible to the Company for the conduct of the business of the Company.

However, the controversy is not resolved by arraying directors as accused persons on the basis of aforesaid bare statement.

Let us see how this is a futile trial, as far as prosecution of directors are concerned. Let us see if there is any merit in my submissions. Let us broadly look at the process of Criminal trial.

a)      Any inquiry into the alleged commission of any criminal offence must begin with the contemplation in our mind, the definition of “offence” as contained in General Clauses Act, 1897.

b)      Section 3(38) of the said Act defines it as "offence" shall mean any “act or omission”” made punishable by any law for the time being in force”.

c)      The word “act or omission” is defined in the said Act in section 3(2) as – "act", used with reference to an offence or a civil wrong, shall include a series of acts, and words which refer to acts done extend also to illegal omissions.

d)     Therefore, it would be safe to say, that “specific act and / or omissions” attributed towards the person, may make the person liable for the commission of an offence, and mere allegation is of no use to initiate any action in law, against any person.

e)      Then we may proceed to look at the substantive definition of the offence, which spells out as what bundle of “acts and omissions” would constitute the commission of an offence.

f)       Section 200 of CrPC, inter alia obliges the Magistrate who is taking cognizance of an offence, to examine upon oath the complainant and the witnesses present, if any, and the substance of such examination shall be reduced to writing.

g)      The paramount object of this examination of the complainant and his witnesses u/s 200, is to secure evidences against the persons accused of; and to further satisfy himself that there are sufficient material or evidences against the persons who are charged with the commission of certain offences.

h)      Therefore, every lawful and valid complaint u/s 200 of CrPC, must aptly demonstrate the bundle of “incriminating acts and omissions” attributed towards the person concerned, wherein the said acts and omissions would constitute a particular offence.

i)        The question may arise as what could be the nature of averments (of facts) in the complaint, and the nature of depositions required before the court, which would constitute “bundle of incriminating acts and omissions”.

j)        Whereas it would depend upon the facts of each case, legally speaking, a valid complaint u/s 200 of CrPC, must aptly spell out the “facts” and “facts in issue”/ relevant facts; wherein the “facts” constitutes the principal allegations against the accused person, and “facts in issue / relevant facts” constitutes the evidences / materials against the said accused person.

k)      In this respect, it is useful to look into the definition of “fact”, “facts in issue”, “evidence” provided u/s 3 of Evidence Act; and mandate of section 5 of Evidence Act, which states that Evidence may be given in any suit or proceedings of every fact in issue and that of such other facts as are hereinafter declared to be relevant, and of no others.

S.3: "Evidence""Evidence" means and includes

(1)    all statements which the Court permits or requires to be made before it by witnesses, in relation to matters of fact under inquiry, such statements are called oral evidence;

(2)    ⁶ [all documents including electronic records produced for the inspection of the Court], such documents are called documentary evidence.

S. 5: Evidence may be given of facts in issue and relevant facts: Evidence may be given in any suit or proceedings of the existence or non-existence of every fact in issue and of such other facts as are hereinafter declared to be relevant, and of no others.

S.3: "Fact".-"Fact" means and includes-

(3)    any thing, state of things, or relation of things, capable of being perceived by the senses;

(4)    any mental condition of which any person is conscious.

S.3: "Facts in issue".-The expression "facts in issue" means and includes- any fact from which, either by itself or in connection with other facts, the existence, non-existence, nature, or extent of any right, liability, or disability, asserted or denied in any suit or proceeding, necessarily follows.

l)        The “Fact” implies– something that actually exists; an aspect of reality; an actual or alleged event or circumstance, as distinguished from its legal effect, consequence or interpretation; an evil deed; a crime. (Source: Blacks Law dictionary). It is also very essential to appreciate the distinction between “Facts” and “Facts in issue”.

m)    The “facts” are principal facts, which constitutes the ingredients of the offence; and the trial court while appreciating the evidence adduced (“facts in issue” / “relevant facts”) would record a finding to the existence or non existence of the alleged “fact”; and the said process may also be termed as “finding of fact” or a fact “proved / disproved / not proved”.

n)      “Facts in issue” are those facts by which the existence of principal facts are sought to be established; are also known as “predicate fact”, from which presumption or inference arises, also termed as fundamental fact or evidentiary fact. Facts in issue may also be referred to as Physical fact: a fact having a physical existence, such as finger print left at a crime scene. Also known as Primary facts: a fact, which can be established by direct testimony and from which inferences are made, leading to ultimate facts. (Source: Blacks Law Dictionary)

o)      Facts in issue are those facts which are so closely and intimately attached to the “Issue”; and by the natural inference from which the existence / non-existence of said “issue” may be determined.

p)      In criminal law, the ingredients of the offence are the “issues” before the court, which the prosecution must “prove”, with the aid of “facts in issue” and “relevant facts”; and the ingredients of the offence are to be proved by adducing evidence (oral and documentary) of “facts in issue” and of “relevant facts”.

q)      S.5 of the Evidence Act says that evidence may be given of “facts in issue” and of “relevant facts”, and of no others [Sections 6 to 55 of Evidence Act. It is also well settled that the party adducing any evidence, must in the first instance, plead such fact, and then only he is allowed to lead evidence on such fact. [(2014) 5 MhLJ 233] (2010) 1 SCC 466; (2007) 10 SCC 21, 27; (1999) 4 SCC 403; (1999) 8 SCC 692.

r)       Therefore, it can safely be argued that it is incumbent upon the Complainant to set out in the Complaint, or to produce such witnesses, having sufficient material and evidences in support of the allegations made in the Complaint; and similarly, equally it is incumbent upon the Magistrates to secure that there are sufficient material / evidence on record against a person before he ventured to issue Summons against him.

s)       Take for example, where a complainant alleges cruelty against a husband and his relatives and the said complainant merely reproduces the words of the section, without stating or adducing anything further, in support of the allegation of cruelty; Can such complaint survive the test of law, more particularly the mandate of section 204 of CrPC.

t)       And when there are sufficient evidence or material on record, to proceed against the person charged with, the Magistrate takes the cognizance of the “offence” u/s 200, and may issue summons or warrant u/s 204, and set the criminal machinery of law into motion. The mandate of section 204, employing the expression “sufficient grounds to proceed” is salutary wherein it sought to check frivolous and meritless cases to be nipped in the bud.

u)      Coming to present case, the ingredients of the offence are contained in section 138 of the Negotiable Instruments Act, 1881.

v)      The said Act, in the event of dishonoured cheque was issued by a “Company”, u/s 141 of the Act, also makes vicariously liable, all persons including directors of the said “Company”, who, when the relevant cheque was issued, were “in-charge of and was responsible to the Company for the conduct of the business of the said “Company”.

w)    Therefore, if any director is to be made vicariously criminally responsible for the dishonour of the cheque, not only it must be averred that “the concerned person is the director of the accused company and when the relevant cheque was issued, he was in-charge of …..”, but also it must be shown as how the director concerned is “in charge of and responsible for the conduct of the business of the said “Company”.

x)      The Complainant who sought to make directors as vicariously responsible for the dishonour of cheque, are obliged to alleged in the Complaint, the “acts and omissions” of the concerned directors, which would prima facie show that their alleged acts and omissions constitute the expression “in-charge of and was responsible to the Company for the conduct of the business of the said “accused Company”.

y)      In this respect, the principal fact constituting the ingredient of the offence is the allegation that “said Persons / directors were in-charge of….. when the relevant cheque was issued”; and “facts in issue” / relevant facts are the evidence and any other material, by the means of which the Magistrate would satisfy himself about the “sufficiency of the grounds” to proceed against the concerned accused person;

z)      The Magistrate then, while taking cognizance of the offence u/s 200 against those directors, would prima facie satisfy himself as to the veracity of the said alleged “acts and omissions” attributed towards them, and then will issue Summons against those directors. However, where in a complaint, if there are mere allegations bereft of any evidence or material, it would not pass the test of mandate of section 204 of CrPC; that is to say, a case of” Fact asserted” but there are no facts in issue / relevant facts, to prove the fact asserted.

aa)   Section 145 of the Act makes a positive departure from conventional procedure for leading evidence, wherein the evidence of the Complainant may be given in form of Affidavit and the said evidence may be read in evidence subject to all just exceptions;

bb)  The Complainant thereafter, files his Affidavit of evidence and list of documents; and may subject himself to the cross examination; and thereafter the Accused Director may lead evidence to disprove the “acts and omissions” alleged, and would subject himself to cross examination;

cc)   And thereafter the Magistrate, after appreciating the evidence or material before him, would record his finding, among other things, as to (a) whether the acts and omissions alleged, are proved; and (b) whether the acts and omissions alleged, constitute the expression “in charge of the day to day affairs of the business of the said Company”.

dd) However, in the instant case, there may not be any “finding of fact” at all, in that, whether the concerned Person / director was “in-charge of…..” when the relevant cheque was issued. Let us see how.

ee)   Therefore, let us look at section 101 of Evidence Act.

SECTION 101 : Burden of proof: Whoever desires any Court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts, must prove that those facts exist. When a person is bound to prove the existence of any fact, it is said that the burden of proof lies on that person.

ff)    Let us also look at definition of “Proved” provided in Indian Evidence Act, 1872. "Proved".-A fact is said to be proved when, after considering the matters before it, the Court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists.

gg)  It is a settled law that “there is no presumption of law” that all directors are “in-charge of and responsible to the Company for the conduct of the business of the Company”; and if this burden is thrown upon the directors, it would imply that “every director is in-charge of….”, unless otherwise proved by the concerned director. [(2005) 8 SCC 89; AIR 1971 SC 2162]

hh)  AND, therefore, the burden of proof is not shifted upon the Accused Director to prove that he is in fact “in-charge of…”.

ii)      AND, when the burden of proof is not shifted upon the Accused Director, the original burden remains upon the Complainant; and whereas the Complainant admittedly does not know anything about the position of the Accused Director, he may not be able to lead any evidence in this respect;

jj)      AND whereas the Accused are Constitutionally protected by Article 20(3) from “Self incrimination” and cannot be forced to lead any evidence; nor section 106 of Evidence can be pressed in the present case (which I will try to explain in later Paras), there will not be any evidence / material before the trial Court to record any finding as to whether the Accused Director is “in-charge of…”.

kk)  Therefore, the fact that “Accused director are / were in-charge of and responsible to the Company for the conduct of the business of the Company”, will never be proved.

ll)      An argument is advanced that Section 106 of the Evidence is attracted in the instant case. However, in my view, said section is not attracted, and I would furnish reasons for the same. Let us look at section 106.

SECTION 106: Burden of proving fact especially within knowledge: When any fact is especially within the knowledge of any person, the burden of proving that fact is upon him.,

Reason No.1: It is not correct to say that “matter” is within the exclusive knowledge of the accused director, for, being “in-charge of ….” is a matter which would in the knowledge of other directors and officers of the accused company.

Reasons No.2: Section 106 is invoked to lead positive evidence and not negative evidence. Here the Director is called upon to prove a negative fact.

Reason No.3: Further, assuming that Accused Director volunteers to lead evidence that he is not “in-charge of …..”;. I fail to fathom what evidence he would lead, and how this burden would be discharged, if the accused director is really a person who is not “in-charge of …..”.

Nobody knows how his innocence would be proved, for, “being in-charge of …..” is a subjective conception, and there is no objective test defined or ascertained so far by any judicial pronouncement or legislative enactment.

Reason No.4: Section 106 could be invoked in circumstances where factual foundation is laid down and duly proved by the prosecution; and then the burden shifts upon the accused. In the instant case, no foundation is laid, question of proving anything does not arise.

mm)                      The paramount necessity of assertion of material facts (which includes Principal facts + facts in issue + relevant facts) into Complaints, is to carry into operation the overriding principle that the litigation between the parties, should be conducted fairly, openly and without surprises. This function has been variously stated, namely, to limit the generality of the allegations in the pleadings. Each party is entitled to know the case that is intended to be made against him at the trial, and to have such particulars of his opponent's case as will prevent him from being taken by surprise.

nn)  However, we must find solution to the controversy, for two good reasons – first, innocent directors may be protected from oppressive prosecution; and secondly the guilty directors may be held responsible for.

(i) The mandate of section 202 of CrPC should be generously availed of by the Magistrates whilst entertaining complaint in respect of Company and their directors. The Magistrate is sufficiently empowered u/s 202, to call for certain information from the competent authorities like the Registrar of Companies (RoC), by the means of which the internal affairs of the company may be ascertained in so far as the names of persons who are “in-charge of ….”; wherein the RoC by invoking Section 206 of the Companies Act, 2013 / Section 234 of the Companies Act, 1956, may call for the said information from the Company; thereby a balance may be struck wherein the internal affairs of the Company are being disclosed only in cases wherein the Courts thinks it fit so.

(ii) It is just and necessary that the Company law must obligate the Company to expressly disclose in its Articles, the names of persons who are “in-charge of ….”; and whereas Articles of Association is a Public document, the Complainant, before filing of the Complaint, may ascertain as who are the persons “in-charge of…”.

(iii) The remuneration and other perks being enjoyed by the director / person alleged to be in-charge of ….”: It has been judicially ascertained that the persons who are said to be "a person in-charge and responsible for the conduct of the affairs of a company" means the persons who are in “overall control of the day to day business of the company”. [AIR 1971 SC 2162; (2005) 8 SCC 89] Therefore the position of such person / director is akin to that of a Managing Director.

The expression “in-charge of …..” has a direct relationship with the “compensation being drawn by “he” from the Company in return for his “Services”; or to say, the necessary attribute of this position is, that the said Person / director who is in fact “in-charge of …..” must be drawing remuneration / perks equivalent of that Managing Director, or such remuneration / perks which are much higher than other Directors who are not “in-charge of……”.

And, therefore, the accused Company may be called upon to disclose the remuneration drawn by each of the Person / directors who are made accused. [Companies Act 2013: section 134; Section 197(4)(5); 206(1); 129 r/w Sch III – Statement of P & L; Additional information – General Instructions for preparation of statement of P & L; section 5 r/w R.11 r/w Table F, G, H I]

oo)  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.

Thank you.

Sandeep Jalan

Advocate.

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