* IN THE HIGH COURT OF DELHI AT NEW DELHI + Crl. M.C. No. 450/2010 % Judgment Reserved on 28th April, 2010 Judgment delivered on 03rd May, 2010 # MANISH PARWANI .....PETITIONER ! Through: Mr. Rajiv Nayar, Sr. Adv. with Mr. Hrishikesh Baruah, Advocate . VERSUS $ THE NATIONAL CAPITAL TERRITORY OF DELHI AND ANOTHER .....RESPONDENTS ^ Through: Mr. R.N. Vats, Additional Public Prosecutor, for the State. Mr. Ramesh Gupta, Sr. Adv. with Mr. B.P. Lathwal, Advocate for the respondent No. 2. AND + Crl. M.C. No. 501/2010 % # MANISH PARWANI & ANOTHER .....PETITIONERS ! Through: Mr. Rajiv Nayar, Sr. Adv. with Mr. Hrishikesh Baruah, Advocate . VERSUS $ THE NATIONAL CAPITAL TERRITORY OF DELHI & ANOTHER .....RESPONDENTS ^ Through: Mr. R.N. Vats, Additional Public Prosecutor, for the State. Mr. Ramesh Gupta, Sr. Adv. with Mr. B.P. Lathwal, Advocate for the respondent No. 2. AND Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 1 of 24 + Crl. M.C. No. 503/2010 % # MANISH PARWANI & ANOTHER .....PETITIONERS ! Through: Mr. Rajiv Nayar, Sr. Adv. with Mr. Hrishikesh Baruah, Advocate . VERSUS $ THE NATIONAL CAPITAL TERRITORY OF DELHI & ANOTHER .....RESPONDENTS ^ Through: Mr. R.N. Vats, Additional Public Prosecutor, for the State. Mr. Ramesh Gupta, Sr. Adv. with Mr. B.P. Lathwal, Advocate for the respondent No. 2. CORAM: Hon'ble MR. JUSTICE S.N. AGGARWAL 1. Whether reporters of Local paper may be allowed to see the judgment? YES 2. To be referred to the reporter or not? YES 3. Whether the judgment should be reported in the Digest? YES S.N.AGGARWAL, J All these three petitions under Section 482 of the Code of Criminal Procedure, 1973 filed by the petitioners Mr. Manish Parwani & Mr. Shekhar Narasimhan for quashing of three criminal complaint cases under Section 138 of the Negotiable Instruments Act, 1881 bearing complaint case Nos.1439/1/08; 649/1/2009 & 573/2009 pending against them before Mr. Sandeep Yadav, Senior Civil Judge cum Rent Controller, District South, Patiala House Courts, New Delhi are proposed to be decided by this common judgment because the legal issue that arises for consideration in all these petitions is common. 2 The facts of the case giving rise to these petitions briefly stated are as follows:- Respondent No. 2 M/s Appreciate Fincap Private Limited Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 2 of 24 (hereinafter to be referred as the 'complainant company') had filed three complaints under Section 138 read with Section 142 of the Negotiable Instruments Act, 1881 against the petitioners Mr. Manish Parwani & Mr. Shekhar Narasimhan, accused No. 1 company M/s HKK Buildwell Private Limited and its two other Directors namely Sanjay Gambhir and Reena Gambhir arrayed as accused Nos. 2 & 3 in the complaints. The case of the complainant company is that two persons namely Mr. Harvinder Singh & Smt. Kuldeep Kaur (both promoters and only shareholders of 5,000 shares each) had incorporated a company named and styled as M/s HKK Buildwell Private Limited (hereinafter to be referred as 'accused No. 1 company'). The said company had purchased eight acres and three marlas of land in Sonepat for a sale consideration of approximately Rs.6.85 crores. In pursuance thereof, accused No.1 company had borrowed a sum of Rs.7,43,57,000/- from various persons including the complainant company. As per the case of the complainant company, out of the said amount of Rs.7,43,57,000/- borrowed by accused No. 1 company, a sum of Rs.2,26,85,000/- was borrowed by the said company from the complainant company. After borrowing the said amount of money, accused No. 1 company had completed the sale transaction of the aforestated land and executed a sale deed for the said land on 11.10.2006. It is further the complainant company's case that in the year 2007, the aforesaid shareholders of accused No. 1 company (i.e. Mr. Harvinder Singh & Smt. Kuldeep Kaur) entered into an agreement with one company M/s D.D. Townships Limited and by virtue of the said agreement, the entire shareholdings of accused No. 1 company was brought over by the said M/s D.D. Townships Limited. In terms of the said arrangement between the said shareholders of accused No. 1 company and M/s D.D. Townships Limited, the accused Nos. 2 & 3 namely Sanjay Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 3 of 24 Gambhir and Reena Gambhir were appointed as Directors of accused No. 1 company on 20.04.2007. In further terms of the aforesaid arrangement, Mr. Harvinder Singh & Smt. Kuldeep Kaur had resigned from the directorship of accused No. 1 company w.e.f. 26.04.2007. 3 It is the case of the complainant company that the entire shareholdings of accused No. 1 company vested in M/s D.D. Townships Limited on the basis of an agreement as mentioned hereinabove. The petitioners being accused Nos. 4 & 5 had become Directors of accused No. 1 company w.e.f. 20.06.2007. 4 The complainant company is stated to had given a loan of Rs.2,26,85,000/- to accused No. 1 company by means of six cheques of dates between 10.10.2006 and 24.04.2007 drawn on South Indian Bank Limited, Greater Kailash-II, New Delhi, details whereof are given in para 7 of the complaint at page 40 of file of Crl.M.C. No. 503/2010. 5 As per the complainant company, the accused Nos. 1 to 5 had given nine post dated cheques of dates between 25.10.2007 and 17.11.2007 for a total amount of Rs.2,26,85,000/- to the complainant company to clear their loan liability with an assurance that these cheques are good for payment and would be honoured on presentation. However, all the above nine cheques given by the accused persons including the petitioners were returned unpaid with the remarks 'funds insufficient' and these cheques were bounced between 26.10.2007 and 20.11.2007. The complainant company is stated to had given a statutory notice dated 22.12.2007 to all the accused persons informing them about the bouncing of the cheques and calling upon them to make the payment of the said cheques within 15 days. Since the payment was not made despite service of legal notice dated 22.12.2007, the complainant company filed two separate complaints being CC No. 573/2009 and CC Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 4 of 24 No.649/1/09 under Sections 138/142 of the Negotiable Instruments Act against the petitioners, accused No. 1 company and its two other Directors namely Sanjay Gambhir and Reena Gambhir. 6 The complainant company also filed a third complaint being CC No.1439/1/08 against the same accused persons against whom abovementioned two complaints were filed alleging that the complainant company had given an additional amount of Rs.1.10 crores to accused No. 1 company vide cheque No.137975 dated 20.04.2007 required by the said company for clearing the post dated cheques of Rs.2,17,87,196/- given by it to one Sh. Rajbir son of Sh. Ramsukh at the time of purchase of agricultural land measuring eight acres and three marlas in Sonepat. The accused No. 1 company is alleged to had given six cheques of total amount of Rs.1.10 crores to the complainant company of dates between 20.11.2007 and 30.11.2007 to clear its loan liability of Rs.1.10 crores given to it by the complainant company. Details of these six cheques are given in para 4 of the complaint (Annexure P-3) at page 34 of file of Crl.M.C. No. 450/2010. The complainant company has stated that it could not institute proceedings against the accused persons in respect of first cheque No. 367018 dated 20.11.2007 for Rs.25 lacs within the stipulated period as provided under the Negotiable Instruments Act. However, the complainant company is stated to had presented the remaining five cheques mentioned in para 4 of its complaint for encashment to its banker on 16.05.2008 but all these five cheques were returned as dishonoured by the bankers of the accused No. 1 company with the remarks 'Payment stopped by drawer' vide bank memo dated 16.05.2008. Immediately thereafter, the complainant is stated to had sent a legal notice dated 02.06.2008 to the accused persons through registered A.D. post and UPC post but the accused persons failed to make Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 5 of 24 payment despite service of the said notice. Hence, the complainant company filed the third complaint against the accused persons as stated above. It may be noted that in this third complaint, petitioner No. 2 Mr. Shekhar Narasimhan was not arrayed as an accused for reasons best known to the complainant company though the name of petitioner No. 2 finds mention as accused person in the remaining two complaints mentioned above. 7 The pre-summoning evidence was filed by the complainant company before the trial court by way of affidavits. The court below vide impugned orders dated 08.01.2008 and 04.09.2008 summoned all the accused persons including the petitioners in the abovementioned three complaint cases filed under Sections 138/142 of the Negotiable Instruments Act and it is aggrieved there from, the petitioners have filed these petitions seeking quashing of summoning orders/complaint cases pending against them. 8 The main ground on which the quashing is sought by the petitioners is that they were independent and non-executive Directors of accused No. 1 company and had nothing to do with its day-to-day management. Their further case is that they both were inducted as Directors of accused No. 1 company on 20.06.2007 and had resigned from the directorship of the said company on 24.10.2007 and that they were not the Directors of the company at the time of commission of the offence under Section 138 of the Negotiable Instruments Act. They have supported their plea that they were not the Directors of accused No. 1 company at the time of commission of the alleged offence by placing reliance on Forms No 32 filed by accused No. 1 company with the Registrar of Companies, Ministry of Company Affairs {Annexure P-2 (colly.)} at pages 30-31 and 35-36 of file of Crl.M.C. No. 503/2010. These Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 6 of 24 Forms No. 32 filed along with the petition are certified copies issued by Registrar of Companies and according to these documents, the petitioners are shown to had resigned from the directorship of accused No. 1 company w.e.f. 24.10.2007. 9 The three complaints in question under Sections 138/142 of the Negotiable Instruments Act were filed by the complainant company in respect of total 14 cheques allegedly given by accused No. 1 company which were returned unpaid. All these 14 cheques, as per complaints, were of dates after the resignation by the petitioners from the directorship of accused No. 1 company. Admittedly, these cheques were returned unpaid by the banker of the complainant company after 24.10.2007 i.e. date of resignation by the petitioners from the directorship of accused No. 1 company. 10 I have heard the argument of Mr. Rajiv Nayar, learned senior counsel who appeared on behalf of the petitioners and also of Mr.Ramesh Gupta, learned senior counsel who appeared on behalf of respondent No. 2 (complainant company). I have also perused the entire record of these cases and have given my anxious consideration to the rival arguments advanced by the counsel for the parties. 11 The main argument of the learned senior counsel appearing on behalf of the petitioners was that the petitioners could not have been summoned by the trial court for offences under Sections 138/142 of the Negotiable Instruments Act allegedly committed by accused No. 1 company as they had ceased to be the Directors of the said company on the date of commission of the offence. He has placed reliance on Form No. 32 at pages 31-36 of the paper book of Crl.M.C. No. 503/2010 to show that both the petitioners who seek quashing of summoning order and criminal complaint under Sections 138/142 of the Negotiable Instruments Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 7 of 24 Act had resigned from the directorship of accused No. 1 company on 24.10.2007, i.e., much before the date of the commission of the offences which admittedly were committed after the said date. 12. Per contra, Mr. Ramesh Gupta, learned senior counsel appearing on behalf of respondent No. 2 (complainant company) had argued that Forms No. 32, on which reliance is placed on behalf of the petitioners, were filed by accused No. 1 company with the Registrar of Companies, Ministry of Company Affairs on 09.01.2008 and 13.01.2008 respectively and, therefore, according to him, whether the petitioners had ceased to be the Directors of accused No. 1 company or not on the date of commission of offence is a disputed question of fact and cannot be gone into by this Court at this stage. He has also contended that the complainant company had specifically pleaded in its complaint that all the accused persons including the petitioners were responsible for day- to-day management of the affairs of the accused No. 1 company, and therefore, they, according to him, are jointly and vicariously liable for criminal liability arising out of bouncing of cheques in question. The learned senior counsel appearing on behalf of respondent No. 2 company had placed reliance on two judgments of this Court, viz., Anurag Modi Vs. M.S.T.C. Limited, 2002 (1) JCC 206 (DHC) and K.P.G. Nair Vs. State, 2008 (III) AD (Cr.) (DHC) 214 in support of his contention that once the accused persons have been summoned to face trial under Section 138 of the Act, the question whether such persons had resigned from the accused company and had ceased to be responsible for day-to-day business of the accused company can be decided only after evidence is led by the parties at the appropriate stage. 13. From the above rival arguments advanced by the learned counsel for both the parties, the legal issue that arises for consideration in these Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 8 of 24 petitions is whether the summoning orders issued by the court below against the petitioners are sustainable or whether the petitioners can be held vicariously liable for the offence committed by accused No. 1 company after the petitioners had ceased to be the Directors of the said company. 14 Proper and smooth functioning of all business transactions, particularly of cheques as instruments primarily depends upon the integrity and honesty of the parties. Undoubtedly, dishonour of a cheque by the bank causes incalculable loss, injury and inconvenience to the payee and the entire credibility of the business transactions within and outside the country suffers a serious setback. A company being an artificial person created by law acts through its directors and officers who are responsible for the conduct of the business of the company. A criminal liability on account of dishonour of cheque primarily falls on the drawer company and is extended to officers of the Company. The normal rule in the cases involving criminal liability is against vicarious liability, that is, no one is to be held criminally liable for an act of another. This normal rule is, however, subject to exception on account of specific provision being made in statutes extending liability to others. Section 141 of the Negotiable Instruments Act,1881 (“NI Act”) regulates offences by companies. 15 The Act has created a deemed offence under a legal fiction, whenever a cheque drawn by a person on an account maintained by him bounces either for insufficiency of the funds in the account or it exceeds the arrangements made. It is apparent that the person who has drawn the cheque on an account maintained by him alone is liable in the event of bouncing of the cheque later. When the company is the drawer of the cheque, such company is the principal offender, and the remaining Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 9 of 24 persons are made offenders by virtue of the legal fiction created by the legislature as per the said section. The actual offence should be committed by the company and then alone the other two categories would also become liable for the offence. Penal statues provide constructive vicarious liability and should be construed much more strictly. When conditions are prescribed for extending such constructive criminal liability to others, the Courts will insist upon strict literal compliance. There is no question of inferential or implied compliance. 16 With the assistance of latest decisions of the Hon’ble Supreme Court of India, we shall be examining the provisions relating to Section 141(1) and shall attempt to determine who are the persons who shall be responsible and can be made liable for an offence done by a company? Who is responsible to the company for the conduct of its business, and who could be said to be in-charge thereof? How does one identify such persons? Is it that a person by virtue of being a director, manager or secretary of a Company automatically becomes liable under this section? Is it necessary to have an averment in the complaint that at the time when this offence was committed, such a person was in charge of and was responsible to the company for the conduct of business of the company? 17 Section 141 of the NI Act, 1881 regulates offences by Companies. It reads as follows:- “(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 Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 10 of 24 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. (2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation. - For the purposes of this section, - (a) 'Company’ means any body corporate and includes a firm or other association of individuals; and (b) 'Director’ in relation to a firm, means a partner in the firm." 18 When a cheque issued by a company is dishonoured, in addition to the Company, the following persons are deemed to be guilty of the offence and shall be liable to be proceeded against and punished: a. 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; b. Any Director, Manager, Secretary or other officer of the company with whose consent and connivance, the offence under section 138 had been committed; and c. Any Director, Manager, Secretary or other officer of the company whose negligence resulted in the offence under section 138 being committed by the company 19 Section 141 contains conditions, which have to be satisfied before the liability can be extended to officers of a company. 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 Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 11 of 24 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. 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. 20 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 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 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 conduct of business of a Company at the relevant time. Liability depends on the role one plays in the affairs of a Company Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 12 of 24 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. 21 The Hon'ble Supreme Court has held in various cases that the words “was in-charge of, and was responsible to the company for the conduct of the business of the company” refer to a person who is in overall control of the day-to-day business of the company. The Court pointed out that, though a person may be a director and, thus, belongs to the group of persons making the policy followed by the company, yet may not be in-charge of the business of the company; that a person may be a manager who is in-charge of the business but may not be in overall charge of the business; and that a person may be an officer who may be in-charge of only some part of the business It is, however, observed by the Hon'ble Supreme Court that the words in Section 141(1) of the Act need not be incorporated in a complaint as magic words. But, at the same time, the substance of the allegations read as a whole, should answer and fulfil the requirements of the ingredients of the said provision. 22 If a mere reproduction of the wording of Section 141 (1) in the complaint is sufficient to make a person liable to face prosecution, virtually every officer / employee of a company without exception could Crl.M.C. Nos. 450, 501 & 503 of 2010 Page 13 of 24 be impleaded as an accused by merely making an averment that at the time when the offence was committed he was in-charge of and was responsible to the company for the conduct and business of the company. This