THE HON’BLE SRI JUSTICE SAMUDRALA GOVINDARAJU CRIMINAL APPEAL No.334 of 2008 Date: 14.02.2011 Between : M/s Damani Shipping Pvt Ltd. … Appellant/Complainant And 1. State of A.P.rep. by Public Prosecutor & 3 others. … Respondents/Accused No.1 &3 HON’BLE SRI JUSTICE SAMUDRALA GOVINDARAJULU CRIMINAL APPEAL No.334 of 2008 JUDGMENT: The complainant filed this appeal against recording of acquittal of A1 and A3 in CC.No.1634 of 2004 by The XI Additional Chief Metropolitan Magistrate, Secunderabad by judgment dated 07.12.2007. 2. The complainant-appellant compounded the offence insofar as A2/3rd respondent herein and had withdrawn the complaint even in the lower Court as against A2. So, this appeal is only insofar as liability of A1 and A3 is concerned for offence punishable under Section 138 of the Negotiable Instruments Act (in short, the Act). It is alleged by the complaint that for payment of money due to the complainant company, A1 company represented by A2 and A3 issued two cheques dated 12.08.2004 for Rs.10,00,000/- each and that when those cheques were presented for encashment, they were dishonoured for want of sufficient funds and that after issue of statutory notices to A1 to A3 for dishonour of those two cheques, both the parties have entered into a memorandum of understanding, by which the accused agreed to pay the amount due in instalments and issued the following post dated cheques: Sl.No. Cheque No. Date Cheque Amount 1. 164087 31-10-04 Rs.4,00,000/- 2. 164088 08-11-04 Rs.3,00,000/- 3. 164089 15-11-04 Rs.3,00,000/- 4. 164090 30-11-04 Rs.2,00,000/- 5. 164091 15-12-04 Rs.2,00,000/- 6. 164092 31-12-04 Rs.2,00,000/- 7. 164093 08-01-05 Rs.2,00,000/- 8. 164095 15-01-05 Rs.2,67,730/- 3. It is further alleged that when the complainant presented cheque bearing No.164087 dated 31.10.2004 for Rs.4,00,000/- for collection on 02.11.2004, the same was dishonoured by the banker of the accused for want of sufficient funds. Ex.P3 is the dishonoured cheque. Ex.P5 is the bank return memo. After issuing Ex.P7 statutory notice, which was received by A1 and A3 as per Exs.P8 and P10, the complainant filed the complaint in the lower Court. The lower Court acquitted A3 on the ground that he is not a signatory of Ex.P3 cheque and that even as per Ex.P6 memorandum of understanding dated 20.10.2004 entered into between the parties, A3 was only a sleeping Director. The lower Court did not give any finding with regard to guilty or not guilty o A1 company and did not record either conviction or acquittal of A1 company. 4. No doubt, in Ex.P6 memorandum of understanding, in pursuance of which the accused issued Ex.P3 cheque, it is mentioned that A1 company is represented by A2 as Chief Executive and A3 as sleeping director. The word “sleeping” in Ex.P6 memorandum of understanding was added by handwriting. This Court heard something about sleeping partners in a partnership firm; and never heard about a sleeping director in the legal parlance in any company. The companies Act, 1956 does not recognize any distinction between a sleeping director or a working director. Such terminology is alien to the company law. 5. In this case, Ex.P3 cheque was signed by A2 only representing A1 company. A3 is not a signatory in Ex.P3 cheque. Liability of A3 in this case has to be determined with reference to his position as director in A1 company. 6. Section 141 of the Act deals with offences by companies, relevant portion of sub-section(1) thereof reads as follows: “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 the proceeded against and punished accordingly:” 7. In the complaint, the relevant pleading in respect of A1 to A3 under Section 141 of the Act reads as follows: “It is submitted that accused No.1 is a private limited company and accused No.2 is the Chief Executive and accused No.3 is the Director of the 1st accused company. Accused No.2 & 3 being the chief Executive and Director of the 1st accused company are responsible for the day to day affairs of the company.” 8. It is contended by the appellant’s counsel that inspite of A3 being a non-signatory of Ex.P3 cheque, he cannot avoid penal liability under Section 138 of the Act because, he has been a director incharge of and responsible for conduct of business of A1 company. Reliance was placed on S.M.S. Pharmaceuticals Limited Vs. Neeta Bhalla[1] of the Supreme Court on this aspect. It is pointed out that as per Section 2(13) of the Companies Act, 1956, the word “Director” is defined as including any person occupying the position of director, by what ever name called. After referring to various provisions of the companies Act, 1956 and case law, the Supreme Court held as follows: 20(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.” 9. The position of a director in a company is lucidly narrated in S.M.S.Pharmaceuticals Limited (1supra) with reference to the provisions of the companies Act in the following manner: “10. There is a whole chapter in the Companies Act on directors, which is Chapter II. Sections 291 to 293 refer to powers of Board of Directors. A perusal of these provisions shows that what a Board of Directors is empowered to do in relation to a particular company depends upon the role and functions assigned to Directors as per the Memorandum and Articles of Association of the company. There is nothing which suggests that simply by being a director in a Company, one is supposed to discharge particular functions on behalf of a company. It happens that a person may be a director in a company but he may not know anything about day-to-day functioning of the company. As a director he may be attending meetings of the Board of Directors of the Company where usually they decide policy matters and guide the course of business of a company. It may be that a Board of Directors may appoint sub-committee consisting of one or two directors out of the Board of the Company who may be made responsible for day to day functions of the Company. These are matters which for part of resolutions of Board of Directors of a Company. Nothing is oral. What emerges from this is the role of a director in a company is a question of fact depending on the peculiar fats in each case. There is no universal rule that a director of a company is in charge of its everyday affairs.” 10. Thus, the Supreme Court laid down that there is no universal Rule that a director of a company is incharge of its every day affairs. It all depends upon facts and circumstances of each case. In the case on hand, except reiterating the allegations made in the complaint, PW1 did not adduce any evidence to show the role of A3 in A1’s company by the date of issue of Ex.P3 cheque in which A3 is not a signatory. No evidence is produced by the complainant to show that A3 was responsible for day- to-day functions of the company either on the date of issue of Ex.P3 or on the date of filing of the complaint in the lower Court. At this stage, mentioning of A3 as sleeping director in Ex.P6 memorandum of understanding, though such term is not recognized by the company law, assumes importance. The said term indicates that A3 was not incharge of day-to-day functions of A1 company. Therefore, I am of the opinion that the lower Court came to the right conclusion in favour of A3. At the same time, the lower Court failed to see that apart from directors and officers who are incharge of day-to-day functioning of the company, under Section 141 of the Act, the company is equally liable for the offence. The lower Court overlooked the said fact in its judgment. 11. In the result, the appeal is partly allowed convicting the 2nd respondent/A1 company for the offence under Section 138 of the Negotiable Instruments Act and sentencing A1 company to pay fine of Rs.4,00,000/-; and the appeal is partly dismissed insofar as the 4th respondent/A3 is concerned. ___________________________ SAMUDRALA GOVINDARAJULU, J Dated: 15th February, 2011 ysk HON’BLE SRI JUSTICE SAMUDRALA GOVINDARAJULU CRIMINAL APPEAL No.334 of 2008 DATED:15.02.2011 ysk [1] 2005(1) Decisions Today(SC894)