IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 28-3-2011 CORAM THE HONOURABLE MR. JUSTICE G.M. AKBAR ALI CRL.O.P.Nos.20185, 20186 and 20489 of 2010 Karthikeya V Sarabhai ... Petitioner /Accused No.4 in all the petitions vs M/s TVS Net Technologies Ltd rep by its Manager-Finance Gowthar K. Moorthy having its Corporate Office at 7th floor, MPL Silicon Towers 23/1 Velachery Tambaram Main Road Pallikaranai Chennai-600 100 ... Respondent/Complainant in all the petitions Criminal Original Petitions filed under Section 482 Cr.P.C. for the reliefs as stated therein. For petitioner : Mr. Habibullah Basha, Senior Counsel for Mr. Sivanandaraj For respondent : Mr.B. Sriramulu Senior Counsel for Mr.A. Sasidharan COMMON ORDER By consent of both sides, the matter has been taken up for final hearing. The petitions are filed seeking a direction to call for the records in C.C.Nos.2561, 2560 and 5268 of 2010 on the file of the learned XIII M.M, Egmore, Chennai, and IX M.M, Saidapet Chennai and quash the same. 2. The petitioner is arrayed as accused number four in a criminal complaint lodged by the respondent under Sec.138 read with Sec.141 of the Negotiable Instruments Act (hereinafter referred to as "Act") before the Court of the learned XIII M.M., and IX M.M at Saidapet, Chennai. 3. The respondent/complainant is a private limited company having its Office at Chennai. The first accused one, M/s ORG informatics Limited is also a company incorporated and represented https://hcservices.ecourts.gov.in/hcservices/ by its Managing Director and other Directors who have been arrayed A.2 to A.6. In pursuant to a Memorandum of Understanding between the complainant company and the accused company, the accused Company placed purchase orders and issued various cheques signed by the authorised signatory/A.3. The following are the cheques issued by the accused company which are subject matters of section 138 N.I.Act proceedings against which criminal O.P.s are initiated: Crl.O.P.No.20185 of 2010 Cheque no. Date 267107 31.8.2009 267111 31.8.2009 267108 31.8.2009 Crl.O.P.No.20184 of 2010 267106 31.8.2009 267103 31.8.2009 Crl.O.P.NO.20489 of 2010 267148 16.8.2009 267147 16.8.2009 174601 16.8.2009 4. The cheques were drawn on ICICI Bank, New Delhi. The complainant company presented these cheques on various dates with their bankers, M/s Axis Bank Limited, Mount Road, Madras. The cheques were returned with an endorsements "payment stopped by the drawer" and "account frozen". Therefore, the complainant company issued statutory notice on various dates calling upon the accused company and its Directors to pay the entire cheque amount within 15 days as per the provisions of the Act. The Company and the other Directors received the notice. The petitioner sent replies to all these notices stating that he is only a non-executive Director and he was not in-charge and was not responsible to the Company for conduct of the business and he had no knowledge about the transaction and issuance of cheques and thereby he denied the liability. Since the payments were not made within the stipulated time, the complainant company has initiated the above said proceedings. Aggrieved by taking cognizance against the petitioner, he is before this court to quash the proceedings invoking the jurisdiction under Sec.482 Cr.P.C. 5. The points raised in all these petitions are same viz; whether the petitioner was in-charge and responsible to the conduct of the business of the Company and whether necessary allegations are made in the complaints to proceed against the petitioner for an alleged offence under Sec.138 read with sec.141 of the Act. 6. Since a common point is raised in all these petitions, they are disposed of by a common order. 7. Mr. Habibullah Badsha, learned senior counsel who appeared for M/s Sivanandaraj and Aparna Mukerjee, would submit https://hcservices.ecourts.gov.in/hcservices/ that merely being a Director of the Company would not make a person liable for the dishonour of the cheque issued by the accused Company. The learned senior counsel pointed out that for launching a prosecution against the petitioner, there must be specific allegation in the complaint as to the part played by the petitioner. In the absence of any such allegation, the liability cannot be fastened on a Director who is designated as non- executive Director. The learned senior counsel pointed out that in the complaint, a general statement was made that A.2 to A.6 are in charge and responsible for the day-to-day operation as well as responsible for taking all financial and policy decisions of A.1 company. According to the learned Senior counsel except this vague allegation, there is no other averments regarding the part played by the petitioner in the transaction for a vicarious liability. The learned senior counsel further pointed out that as per Form-32 of Registrars of Company, the petitioner is designated as non- executive Director and this fact has also been brought to the notice of the complainant company by way of reply to the statutory notice. The learned senior counsel further pointed out that in spite of that, the complainant company has chosen to prosecute the petitioner and such proceedings is an abuse of process of law which is liable to be quashed. 8. The learned senior counsel relied on the following case laws in support of his contentions: N.K. Wahi vs Shekhar Singh and others (2007) 9 SCC 481 (K. Srikanth Singh vs North East Securities Ltd and another) (2007) 12 SCC 788 (DCM Financial Services Limited vs J.N. Sareen and another) (2008) 8 SCC 1 (Ramraj Singh vs State of Madhya Pradesh and another) (2009) 6 SCC 729 (National Small Industries Corp Ltd vs Harmeet Singh Pairtal and another) CDJ 2010 SC 153 9. Per contra, Mr.B. Sriramulu, the learned senior counsel for Mr.A.Sasidharan counsel for the respondent/complainant would submit that clear allegations were made to show that the petitioner is a Director who was in-charge and responsible for the day-to-day operations and also responsible for taking all financial and policy decisions of the Company. The learned senior counsel further submitted that only during the course of trial, material evidence could be produced to show that the petitioner was also in-charge and responsible for the conduct of the business of the Company and quashing of the proceedings is unwarranted at this stage. He also pointed out that the petitioner and his family are holding https://hcservices.ecourts.gov.in/hcservices/ substantial shares in the accused company, therefore, was and is, in a position to take financial and policy decision. He further pointed out that having received the statutory notice, the petitioner has failed to repay the amount and therefore, liable for the criminal prosecution. 10. The learned senior counsel relied on the following case laws: N.K. Wahi vs Shekhar Singh and others (2007) 9 SCC 481 2007 5 SCC 108 (N. Rangachari vs Bharat Sanchar Nigam Ltd) Paresh P. Rajda vs State of Maharashtra and another (2008) 7 SCC 442 Malwa Cotton and Spinning Mills Limited vs Virsa Singh Sidhu and others (2008) 17 SCC 147 11. I have heard and perused the materials available on record. 12. For the dishonour of various cheques issued on behalf of the accused company, criminal proceedings were initiated against the Company and as well as against all the Directors under Sec.138 and 141 of the Act. Sec.141 of the Act reads as follows: 141. Offences by Companies - () If the person committing an offence under Section 138 is a Company, every person who, at the time of 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 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. Provided further that where a person is nominated as a Director https://hcservices.ecourts.gov.in/hcservices/ of a Company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter. (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. 13. The issue whether all the directors of a company is liable to be prosecuted was under the consideration of Hon'ble Supreme Court on many occasions. There are catena of decisions rendered by the Hon'ble Supreme Court regarding the liability of the Directors of the Company. It is well settled that to launch a prosecution for the offence by a Company and its Directors, there must be specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegations as to how the Directors were in-charge and responsible for the conduct of the business of the Company. 14. In the case of SMS Pharmaceuticals vs Neeta Bhalla (2005 8 SCC 89), the Supreme Court held as follows: "19.... (a) It is necessary to specifically aver in a complaint under Section 141 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. This averment is an essential requirement of Section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of https://hcservices.ecourts.gov.in/hcservices/ Section 141 cannot be said to be satisfied. (b) 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. 15. Following the above judgment cited supra, the Apex Court has held in N.K. Wahi vs Shekhar Singh and others (2007) 9 SCC 481 "7. This provision clearly shows that so far as the companies are concerned if any offence is committed by it then every person who is a Director or employee of the Company is not liable. Only such person would be held liable if at the time when offence is committed he was in charge and was responsible to the company for the conduct of the business of the company as well as the Company. Merely being a Director of the Company in the absence of above factors will not make him liable. 8. To launch a prosecution, therefore, against the alleged Directors there must be a specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegation as to how the Directors are in-charge and responsible for the conduct of the business of the Company. The description should be clear. It is true that precise words from the provisions of the Act need not be reproduced and the court can always come to a conclusion in facts of each case. But still, in the absence of any averment or specific evidence the https://hcservices.ecourts.gov.in/hcservices/ net result would be that complaint would not be entertainable. 16. In the case of (K. Srikanth Singh vs North East Securities Ltd and another) (2007) 12 SCC 788, the Apex Court has held as follows: "4. It is not in dispute that for showing a vicarious liability of a Director of a company upon the complaint it is incumbent to plead that the accused was responsible to the Company for the conduct of the business of the company. No such allegation having been made in the complaint petition, in our opinion, the High Court was not correct in passing the impugned judgment. The allegation contained in the complaint petition was that all the accused Directors participated in the negotiations for obtaining financial help for Accused 1, which in our opinion, would not give rise to an inference that the appellant was responsible for day-today- affairs of the Company...... 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 the 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 the 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 https://hcservices.ecourts.gov.in/hcservices/ designation in a company may be liable if he satisfies the main requirement of being in charge of and responsible for the conduct of business of a company at the relevant time...." 5. Negotiation for obtaining financial assistance on behalf of the by its Directors itself is not an ingredient for the purpose of constituting an offence under Sec.138 of the Negotiable Instruments Act. Furthermore, a vicarious liability on the part of a person must be pleaded and proved. It cannot be a subject matter of mere inference". 17. In (DCM Financial Services Limited vs J.N. Sareen and another) (2008) 8 SCC 1, which is a case where proceedings were initiated against the accused company and also against the person who signed the cheque when he was Director of the accused company and later resigned from the accused company before bouncing of the cheque. The Hon'ble Supreme Court held, ""19. Section 141 of the Act provides for a constructive liability. A legal fiction has been created thereby. The statute being a penal one, should receive strict construction. It requires strict compliance with the provision. Specific averments in the complaint petition so as to satisfy the requirements of Section 141 of the Act are imperative. Mere fact that at one point of time some role has been played by the accused may not be itself by sufficient to attract the constructive liability under Section 141 of the Act". 18. In (Ramraj Singh vs State of Madhya Pradesh and another) (2009) 6 SCC 729 , the Apex court has again followed the principle laid down in SMS Pharmaceuticals vs Neeta Bhalla (2005 8 SCC 89), and Sabitha Ramamurthiy vs R.B.S Channabasavaradhya (2006) (10) SCC 581 and held that when there was no evidence that the appellant was in-charge and was responsible for the conduct of the business of the Company, the conviction cannot be maintained. 19. In (National Small Industries Corp Ltd vs Harmeet Singh Pairtal and another) CDJ 2010 SC 153 , the Supreme Court held "25. From the above discussion, the following principles emerge: (i) The primary responsibility is on the https://hcservices.ecourts.gov.in/hcservices/ complainant to make specific averments as are required under the law in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no presumption that every Director knows about the transaction. (ii) Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company. (iii) Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make accused therein vicariously liable for offence committed by company along with averments in the petition containing that accused were in-charge of and responsible for the business of the company and by virtue of their position they are liable to be proceeded with. (iv) Vicarious liability on the part of a person must be pleaded and proved and not inferred. (v) If accused is Managing Director or Joint Managing Director then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with. (vi) If accused is a Director or an Officer of a Company who signed the cheques on behalf of the company then also it is not necessary to make specific averment in complaint. (vii) 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." https://hcservices.ecourts.gov.in/hcservices/ 20. Placing strong reliance on the above decisions, Mr. Habibullah Badsha, the learned Senior Counsel would submit that the complaint is bereft of any averments against the petitioner and merely the petitioner being a director and that too a non executive director the vicarious liability can not be fastened against him. According to the Senior counsel the continuance of the proceeding is abuse of process of law. 21. On the other hand, the line of argument of Mr. Sriramulu, the learned Senior Counsel, for the complainant is that necessary averments have been made in the complaint to show that the petitioner was in charge of and responsible to the conduct of the business of the company and only during the course of the trail the liability could be proved and this court need not interfere at this stage. The learned Senior Counsel relied on N.K. Wahi vs Shekhar Singh and others (2007) 9 SCC 481 where the Apex Court has held "it is true that precise words from the provisions of the Act need not be reproduced and the court can always come to the conclusion on facts of each case". 22. In 2007 5 SCC 108 (N. Rangachari vs Bharat Sanchar Nigam Ltd) , the Apex Court has held "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 of 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. https://hcservices.ecourts.gov.in/hcservices/ 23. In Malwa Cotton and Spinning Mills Limited vs Virsa Singh Sidhu and others (2008) 17 SCC 147 , the Apex Court held as follows: "We find that the prayers before the courts below essentially were to drop the proceedings on the ground that the allegations would not constitute a foundation for action in terms of Section 141 of the Act. These questions have to be adjudicated at the trial. Whether a person is in charge of or is responsible to the company for conduct of business is to be adjudicated on the basis of materials to be placed by the parties. Sub section (2) of Section 141 is a deeming provision which as noted supra operates in certain specified circumstances. Whether the requirements for the application of the deeming provision exist or not is again a matter for adjudication during trial. Similarly, whether the allegations contained are sufficient to attract culpability is a matter for adjudication at the trial." 24. In Paresh P. Rajda vs State of Maharashtra and another (2008) 7 SCC 442, the Apex Court has held as follows: "A perusal of the aforesaid paragraphs would show that accused 2 is Paresh Rajda, the Chairman of the Company, and as per the impugned judgment of the High Court, the question of his responsibility for the business of the Company has not been seriously challenged. We, nonetheless, find clear allegations against both the appellant-accused to the effect that they were officers and responsible for the affairs of the Company. We are of the opinion that at a stage where the trial has not yet started, it would be inappropriate to quash the proceedings against them in the light of the https://hcservices.ecourts.gov.in/hcservices/ observations of this court quoted above. We, accordingly, find no merit in the appeals. They are dismissed." 25. The basic principles to bring an action against the directors of the accused company is well settled. In Sabitha Ramamurthiy vs R.B.S Channabasavaradhya (2006) (10) SCC 581 and Saroj Kumar Poddar vs State (NCT of Delhi (2007) (3) SCC 693, the Supeme court held, "14. Section 141 raises a legal fiction. By reason of the said provision, a person although is not personally liable for commission of such an offence would be vicariously liable therefor. Such vicarious liability can be inferred so far as a company registered or incorporated under the Companies Act, 1956 is concerned only if the requisite statements, which are required to be averred in the complaint petition, are made so as to make the accused therein vicariously liable for the offence committed by the Company. Before a person can be made vicariously liable, strict compliance with the statutory requirements would be insisted". 26. In SMS Pharmaceuticals vs Neeta Bhalla (2005 8 SCC 89), the Apex Court has held that 19. (a) It is necessary to specifically aver in a complaint under Section 141 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. This averment is an essential requirement of Section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of Section 141 cannot be said to be satisfied. (b) Merely being a director of a Company is not sufficient to make the person liable under Section https://hcservices.ecourts.gov.in/hcservices/ 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. 27. In N.K. Wahi vs Shekhar Singh and others (2007) 9 SCC 481, the Apex Court reiterated the principles laid down in Sabitha Ramamurthi's case and SMS Pharmaceutical's case. 28. However, there is slight digression in the judgements in S.V.Mazumdar's case and N.Rangachari's case wherein it was held, " 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