Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 1 of 27 IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 9th January 2008 Date of decision: 28th January 2008 CRL.M.C. 1901/2004 & Crl.M.A. No. 6172/2004 R.S. RATHORE ..... Petitioner Through S/Shri Vijay Nair with Sumesh Dhawan and Vikas Chandel, Advocates. versus THE RESERVE BANK OF INDIA & ORS. ..... Respondents Through Mr. Jayant Bhushan, Senior Advocate with Mr. Gajinder Kumar and Ms. Kiran Jai, Advocates for RBI. CRL.M.C. 1914/2004 & Crl.M.A. No. 6229/2004 D.G. RAMAIAH ..... Petitioner Through S/Shri Vijay Nair with Sumesh Dhawan and Vikas Chandel, Advocates. versus THE RESERVE BANK OF INDIA & ANR. ..... Respondents Through Mr. Jayant Bhushan, Senior Advocate with Mr. Gajinder Kumar and Ms. Kiran Jai, Advocates for RBI. CRL.M.C. 1953/2004 & Crl.M.A. No. 6392/2004 S.S. KARNIK ..... Petitioner Through S/Shri Vijay Nair with Sumesh Dhawan and Vikas Chandel, Advocates. versus THE RESERVE BANK OF INDIA & ANR. ..... Respondents Through Mr. Jayant Bhushan, Senior Advocate with Mr. Gajinder Kumar and Ms. Kiran Jai, Advocates for RBI. Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 2 of 27 CORAM: HON'BLE DR. JUSTICE S. MURALIDHAR 1. Whether Reporters of local papers 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 Digest? Yes JUDGMENT Dr. S. Muralidhar, J. 1. These are three petitions under Section 482 of the Code of Criminal Procedure (`CrPC‟) seeking the quashing of a Criminal Complaint titled “Reserve Bank of India v. Kuber Auto General Finance & Leasing Ltd. & Ors.” and an Order dated 18th December 2003 by which the learned Metropolitan Magistrate, New Delhi (`MM‟) dismissed the application for recall of the summoning order dated 21st September 1999. Since the three petitions are directed against a common criminal complaint, summoning order, and the order dismissing the application for recall, they are being disposed of by this common judgment. 2. In 1999, a complaint was filed by the Reserve Bank of India (`RBI‟) against Kuber Auto General Finance & Leasing Limited (hereafter the `Company‟) and six others who are described in the complaint as its Directors as indicated in the Annual Report of the Company for the year ending 31st March 1998. The complaint states that the Company submitted an application on 3rd July 1997 to the complainant RBI under Section 45 IA of the Reserve Bank of India Act, 1934 (`Act‟) for grant of a certificate of registration for carrying on business as a non-banking financial company (NBFC). It is then stated that for the purposes of examining that application, the RBI sought to scrutinize the books of accounts of the Company. It is Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 3 of 27 stated that although the Managing Director of the Company and its Directors did not allow such scrutiny, upon the persistence of the officials of the RBI, a few computer print outs and security documents were made available for scrutiny on 30th January 1999. It is stated in the complaint that the scrutiny of those documents revealed three specific violations: (a) That the Company had classified some of the sub-standard loans and advances as standard assets thereby violating Para 7(1) of the NBFC Prudential Norms (Reserve Bank) Directions, 1998, and therefore, there has been a violation punishable under Sections 58(B)(5)(aa) of the Act. (b) The Company had failed to maintain a consolidated register of branches at its registered office of the receipt and repayment or renewal deposits for at least a period of eight calendar years and thus had violated para 16 of the aforementioned statutory directions attracting the penalty under Section 58B(5) (aa) of the Act. (c) Cheques had been drawn in favour of depositors despite that there being insufficient balance in the account of the Company, as a result of which a large number of cheques had been dishonoured. However, on the basis of such cheques, the Company had reduced its deposit liabilities artificially in its books and accounts and therefore had violated the statutory direction contained in para 16 (1) of the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1998 which is also punishable under Section 58B(5) (aa) of the Act. 3. The complaint proceeds to aver that in terms of Section 58C of the RBI Act where the default is committed by a company “every person who at the time the contravention or default was committed was in charge of or was responsible to the company for the conduct and business of the company, as well as the company, shall be deemed to be guilty for the contravention or Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 4 of 27 default and shall be liable to be proceeded against and punished accordingly”. In this regard, the key averment concerning the three petitioners here, who according to the RBI, were Directors of the Company reads as under: “10. In the present case, the offences have been committed by the first accused company. The accused Nos. 2 to 7 are the directors, who at the time the contravention or default was committed or in other words, when the offences were committed, were in- charge of and were responsible to the company for the conduct of business of the company. This position is supported by the responsibility of the directors to the conduct of the business of the company contained in the Article 142 of the Articles of Association of the company and also by the specific provisions of Sec. 5 of the Companies Act, 1956.” (emphasis supplied) 4. Preceding the filing of the complaint, the RBI had an inspection conducted and had also placed before the Magistrate the report of such inspection. The petitioners have placed on record a copy of the Inspection Report dated 29/30th January 1999 which is shown to have been filed by RBI in the Court of the learned MM on 18th May 1999. On 21st September 1999, the following summoning order was passed by the Magistrate: “File perused. The Complaint is made by the Public Servant in discharge of his official duties so the pre-summoning evidence of the Complainant is dispensed with under Section 200 of the Cr.PC. After perusing the material on record I am of the opinion that there is sufficient ground for proceeding against the accused person under section 58-B & 58-C of the RBI Act. So the accused be summoned on PF & RC on 08.03.2000. Metropolitan Magistrate 21.09.1999” 5. Thereafter each of the petitioners here filed an application for recall of the Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 5 of 27 summoning order, and for discharge from the case. In these applications, it was stated that none of these petitioners, was any longer a Director of the Company. It was stated that Mr. R.S. Rathore had resigned on 5th January 1999, Mr.D.G. Ramaiah had resigned on 4th February 1999 and Mr. S.S. Karnik had resigned on 29th October 1998. Form 32 in terms of the Companies Act intimating the change in the Board of Directors of the Company was filed by the Company later but this was not due to the fault of the petitioners. The fact remained that by the time the complaint was filed on 12th May 1999 each of them had ceased to be a Director. The learned MM dismissed these applications by the following order dated 18th December 2003: “An application seeking exemption of AR of the Complainant has been moved. Heard he is exempted from personal appearance for today. None for accused no.1. Accused No. 5, 6 & 7 have been exempted till disposal of the application for discharge. Accused No. 2,3 & 4 are absent. Matter is listed for today for orders on the application of accused no. 2 to 7 for discharge. Arguments on the same have already been advanced. Relevant provisions of law and precedents on the point have been perused. All the accused persons have been summoned vide order dated 21.09.2001 of the LD. Predecessor of this court and I find that the reasons for summoning of the accused are mentioned in the order. I do not find any reason to deviate from the opinion expressed by my Ld. Predecessor. The contentions of the accused persons cannot be considered at this stage and can be decided only after adducing evidence by both the sides. In the circumstances as the application for discharge of accused no. 2 to 7 are without merits the same are hereby dismissed matter be listed for precharge evidence.” 6. Thereafter the present petitions were filed. While directing notice to issue to the respondents on 28th July 2004, this Court passed the following order in Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 6 of 27 one of the cases, i.e. Crl.M.C 1901/2004: “Cr. M.C. 1901/2004 & Crl.M.6172/2004 Learned counsel for petitioner submits that petitioner specifically pleaded before the learned trial court that he after his retirement from the Government service was only engaged as a non-Executive Director for consultations and resigned from the Board of Directors way back in January, 1999 and that nothing incriminating against him indicating that he was In-charge or responsible for conduct of day-to-day management of the accused M/s. Kuber Auto General Finance & Leasing Ltd., was placed on record. Learned trial court dismissed the application without dealing with the issues raised. Notice for the next date. At this stage, learned counsel for petitioner submits that the petitioner is represented by a counsel, whose power of attorney is on record; who has full instructions in the matter, the case is at the preliminary stage and the presence of the applicant is not required for further progress in the case; that the petitioner will be present as and when ordered by the Court, therefore, he be permitted to be represented through his counsel. In view of the above, petitioner may move an application for exemption before the trial court and if the above conditions are satisfied, learned trial court will consider the application for exemption favourably. List on 21st September, 2004.” 7. A reply has been filed by the complainant RBI in which it has been contended that the accused Company which was incorporated on 1st November 1993 filed an application on 3rd July 1997 with the RBI for grant of certificate of registration as an NBFC. During the processing of the said application, an inspection of the Company was conducted by the RBI on 29th and 30th January 1999 which revealed the commission of various irregularities. The RBI then issued a show cause notice to the Company on 19th March 1999. Neither the Company nor its Directors gave a satisfactory explanation and accordingly the application for grant of certificate of Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 7 of 27 registration was rejected. Even though the Company had stopped accepting public deposits from 1st January 1998 onwards, the total figure of unpaid and matured deposits and non-convertible debentures stood at Rs. 295.06 lakhs and Rs. 209.76 lakhs respectively as on 31st December 1998. It is contended that the offences are of a continuing nature, and these offences were detected for the first time only during the inspection. 8. The learned counsel for the Petitioners contends that as on the date of the issuance by the RBI of the show cause notice, and on the date of filing of the criminal complaint, each of threes three Directors had ceased to function as such. Two of them, i.e., Shri Rathore, and Shri Karnik had resigned even before the date of inspection. Shri Ramaiah had resigned soon after on 4th February 1999. Further, it was not enough to merely state in the complaint that these persons were in charge of the affairs of the Company. It had to be shown that in fact they were in fact in charge of its affairs on the date of commission of the offence by the Company. The inspection report of the RBI, which is available in the record before the learned MM showed that the factual position was to the contrary. The learned MM did not refer to this report at all, and erroneously proceeded to summon these accused although the requirement of Section 58 C (2) of the RBI Act was not satisfied. 9. Counsel for the petitioners contends that the wording of Section 58 C (2) RBI Act concerning liability of Directors where the offence is committed by a Company is in pari materia with Section 141 of the Negotiable Instruments Act 1881 („NI Act‟). Accordingly it is submitted that the decisions of the Supreme Court rendered in the context of Section 141 NI Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 8 of 27 Act would equally apply to the instant case in order to test the individual liability of the petitioner Directors for the offence under Section 58 C (2) RBI Act. A reference is made to the judgments in S.M.S. Pharmaceuticals v. Neeta Bhalla 2005 VIII AD (SC) 107; Pepsi Foods Limited v. Special Judicial Magistrate (1998) 5 SCC 749; K. Srikanth Singh v. North East Securities Limited 2007 (9) SCALE 371, and the judgment of the Bombay High Court in Saumir Dilip Mehta v. State of Maharashtra 2003(113) Company Cases 443. 10. Counsel for the petitioners also refers to the decison of the Rajasthan High Court in Ravindra Narayan v. Registrar of Companies 1994 (3) Company Law Journal 416 (Raj) in which, in the context of the failure of a company to file balance sheets as stipulated under Section 220 of the Companies Act, 1956, the Court held that the definition of the expression “officer who is in default” in Section 5 of that Act would be determinative of who could be made liable for the default committed by the Company. The High Court held that only be the Managing Director or whole-time Directors, and the Managers could be held liable and not the non-executive Directors. Based on the judgment in Ravindra Narayan, the Department of Company Affairs issued a Circular on 24th June 1994 directing that prosecution should be launched against only such persons who were officers- in-default in terms of Section 5 of the Companies Act. Drawing an analogy, it is submitted by the learned counsel for the Petitioners that even for the purposes of RBI Act, it is only those persons who could be characterised as officers-in-default who may made liable for the offence committed by a company. It is submitted that in the instant case, there is no Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 9 of 27 such averment in the complaint and in fact none of the Petitioners answers that description. 11. Appearing for the complainant RBI, Mr. Jayant Bhushan, the learned Senior Counsel, contends that in order to satisfy himself that the complaint discloses the commission of a cognizable offence in terms of Section 58 C (2) RBI Act, the learned MM has only to see if the complaint contains the necessary averments to the effect that the named individual was a director who, at the time the offence was committed, “was in charge of and was responsible to the company for conduct of the business of the company.” If it does, then the learned MM has no option but to issue summons to the accused. He further refers to the guidelines issued by the RBI as regards compliance with the relevant provisions of the RBI Act, and in particular Section 58C which makes it clear that where the default is committed by a company, then every person in charge of the affairs of such company, would be liable. He reiterates that this is a continuing offence, and therefore, the fact that two of the Board of Directors had resigned at the time of inspection, cannot be determinative of their respective liabilities for violation of the provisions of the RBI Act. He submits that even if one were to draw comparison with Section 141 NI Act, the question whether in fact any of these Directors were in charge of the affairs of the company at the time of the commission of the offence, can be determined only at the trial and not at the pre-summoning stage. Further the complainant RBI seeks to make out a case against the petitioners not only on the basis of Section 58 C (1) but Section 58 C (2) which says that such of those directors who have connived in or to whom the commission of the offence by the company can be Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 10 of 27 attributed to “shall also be deemed to be guilty of the offence.” He submits that it was not incumbent on the MM to look into the inspection report which would be proved in accordance with law at the time of trial. Referring to the judgment in S.M.S Pharmaceuticals, Mr. Bhushan submits that this Court should exercise the power of quashing extremely sparingly, and this is not a case which can be categorized as one in which, when on the reading of the complaint as a whole, no offence can be said to have been made out. 12. As regards the judgment of the Rajasthan High Court in Ravindra Narayan, Mr. Jayant Bhushan sought to point out that the wording of Section 220 read with Section 5 of the Companies Act was not in pari materia with the relevant provisions of the RBI Act. The question whether the proviso to Section 58-C of the RBI Act would apply, could be determined only at the trial. 13. At the outset it requires to be noticed that the present complaint has been filed specifically in relation to the offences by the Company and its Directors under Sections 58-B and 58-C of the RBI Act. The said two sections read as under: “58B–Penalties. (1) Whoever in any application, declaration, return, statement, information or particulars made, required or furnished by or under or for the purposes of any provisions of this Act, or any order, regulation or direction made or given thereunder or in any prospectus or advertisement issued for or in connection with the invitation by any person, of deposits of money from the public wilfully makes a statement which is false in any material particular knowing it to be false or wilfully omits to make a material statement shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine. Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 11 of 27 (2) If any person fails to produce any book, account or other document or to furnish any statement, information or particulars which, under this Act or any order, regulation or direction made or given thereunder, it is his duty to produce or furnish or to answer any question put to him in pursuance of the provisions of this Act or of any order, regulation or direction made or given thereunder, he shall be punishable with fine which may extend to two thousand rupees in respect of each offence and if he persists in such failure or refusal, with further fine which may extend to one hundred rupees for every day, after the first during which the offence continues. (3) If any person contravenes the provisions of section 31, he shall be punishable with fine which may extend to the amount of the bill of exchange, hundi, promissory note or engagement for payment of money in respect whereof the offence is committed. (4) If any person discloses any credit information, the disclosure of which is prohibited under section 45E, he shall be punishable with imprisonment for a term which may extend to six mounts, or with fine which may extend to one thousand rupees, or with both. [(4A) If any person contravenes the provisions of sub-section (1) of section 45-IA, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to five years and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees. (4AA) If any auditor fails to comply with any direction given or order made by the Bank under section 45MA, he shall be punishable with fine which may extend to five thousand rupees. (4AAA) Whoever fails to comply with any order made by the Company Law Board under sub-section (2) of section 45QA, shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to a fine of not less than rupees fifty for every day during which such non- compliance continues.] (5) If any person [other than an auditor]-(a) receives any deposit in contravention of any direction given or order made under Chapter IIIB; or [(aa) fails to comply with any direction given or order made by the Bank under any of the provisions of Chapter IIIB; or] Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 12 of 27 (b) issues any prospectus or advertisement otherwise than in accordance with section 45NA or any order made under section 45], as the case may be, he shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine which may extend,- (i) in the case of a contravention falling under clause (a), to twice the amount of the deposit received; and (ii) in the case of a contravention falling under clause (b), to twice the amount of the deposit called for by the prospectus or advertisement. [(5A) If any person contravenes any provision of section 45S, he shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of deposit received by such person in contravention of that section, or two thousand rupees, whichever is more, or with both: Provided that in the absence of special and adequate reasons to the contrary to be mentioned in the judgment of the court, the imprisonment shall not be less than one year and the fine shall not be less than one thousand rupees. (5B) Notwithstanding anything contained in section 29 of the Code of Criminal Procedure, 1973 (2 of 1974), it shall be lawful for Metropolitan Magistrate or a Judicial Magistrate of the first class to impose a sentence of the fine in excess of the limit specified in that section on any person convicted under sub-section (5A).] (6) If any other provision of this Act is contravened of if any default is made in complying with any other requirement of this Act or of any order, regulation or direction made or given or condition imposed thereunder, any person guilty of such contravention or default shall be punishable with fine which may extend to two thousand rupees and where a contravention or default is a continuing one, with further fine which may extend to one hundred rupees for every day, after the first, during which the contravention or default continues. 58C-Offences by companies. (1) Where a person committing a contravention or default referred to in section 58B is a company, every person who, at the time the contravention or default was committed, was in charge of, and was responsible to, the company for the conduct of the business of the Crl.M.C.Nos. 1901, 1914 and 1953/2004 Page 13 of 27 company, as well as the company, shall be deemed to be guilty of the contravention or default and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any such person liable to punishment if he proves that the contravention or default was committed without his knowledge or that he had exercised all due diligence to prevent the contravention or default. (2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the same was committed with the consent or connivance of, or is attributable to any neglect on the part of,