The aforesaid issue has been cursed with consistent
unpredictable decisions of the Apex Court and High Courts; and the law deserves
to be set at peace with utmost clarity, may be by Constitution Bench.
What is the mandate of S.141: Section 141 of the Negotiable Instruments Act
creates vicarious criminal liability upon persons, including the directors of
the Company, who, when the offence was committed, were “in-charge of and were
responsible to the accused Company for the conduct of the business of the
Company”.
The Apex Court inconsistent Rulings: The Apex Court in its various inconsistent
rulings have held that the directors of the Company may be called upon to face
criminal prosecution, on the basis of “bare averments” in complaint that “when
the offence was committed, the concerned person was a director and was
in-charge of and was responsible to the Company for the conduct of the business
of the Company”. [AIR 2015 SC 1072, AIR 2016 SC 1750].
Contrary to this, the Apex Court have in the case
of National small Industries case [AIR 2010 SC (Supp) 569], and thereafter in
many cases AIR 2006 SC 3086, AIR 2007 SC 912, AIR 2007 SC 1454, AIR 2009
SC(Supp) 1726, AIR 2017 SC 2854], have held that, to fasten criminal liability
upon Directors, it is essential to set out in the Complaint, as how and in what
manner, the Accused director was “in-charge of and was responsible ….”; and
bare averment or the reproduction of the language of Section 141 is not sufficient
to launch criminal prosecution against Directors. This proposition is subject
to the proposition that Managing Directors, Jt. Managing Directors, Whole Time
Directors, or the signatory of the relevant Cheque, by very nature of office
they hold, would invariably comes within the ambit of Section 141 of the Act.
What is the mandate of S.204: Section 204 of CrPC, 1973, mandates that, at
the time of taking cognizance of the offence and before issuance of Summons /
Warrant against the persons accused of, the Ld. Magistrate has to form a prima
facie opinion, as whether there are sufficient grounds to proceed against the
persons accused of.
“Sufficient grounds to proceed” connotes that
the Magistrate would conceive that there are 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.
In a very recent judgment, the Apex Court observed
to say that –At the stage of taking cognizance, the only consideration before
the Court remains to consider judiciously whether the “material” on which the
prosecution proposes to prosecute the accused brings out a prima facie case or
not. [AIR 2015 SC 923]
The Prima facie case implies that, the
incriminating materials and the pleadings which are placed before the Court,
inspires the conscience of the Court; and having regard to the nature of
offences alleged to have been committed, the Court thinks fit to proceed with
the case against the persons accused of.
The principal submission is – bare averments in the
Complaint that “Accused director is / was in-charge of …..” cannot by any
stretch of imagination, be considered as “incriminating material / evidence”.
It is barely an allegation.
The Apex Court Ruling on the expression “In-charge
of …”: The Apex Court in a case before
it, [AIR 1989 SC 1982] have dealt with the expression “in-charge of……”. The
Hon’ble Court observed to say that “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. Relyng upon the aforesaid Apex Court Ruling, the
Hon’ble Bombay High Court in a case before it, [(2003) 3 MhLJ 34] have
held that 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.
Dissecting SMS Judgment: Now, let us scrutinize the SMS Pharma
judgment [AIR 2005 SC 3512], which purportedly say 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.
The Three Judges Bench have held that it is
necessary to specifically aver in a complaint 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.
Nevertheless, it is essential to read the entire
judgment, more particularly Para 18 which says, 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 clear case should be spelled out in the complaint against the person sought
to be made liable. 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.
It may further be appreciated that the Court have
said, “This averment is an essential requirement of Section 141; and the Court
have not said, “ this is sufficient requirement of Section 141”.
Therefore, it is not correct to say that the SMS
Pharma judgment laid down the law that bare averments in the Complaint are
sufficient to maintain a criminal prosecution against directors of the Company.
Therefore, the proposition that bare averments of reproducing
the words of the statute would suffice to initiate criminal prosecution of a
person, is inconceivable and unsustainable.
Further submission is – the controversy is not
resolved by arraying directors as accused persons on the basis of aforesaid
bare statement. This is because (a) 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”. [AIR 2005 SC 3512; AIR
1971 SC 2162] (b) And therefore the burden to prove remains on the Complainant
that the accused director is “ in-charge of and responsible….” (c) admittedly,
the Complainant doesn’t know anything as to the actual state of affairs of the
Company qua the role of accused directors.
AND, therefore, the Complainant may not be able to
lead any evidence in this respect; 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, 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…”. 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.
The Section 106 of the Evidence is not attracted
because S.106 is invoked to lead positive evidence and not negative evidence.
Here the Accused Director would be called upon to prove a negative fact that
“he is / was not incharge of…..”.
Therefore, if it is argued that bare averments in
the Complaint are suffice to criminally prosecute a director, then we are
engaging in speculative prosecution, because it is hoped that during the course
of trial some evidence may come against the said accused director, and if no
such evidence comes, he may be acquitted. This is hazardous proposition we are
talking about, and, no law of the land should permits such vexatious prosecution.
[AIR 1998 SC 128].
Any Solution ?: 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 booked
for.
In this respect, the mandate of section 202 of CrPC
may be availed of. The Magistrate may call for this information from Registrar
of Companies (RoC), wherein the RoC by invoking Section 206 of the Companies
Act, 2013 may call for the said information from the Company.
Further, the expression “in-charge of …..” has a
direct relationship with the “compensation being drawn by “he” from the Company
in return for his “daily engagement with the business of the Company”. 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]
Sandeep
Jalan
Advocate
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