Roles of directors must be specified if allegations are made holding them liable for the conduct of the company: High Court of Telangana

IN THE HIGH COURT FOR THE STATE OF TELANGANA AT: HYDERABAD CORAM: THE HON’BLE SRI JUSTICE B. VIJAYSEN REDDY CRIMINAL PETITION No.82311 Delivered on: 10 06 2021 Smt.Akkinapalli Sujatha & others ... Petitioners The State of Telangana. Public Prosecutor High Court of Telangana Hyderabad & another ... Respondents For Petitioners For Respondents N VINESH RAJ < Gist Head Note Cases Referred PUBLIC Prosecutor2014) 16 SCC 1 Mr. P RAMACHANDRAN THE HON’BLE SRI JUSTICE B. VIJAYSEN REDDY CRIMINAL PETITION No.82311 ORDER: This criminal petition is filed by the petitioners accused Nos.5 7 8 and 9 to quash the proceedings in CC.No.10110 on the file of the II Additional Chief Metropolitan Magistrate Hyderabad. The complaint in CC.No.10110 is filed by the respondent No.2 to prosecute the petitioners for the offence under Section 138 of the Negotiable Instruments Act. It is alleged in the complaint that the complainant is a wholesale dealer in gold and jewellery business run in the name of M s. Sanghi Jewellers Private Limited. A1 is the Jewellery Shop situated at Sapthagiri Complex KPHB Colony Hyderabad. A2 is the Managing Director of the A1 company and signatory of the subject cheques. A3 to A9 are the Directors of A1 company. In the month of July 2010 A2 to A9 visited the complainant’s jewellery shop at Hyderguda Hyderabad. A2 to A9 represented that they are interested in doing business transactions in the complainant company. They also stated that the complainant company is known for designer jewellery adhering to the contemporary standards. On the representation of A2 to A9 the complainant believing their version showed them various types of jewellery pertaining to men and women. A5 A6 A7 A8 and A9 selected various jewellery items like necklace ear rings etc. as they are women they showed keen interest in selecting jewellery. They assured the complainant that they going to be permanent customers and would place more orders on various occasions like marriage season festivals like Akshaya Tritiya. A2 A3 and A4 selected 3 various kinds of jewellery like bracelets rings etc. and placed orders for the same. It is alleged that A2 to A9 purchased gold ornaments worth about Rs.25 49 121 and issued two cheques drawn on Allahabad Bank Balangar Branch and Axis Bank Kukatpally Branch and assured that the cheques would be honoured on their presentation. Believing the representation of the accused the complainant presented the cheques with its bank SBI Koti Branch Hyderabad which were dishonoured with an endorsement ‘insufficient funds’. The cheque dated 26.06.2010 for a sum of Rs.4 75 000 was dishonoured on 01.07.2010 and another cheque dated 03.07.2010 for a sum of Rs.20 74 121 was dishonoured on 17.07.2010. The complainant informed about the dishonoured cheques to A2 to A9 and went personally to their shop and residences and expressed his anguish over failure of the accused to fulfill their commitment. A2 to A9 gave evasive replies and assured to settle the matter amicably but failed to fulfill their commitment. It is alleged that at the time of issuing cheques the accused were well aware there were no sufficient funds in the accounts maintained by them in the bank. After statutory notice dated 28.07.2010 was issued A1 to A9 calling upon them to pay cheque amount within 15 days notices were received by A2 to A5 and A7 to A9 on 30.07.2010. The legal notice sent to A1 and A6 was returned back with an endorsement ‘not claimed’. A1 company along with A2 to A9 who are Directors thus committed offence punishable under Section 138 of the Negotiable Instruments Act. The petitioners accused contend that all of them have resigned from A1 company with effect from 02.07.2010 and Form 32 to that 4 effect was issued by the Registrar of Companies. The company was wholly managed and operated by A2 who is the Managing Director and involved in the day to day affairs of the company. The petitioners though are Directors did not have direct access to the purchases or sales or to the accounts or to the receipts or payments pertaining to the business of A1 company. It is only A2 who was responsible for the affairs of A1 company. From 02.07.2010 onwards the petitioners are no way concerned with A1 company since they have resigned as Directors and by suppressing the same the present complaint is filed. It is further contended that the respondent No.2 also filed a recovery suit in O.S.No.388 of 2010 on the file of the III Additional Chief Justice City Civil Court Hyderabad. There is no allegation in the suit proceedings that the petitioners have approached the complainant and taken the gold ornaments and that they have selected ornaments and contradictory statement is made in the instant complaint. All the petitioners Accused Nos.5 7 8 and 9 are household ladies. Their occupation in the cause title of the petition is shown as ‘House wife’. The same is not controverted by the counsel for the complainant. Though allegations are made against all the petitioners that they have selected the jewellery and assured payment to complainant such facts are not relevant to prosecute them for the offence under Section138 read with Section 141 of the Negotiable Instruments Act. The petitioners are neither signatory of the cheques nor in any way responsible for issuance of the subject cheques. Accused No.2 is said to be the Managing Director who signed the The prosecution under Section 138 of the Negotiable Instruments Act is against persons who have issued the cheque which is later dishonored. Mere assurance of payment or selection of jewellery cannot be the basis to rope in the petitioners. It is vaguely stated in the complaint that the petitioners are directors and responsible for the day to day affairs of the A1 company. But in the given facts and circumstances of the case and particularly the uncontroverted claim of the petitioners that they are household ladies this Court is of the opinion that vague and omnibus against the petitioners directors as being responsible for the day to day affairs of A1 company is not sufficient. Mere verbatim reproduction of the words contained in Section 141 of the Negotiable Instruments Act without any specific role attributed to each of the petitioners in the A1 company cannot be the basis to prosecute the petitioners as the same would unjust and result in abuse of process of law. In POOJA RAVINDER DEVIDASANI v. STATE OF the Supreme Court made “… Time and again it has been asserted by this Court that only those persons who were in charge of and responsible for the conduct of the business of the Company at the time of commission of an offence will be liable for criminal action. A Director 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 for an offence Under Section 141 of the N.I. Act. In National Small Industries Corporation this Court observed: Section 141 is a penal provision creating vicarious liability and which as per settled law must be strictly construed. It is therefore not sufficient to make a bald cursory statement in a complaint that the Director arrayed as an accused) is in charge of and responsible to the company for the conduct of the business of the company without anything more as to the role of the Director. But the complaint should spell out as to how and 116 SCC 1 in what manner Respondent 1 was in charge of or was responsible to the accused Company for the conduct of its business. This is in consonance with strict interpretation of penal statutes especially where such statutes create vicarious liability. A company may have a number of Directors and to make any or all the Directors as accused in a complaint merely on the basis of a statement that they are in charge of and responsible for the conduct of the business of the company without anything more is not a sufficient or adequate fulfillment of the requirements Under Section emphasis supplied) 27. Unfortunately the High Court did not deal the issue in a proper perspective and committed error in dismissing the writ petitions by holding that in the Complaints filed by the Respondent No. 2 specific averments were made against the Appellant. But on the contrary taking the complaint as a whole it can be inferred that in the entire complaint no specific role is attributed to the Appellant in the commission of offence. It is settled law that to attract a case Under Section 141 of the N.I. Act a specific role must have been played by a Director of the Company for fastening vicarious liability. But in this case the Appellant was neither a Director of the accused Company nor in charge of or involved in the day to day affairs of the Company at the time of commission of the alleged offence. There is not even a whisper or shred of evidence on record to show that there is any act committed by the Appellant from which a reasonable inference can be drawn that the Appellant could be vicariously held liable for the offence with which she is In POOJA RAVINDER DEVIDASANI’s case the Supreme Court allowed the quash petition not only on the ground that there is no specific role attributed to the appellant but also on the ground that the appellant has resigned as Director much prior to issuance of the cheque. The Supreme Court taking into consideration its earlier decisions in National Small Industries Corporation v. Harmeet Singh Panital 3 SCC 330] Gunmala Sales Private Ltd. v. Anu Mehta 1 SCC 103] and Pepsi Foods Ltd. v. Special Judicial Magistrate 5 SCC 343] reiterated the ratio that a complaint where no specific role is attributed to the Director Accused is liable to be quashed. In the light of the above observations this Court is not inclined to go into the other point regarding resignation of the petitioners as Directors on 02.07.2010 which is unnecessary. Accordingly the criminal petition is allowed and the proceedings in CC.No.1011 of 2010 on the file of the II Additional Chief Metropolitan Magistrate Hyderabad against the petitioners accused Nos.5 7 8 and 9 are hereby quashed. Pending miscellaneous petitions if any shall stand closed. June 2021 B. VIJAYSEN REDDY J 

Summary: The Hon’ble Justice B. Vijaysen Reddy judged a case dealing with section 138 of the Negotiable Instruments Act, where he held that “Mere assurance of payment or selection of jewelry cannot be the basis to rope in the petitioners. It is vaguely stated in the complaint that the petitioners are directors and responsible for the day-to-day affairs of the A1 company. But in the given facts and circumstances of the case and particularly the uncontroverted claim of the petitioners that they are household ladies, this Court is of the opinion that vague and omnibus against the petitioners/directors as being responsible for the day-to-day affairs of A1 company is not sufficient. Mere verbatim reproduction of the words contained in Section 141 of the Negotiable Instruments Act without any specific role attributed to each of the petitioners in the A1 company, cannot be the basis to prosecute the petitioners, as the same would unjust and result in abuse of process of law”. This case was Smt. Akkinapalli Sujatha &amp; others Vs. The State of Telangana [CRIMINAL PETITION No.8231 of 2011]   Brief facts of the case are, the complainant is a wholesale dealer in gold. A1 is the jewelry shop. A2 is the Managing director of A1. A3 to A9 are the directors of the company. A2 to A9 visited the complainants shop to do business transactions. They shopped for Rs. 25,49,121. They paid through 2 cheques; one worth Rs. 4,75,000/- and the other Rs.20,74,121/-. Both these cheques were dishonoured. The complainant sent a statutory notice to A1 to A9 which was returned with an endorsement ‘not claimed’. He then filed a case before the Hon’ble High Court. The counsel for the petitioners contends that A3-A9 have resigned from A1 company. Furthermore, since A2 has signed on these cheques, he must be held liable for such a dishonour. After hearing both the counsels, the High court observed that occupation in the cause title of the petition of the petitioners No. 5,7,8 and 9 was ‘house wife’. The learned judge was of the opinion that “though allegations are made against all the petitioners that they have selected the jewelry and assured payment to complainant, such facts are not relevant to prosecute them for the offence under Section138 read with Section 141 of the Negotiable Instruments Act. The petitioners are neither signatory of the cheques nor in any way responsible for issuance of the subject cheques. Accused No.2 is said to be the Managing Director, who signed the cheques.”   The court placed heavy reliance on National Small Industries Corporation v. Harmeet Singh Panital [(2010) 3 SCC 330] wherein the supreme court held that, “It is therefore, not sufficient to make a bald cursory statement in a complaint that the Director is in charge of and responsible to the company for the conduct of the business of the company without anything more as to the role of the Director. But the complaint should spell out as to how and in what manner Respondent 1 was in charge of or was responsible to the accused Company for the conduct of its business. This is in consonance with strict interpretation of penal statutes, especially, where such statutes create vicarious liability.”