THE HON’BLE SRI JUSTICE G.KRISHNA MOHAN REDDY CRIMINAL PETITION No.5545 OF 2008 Dated 18th March, 2011 Between: N.Lakshman …..Petitioner And M/s. Pavithra Cotton Company, Rep. by its Sole Proprietor Sriram Rama Rao, Chilakaluripet, Guntur District and another …..Respondents This court made the following : THE HON’BLE SRI JUSTICE G.KRISHNA MOHAN REDDY CRIMINAL PETITION No.5545 OF 2008 ORDER: 1. This Criminal Petition is filed under Section 482 of Cr.P.C. to quash proceedings in C.C. No.81 of 2006 registered on the basis of a complaint filed under Section 200 of Cr.P.C. for offence punishable under Section 138 of Negotiable Instruments Act, 1881 (for short, ‘the N.I. Act’) on the file of the Court of Additional Judicial Magistrate of First Class, Chilakaluripet, Guntur District. 2. The 1st respondent is the complainant and the petitioner is the 5th accused in the calendar case. For the sake of convenience, the parties hereinafter will be referred as they are arrayed in the calendar case. The complaint was filed on the following grounds: The complainant-firm is doing business in cotton and its products at Chilakaluripeta. The 2nd accused is the Director-cum- General Manager of the 1st accused-firm, whereas the accused No.3 is the Chairman and the accused Nos.4 to 7 are the Directors of the 1st accused-firm. The accused Nos.2 to 7 used to involve in the day-to- day business of the 1st accused-firm. The directors and officials of the 1st accused-firm requested the complainant-firm to send cotton bales on credit basis under mutual and consequential agreement orally. Accordingly, the complainant supplied cotton bales under several invoices to the 1st accused-firm. The 1st accused-firm fell due consequently an amount of Rs.80,000/- to the complainant. Thereafter, the Director-cum-General Manager of the 1st accused-firm, who was representing it, had issued cheque bearing No.NON MICR NCW 657771, dated 26-02-2000, for an amount of Rs.80,000/- drawn on Indian Bank, Main Branch, Madurai for the encashment of the due amount. The complainant presented the said cheque through its banker, i.e., Vysya Bank, Guntur Branch, Guntur for collections, but the cheque was returned dishonoured due to insufficiency of funds in the bank account of the 1st accused-firm and the same was intimated by the complainant’s banker (Vysya Bank, Guntur Branch, Guntur) vide memo, dated 3-05-2000 along with a memo given by the Indian Bank, Main Branch, Madurai, dated 24-04-2000 in that context. Further, a statutory notice was issued for complying necessary formalities to the 1st accused-firm, but it was proved futile. Hence, the complaint was filed. 3. The learned Counsel for the petitioner argues as follows: There is only bald allegation to the effect that the petitioner along with the accused Nos.2 to 4, 6 and 7 involved in the day-to-day affairs of the company and there is no material to take cognizance of the case against him. Further he retired from the partnership firm in the year 1998 itself. Hence, the complaint is liable to be quashed so far as the 5th accused is concerned. In support of his contentions, he has relied upon the following decisions reported in 1) K.K. Ahuja Vs. V.K. Vora and another[1], 2) D. Harshendra Kumar Vs. Rebtilata Koley Etc.[2] and 3) S.M.S. Pharmaceuticals Ltd. Vs. Neeta Bhalla and another[3]. 4. On the other hand, it is the contention of learned Counsel for the respondents that the plea of the 5th accused that he retired from the partnership and that he got nothing to do with the issuance of the cheque on the ground that he was not involved in day-to-day affairs of the company are purely questions of fact which can be decided basing upon necessary evidence to be recorded and in fact, there is clear material against him to the effect that he along with the accused Nos.2 to 4, 6 and 7 had participated in the affairs of the company actively and he also issued the cheque along with other accused in the case which cannot be termed to be bald allegations and consequently the question of quashing the calendar case at this stage does not arise so far as the 5th accused is concerned. In this context, he has relied upon the decision reported in Malwa cotton and spinning mills limited Vs. Virsa Singh Sidhu and others[4]. 5. In K.K.Ahuja V. V.K.Vora & another, cited 1st supra, it was alleged that several cheques were issued in favour of the appellant’s proprietary concern M/s. Delhi Paints and Oil Traders by M/s. Motorol Speciality Oils Limited (for short, ‘the company’) and those cheques were dishonoured on the ground of “insufficiency of funds” when they were presented before concerned forum and thereupon complaint was filed against the company (A-1) and 8 directors of it (A-2 to A-9) against whom it was alleged that they were directly and actively involved in the financial dealings of the company and they were also responsible for the issuance of the cheques which were dishonoured and as such they should be punished under Section 138 of the N.I. Act. Then a question arose as to whether there was material to proceed against the directors who did not sign the cheques and whether the proceedings against them were to be quashed or not. It was observed by the Supreme Court examining relevant factors : “To sum up, there is almost unanimous judicial opinion that necessary averments ought to be contained in a complaint before a person 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….……………………………….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.” “What is required is that the persons who are sought to be made criminally liable under Section 141 should be at the time of the offence was committed, in charge of and responsible to the company for the conduct of the business of the company. Every person connected with the company shall not fall within the ambit of the provision. 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. 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 of 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.” “But neither section 141 (1) of the Act, nor the pari material provisions in other enactments give any indication as to who are the persons responsible to the company, for the conduct of the business of the company. Therefore, we will have to fall back upon the provisions of companies Act, 1956 which is the law relating to and regulating companies. Section 291 of the said Act provides that subject to the provisions of that Act, the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do. A company though a legal entity can act only through its Board of Director. The settled position is that a Managing Director is prima facie in charge of and responsible for the company’s business and affairs and can be prosecuted for offences by the company. But insofar as other directors are concerned, they can be prosecuted only if they were in charge of and responsible for the conduct of the company’s business. A combined reading of Sections 5 and 291 of Companies Act, 1956 with the definitions in clauses (24), (26), (30), (31), (45) of section 2 of that Act would show that the following persons are considered to be the persons who are responsible to the company for the conduct of the business of the company :- (a) the managing director/s ; (b) the whole-time director/s ; (c) the manager ; (d) the secretary ; (e) Any person in accordance with whose direction or instructions the Board of directors of the company is accustomed to act ; (f) Any person charged by the Board with the responsibility of complying with that provision (and who has given his consent in that behalf to the Board); and (g) Where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors. It follows that the other employees of the company cannot be said to be persons who are responsible to the company, for the conduct of the business of the company. 6. In D. Harshendra Kumar Vs. Rebatilata Koley Etc., cited 2nd supra and in S.M.S. Pharmaceuticals Ltd Vs. Neet Bhalla and another, cited 3rd supra, similar observations were made under similar circumstances. 7. The principles laid down in the decisions cited above make it very clear that in order to prosecute a particular individual under Section 138 of the N.I. Act for dishonouring of cheques there should be sufficient material to the effect that he was responsible for the management of the corresponding business including the question of issuance of the cheques by himself or along with others and for doing so mere allegation that he was in charge of the business and he was also responsible for the issuance of cheques which can be easily alleged without giving clear and categorical instances of his involvement therein is not suffice. 8. The Criminal justice system mandates that unless there is material to prosecute a person on a Criminal charge no cognizance of the case should be taken other wise it amounts to abuse of process of law and it results unnecessary harassment of innocents. 9. In Malwa cotton and spinning mills limited Vs. Virsa Singh Sidhu and others cited 4th supra, it was observed under similar circumstances : “19. Therefore, a person in the commercial world having a transaction with a company is entitled to presume that the Directors of the company are in charge of the affairs of the company. If any restrictions on their powers are placed by the memorandum or articles of the company, it is for the Directors to establish it at the trial. It is in that context that Section 141 of the Negotiable Instruments Act provides that when the offender is a company, every person, who at the time when the offence was committed was in charge o and was responsible to the company for the conduct of the business of the company, shall also be deemed to be guilty of the offence along with the company. It appears to us that an allegation in the complaint that the named accused are Directors of the company itself would usher in the element of their acting for and on behalf of the company and of their being in charge of the company”. 10. The observations made by the Supreme Court in the decision 4th cited supra holds good if there is a prima-facie material to proceed against the petitioner/5th accused in the case. However, in view of the later decisions of the Supreme Court discussed earlier different view of the matter is to be taken. 11. Only bald allegations are made against the 5th accused without any supporting material. Further, when there is clear material to the effect that a particular individual was in charge of the Management and issued the cheque, he can be prosecuted accordingly. So far as his retirement from the partnership is concerned there is no sufficient material. 12. Therefore, the contentions raised by the learned counsel for the respondents are not tenable, whereas, the contentions raised by the learned counsel for the petitioner are to be upheld. In the result, the Criminal Petition is allowed and the proceedings in C.C. No.81 of 2006, pending on the file of Additional Judicial Magistrate of First Class, Chilakaluripet, Guntur District, are quashed so far as the 5th accused is concerned. __________________________ G. KRISHNA MOHAN REDDY, J 18th March, 2011 Dsh/Tjmr THE HON’BLE SRI JUSTICE G.KRISHNA MOHAN REDDY CRIMINAL PETITION No.5545 OF 2008 Date: 18th March, 2011 [1] CDJ 2009 SC 1340 [2] CDJ 2011 SC 111 [3] CDJ 2005 SC 692 [4] (2008) 17 SCC 147