BOUNCING OF CHEQUES: POST SUMMONING SETTING OUT OF DEFENCE BY DIRECTORS OF COMPANY/ACCUSED ANIL K KHAWARE ADVOCATE

 

Bouncing of Cheques: Post summoning setting out of defence by DIRECTORS OF COMPANY/accused

Anil K Khaware

Advocate

As a sequel to the preceding article, the penumbra whereof was limited to stage of filing complaint only, the endeavour herein is to dissect the case, after receiving of summons u/s 138 of Negotiable Instruments Act (In short “NI Act” or “Act”)  and defence available to the accused or Directors of the company, as the case may be. The ambit of defence and the cavil from the perspective of probable defence of the accused, who may have been summoned on the premise of prima facie case, is to be analysed. Whether the defence to the accused is available at the stage of joining the proceedings post summoning or only during trial. The bouncing of cheque is made as offence only in 1988, by inserting the provisions of section 138 in the Negotiable Instruments Act, 1881. To set out the tone in its perspective, it may be apt to quote the observation of hon’ble Supreme Court in a matter reported as P. Mohanraj v. Shah Brother Ispat Pvt. Ltd. 2021 SCC OnLine SC 152, The observation is as under: .

“Interestingly, criminal proceedings are stated to be proceedings in which the larger interest of the State is concerned. Given these tests, it is clear that a Section 138 proceeding can be said to be a “civil sheep” in a “criminal wolf’s” clothing, as it is the interest of the victim that is sought to be protected, the larger interest of the State being subsumed in the victim, alone, moving a court in cheque bouncing cases”.

The Supreme Court has further observed that criminal proceedings for the dishonour of cheque under Section 138 of the Negotiable Instruments Act, 1881, are "quasi-criminal" in nature. The gravamen of a proceeding under Section 138, though couched in language making the act complained of an offence, is really in order to get back through a summary proceeding, the amount contained in the dishonoured cheque together with interest and costs, expeditiously and cheaply.”

The complaint when lodged along with original cheque/s, bank memo and other relevant documents, before the Metropolitan Magistrate or Judicial Magistrate (First Class), as the case may be, and if the threshold of prima facie case is established, upon affidavit filed by the complainant or by Authorised Representative if the complainant is a “company” or “entity” other than individual. The complainant is then examined under section 202 of Cr.P.C and upon recording of satisfaction the summons are issued against the accused.

The prima facie threshold is settled in Kusum Ingots & Alloys Ltd Vs Pennar Peterson Securities Ltd , (2000) 2 SCC 745 : 2000 SCC (Cri) 546 : AIR 2000 SC 954]. The following ingredients are required to be satisfied for making out a case under Section 138 of the NI Act:

(i) a person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person

(ii) The cheque must be for the part or full discharge of any legally recoverable debt or other liability;

(iii) that cheque has been presented to the bank within the period of validity ( 3 months) from the date on which it is drawn or within the period of its validity, whichever is earlier;

(iv) that cheque is returned by the bank unpaid, for “insufficient funds” “exceeds arrangement” or such other reasons;

(v) the payee or the holder in due course of the cheque makes a demand of payment vide a statutary demand notice by giving a notice in writing, to the drawer of the cheque, within 15 days ( Now 30 days after amendment in the NI Act) on the receipt of information through bank memo spelling out the reason of return of the cheque as unpaid;

(vi) Amount remains unpaid, even on expiry of Fifteen (15) days, despite service of statutary cum demand notice notice

RECALLING OF SUMMONS:

The question, whether a Magistrate is empowered to recall the summons, if it is found after summoning and representation of the summoned accused that he is wrongly summoned has been a vexed topic.

In K.M. Mathew Vs State Of Kerala & Anr AIR 1992,2206 SC it is held by hon’ble Supreme Court that It is open to the accused to plead before the Magistrate  that the process against him ought not to  have been issued. Magistrate may drop the proceedings if he is satisfied on reconsideration of the complaint that there  is  no offence for  which the accused could be tried. Since then, the Mathews judgment of Supreme Court remained applicable, the Magistrate was empowered to recall the summons issued in a complaint case.

However, then came Adalat Prasad Vs Rooplal Jindal & Ors, AIR 2004 SC 4674. The hon’ble Supreme Court, while reversing the Mathew Judgment held as under:

“It is true that if a Magistrate takes cognizance of an offence, issues process without there being any allegation against the accused or any material implicating the accused or in contravention of provision of Section 200 & 202, the order of the Magistrate may be vitiated, but then the relief an aggrieved accused can obtain at that stage is not by invoking Section 203 of the Code, because, the Criminal Procedure Code does not contemplate a review of an order. Hence in the absence of any review power or inherent power with the subordinate criminal courts, the remedy lies in invoking Section 482 of Code”.

The Adalat Prasad (supra) judgment has thus stipulated that a Magistrate after having summoned an accused cannot recall the summon and that Mathews judgment was not good law. It may be noted that Adalat Prasad Judgment was rendered by Three Judge Bench and Mathews judgment was thus reversed. It is held that what is not conferred by statute cannot be permitted. The Cr.P.C did not contain the provision of recalling of summon and therefore, no such power could be available to a Magistrate. In that judgment it was further held that only recourse to the accused shall be to approach high court for quashing and that stage it was held that even sessions court had no such authority.

Permanent exemption of accused u/s 138 NI Act

The very first predicament of the accused upon receiving summon in section 138 NI Act case is to cause appearance and take bail, the offence being bailable. However, the accused may also seek exemption in very first appearance or such subsequent appearance, as may be deemed necessary and section 205 of Cr.P.C contains such provisions, whereunder the Magistrate is empowered to grant exemption to accused, in apt cases, exemption for the day. However, in some cases accused seeks plenary exemption and then section 317 Cr.P.C shall be applicable.The recitation in this regard are as under:

(i)   Bhaskar Industries Ltd vs Bhiwani denim and apparels 2001 (2)OCR SC 452

It is held by Supreme Court:

“The normal rule is that the evidence shall be taken in the presence of the accused. However, even in the absence of the accused such evidence can be taken but then his counsel must be present in the court, provided he has been granted exemption from attending the court. The concern of the criminal court should primarily be the administration of criminal justice. For that purpose the proceedings of the court in the case should register progress. Presence of the accused in the court is not for marking his attendance just for the sake of seeing him in the court. It is to enable the court to proceed with the trial. If the progress of the trial can be achieved even in the absence of the accused the court can certainly take into account the magnitude of the sufferings which a particular accused person may have to bear with in order to make himself present in the court in that particular case”.

(ii)         Surendra puhan Vs State of Orissa 2011 (3)crimes 383(orissa)

On the basis of the above judgment Bhaskar Industries (Supra) permanent exemption was granted. However, law in this regard is clear that the exemption should be given in just case and subject to the fact that accused shall not endeavour to delay trial in the case nor identity of witnesses shall be disputed by him. Apart from this, the appearance for obtaining bail, framing of notice and examination of accused u/s 313 of Cr.P.C being statutory requirement the same has to be duly complied with and accused need to remain present , then. 

As narrated above, the provision of exempting the accused is stipulated in section 205 and section 317 of the Code. Section 205 however deals with exemption on day to day basis, whereas section 317 also deals with permanent exemption due to hardship of accused. Moreover, whereas section 205 relates to magistrate, but section 317 shall also include in its ambit Sessions Court.  

CAN ACCUSED BE DISCHARGED U/s 138 NI ACT?

Trial of summons cases by Magistrate has been provided under Sections 251 to 259 Cr.P.C under Chapter XX of Cr.P.C. It may be noted that  there is no provision of discharge of accused of an offence triable as summons case, as has been stipulated under Section 239 in trial of warrant cases by Magistrate and under Section 227 in a trial before a Court of Session. The Apex Court by a 3 judge bench in 'Subramanium Sethuraman v. State of Maharashtra & Anr.' in Appeal (Crl) No. 1253 of 2002, has held in clear  terms that in summon case which is covered by Chapter XX of the Code does not contemplates a stage of discharge, unlike, Section 239 which provides for a discharge in a warrant case. Further, once the plea of the accused is recorded, the procedure contemplated under Chapter XX has to be followed which is to take the trial to its logical conclusion.

 

The judgment worth perusal in this regard shall be Arvind Kejriwal and Ors Vs Amit Sibal, (2018) 12 SCC 165, wherein, Hon'ble Delhi High Court had held that the Magistrate shall be empowered to discharge/drop the proceedings at the stage of framing notice under Section 251 of the Code, if no case is made out.  The Delhi High Court ruling however was set aside by hon’ble Supreme Court (Amit Sibal vs Arvind Kejriwal) and it is held that in a complaint case, where summoning order has been issued, the order permitting the respondents/accused to raise such contentions at the stage of framing of notice and directing the Magistrate to consider the same and pass appropriate order, is contrary to law.

Therefore, it can be said that in summon trial case, at the stage of framing of notice under Section 251 of the Code, trial Court cannot discharge the accused. Further, proceedings cannot be stopped under Section 258 of the Code in a complaint case. The corollary to this is that if trial court cannot discharge the accused at the stage of framing of notice under Section 251 of the Code and it cannot stop the proceedings under Section 258 of the Code, then it cannot be said that order of Trial Court suffers from illegality, infirmity and impropriety as mentioned in Section 397 of the Code.

WHEN ACCUSED IS COMPANY: LIABILITY OF DIRECTORS OR MANAGERS

141: Offence by companies

(1) 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 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 offence.

PROVIDED FURTHER that where a person is nominated as a Director 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 shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.  

The crux of the aforesaid section may be analysed further. It may be noted that, while, liability of persons in the first category arises under sub-section (1) of Section141, the liability of persons mentioned in categories (ii) and (iii) arises under sub-section (2). The scheme of the Act, therefore is, that a person who is responsible to the company for the conduct of the business of the company and who is in charge of business of the company is vicariously liable by reason only of his fulfilling the requirements of sub- section (1). However, if the person responsible to the company for the conduct of business of the company, was not in charge of the conduct of the business of the company, then he can be made liable only if the offence was committed with his consent or connivance or as a result of his negligence. The liability of persons mentioned in sub-section (2) is not on account of any legal fiction but on account of the specific part played - consent and connivance or negligence. If a person is to be made liable under sub-section (2) of Section141, then it is necessary to aver consent and connivance, or negligence on his part.

Merely, because someone is a Director in accused company he will not be liable to be prosecuted, unless averments of his actually being involved in everyday affair is tangibly present in the complaint. If a Director is a nominee Director on behalf of Government, he is not liable to be prosecuted. If a Director is not involved in every day affair, he is not liable. The trap of section 138 of NI Act shall include the Managing Director, who will be responsible by virtue of the position that he holds, full time Director, provided he is involved in day to day affair shall also be liable. The signatory of cheque is also liable apart from such Manager or Secretary, who were involved in every day affairs related to the transaction and who could have played a direct role in the transaction. The principle of vicarious liability shall therefore be attracted only if the role and responsibility is clearly attributed on the accused. If a Director is merely arrayed as a party, by virtue of the position that he held without any corresponding roles, then the proceedings against him is liable to be quashed. Only the High Courts are empowered to quashing the complaint including the complaint u/s 138 of NI Act. Though, in a trail after evidence, such Director is likely to be acquitted, but the moot point is that why should a Director stand rigour of trial, if ex facie it is evident that he had no role in every day affairs. Apart from these, the courts are flooded with the complaint where ex Directors are arrayed as party or accused, whereas at the relevant time i.e when the offence was committed, he was not a Director, the complaint against such Director is liable to be quashed. 

In Aneeta Hada vs. Godfather Travels & Tours (P) Ltd 2012) 5 SCC 661, the three-judge bench of the SC said that a person cannot proceed against directors of a company without making the said company a party under the suit. The current position with regards to the subject is that a director cannot be held liable for dishonour of a cheque without proceeding against the company for the said charge and the complaint may be quashed if the company is not arrayed as an accused.

Thus, it is no res integra that in case of summons, if the accused has a case, then the only remedy available to the accused shall be to seek quashing of the complaint or summoning order passed by Magistrate u/s 482 of Criminal Procedure Code. The Mathews judgment being overruled in view of a Three (3) judge bench judgment in Adalat Prasad (Supra), the only remedy is before the high court.

The law further evolved in this context, though, the periphery of that broadly remained what was held in Adalat Prasad ( Supra). The culpability of Directors/accused in a company may be noticed in the following recitations:  

S.N	Citation	Remark
1.	SMS Pharmaceuticals Ltd Vs Neeta Bhalla & Anr 123 (2005)DLT 275 SC	(i)    Three judge bench judgment of Supreme Court. To be vicariously liable he person must hold a position in the company where he is in charge of the company and responsible for its conduct. (ii)   The offence has been committed with his connivance or consent or is attributable to the person and mere naming an accused in complaint is not enough.
2.	Sabitha Ramamurthy v. R.B.S. Channabasavaradhya (2006) 10 SCC 581.	The Supreme Court has held that to prosecute a person under Section 141 of Negotiable Instruments Act, 1881, an averment has to be made in the complaint alleging the accused to be vicariously liable for the offences under Section 138 of Negotiable Instruments Act, 1881. It is a prerequisite, else, a person cannot be vicariously held liable for offences under Section 138 of NI Act
3.	K.K. Ahuja v. V.K. Vora, (2009) 10 SCC 48.	(i) 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; (ii) any Director, Manager, Secretary or other officer of the company with whose consent and connivance, the offence under Section 138 has been committed; and (iii) any Director, Manager, Secretary or other officer of the company whose negligence resulted in the offence under Section 138 of the Act, being committed by the company. While liability of persons in the first category arises under sub-section (1) of Section 141, the liability of persons mentioned in categories (ii) and (iii) arises under sub-section (2). The scheme of the Act, therefore is, that a person who is responsible to the company for the conduct of the business of the company and who is in charge of business of the company is vicariously liable by reason only of his fulfilling the requirements of sub- section (1). But if the person responsible to the company for the conduct of business of the company, was not in charge of the conduct of the business of the company, then he can be made liable only if the offence was committed with his consent or connivance or as a result of his negligence.
4.	National Small Industries Corp. Ltd. vs.Harmeet Singh Paintl  167 (2010) DLT 143 (SC).,	The Supreme Court had acquitted an ex- director because on the date when the cheque was issued, he was no longer a director of the company.
5.	Standard Chartered Bank v. State of Maharashtra  (2016) 6 SCC 62	The Supreme Court has held d that an averment in the complaint alleging the accused vicariously liable for the offence under Section 138 of Negotiable Instruments Act, 1881 is an essential requirement under Section 141 of Negotiable Instruments Act, 1881.

 

GENERIC ALLEGATION IN COMPLAINT NOT ENOUGH

In KK Ahuja (Supra) the hon’ble Supreme Court has held that the words "every person who, at the time of the offence was committed, was in charge of, and was responsible for the conduct of the business of the company" not only finds mention in Section 141 (1) of the NI Act but in several enactments dealing with offences by companies as well such as Section 278 B of the Income Tax Act, 1961, Section 22 C  of Minimum Wages Act, 1948, Section 86 A of the Employees State Insurance Act, 1948,  Section 14 A of Employees Provident Fund and Miscellaneous Provisions Act , 1952, Section 29 of Payment of Bonus Act, 1965, Section 40  of The Air (Prevention and Control of Pollution) Act, 1981 and Section 47 of Water (Prevention and Control of Pollution) Act,  1974. But neither Section 141 (1) of the NI Act, nor any other Act as per above, pari materia these enactments gives any indication, as to who are the persons responsible to the company and for the conduct of the business of the company. The perusal and analysis of Companies Act 1956 is thus essential. Section 291 of the Companies Act provides that subject to the provisions of the said 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 as a legal entity can act only through its Board of Directors. 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 Section 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 directions 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 other employees of the company, cannot be said to be persons who are responsible for the conduct of the affairs of the company.

In Pepsi Foods v. Special Judicial Magistrate and Ors. reported as (1998) 5 SCC 749, it was held that summoning an accused person cannot be resorted to as a matter of course and such an order or summoning is liable to be quashed.

In Saroj Kumar Poddar v State (NCT of Delhi) - 2007 (3) SCC 693, while dealing with an appeal against the refusal to quash the order taking cognizance, by an Ex-Director who had resigned from the Board prior to the date of issuance of the cheque, the Supreme Court had observed that how was the Director responsible for issuance of cheque was not disclosed in the complaint. It was thus held making some bald averment was not sufficient to maintain a complaint.

RECENT JUDGMENTS

To the similar effect are the decisions of Supreme Court in Kanarath Payattiyath Balrajh v. Raja Arora reported as 2017 SCC Online 7418, Har Sarup Bhasin v. M/s Origo Commodities India Ltd. reported as 2020 SCC Online Del 9 and Chanakya Bhupen  Chakravarti & Anr. v. Rajeshri Karwa & Ors. reported as 2018 SCC Online Del 12968.

 In Chintalapati Srinivasa Raju v. Securities and Exchange Board of India reported as (2018) 7 SCC 443, it has been held as follows:-

“23… .Non-Executive Directors are, therefore, persons who are not involved in the day-to-day affairs of the running of the company and are not in charge of and not responsible for the conduct of the business of the company.’

 

In Nandakumar & Ors. v. M/s ECE Industries Ltd. in SLP (Crl.) No.2770/2013 the Supreme Court held as under:-

“Therefore, it is clear that merely being a Director of a company is not sufficient to make the person liable under Section 141 of the Act, till it is shown that the said Director was in-charge of and responsible for the conduct of his business. The Court below and the High Court erred in not appreciating that”.

On Territorial Jurisdiction

Section 142 is amended vide Negotiable Instruments (Amendment) Act 2015 and section 142 (2) is added, to the effect of judgment recited by hon’ble Supreme court in a matter captioned as Dashrath Roopsingh Rathod Vs State of Maharashtra & Anr, reported   in   MANU   /SC/   0655/  2014 is negated. The judgment as narrated below, thus, continues to rule the field as the judgments are in sync with the subsequent amendment in the Negotiable Instruments (Amendment) Act 2015.

(i)          Harman Electronics Pvt Ltd vs National Panasonic India Ltd 156(2009)DLT 160 SC-If only legal notice is issued from Delhi then Delhi court shall have no jurisdiction. To attract jurisdiction it has to be more than the act of sending legal notice from a particular place (ref: Kusum Ingots (Supra)

(ii)        Hartaj Singh vs Godrej Agrovet Ltd 170(2010)DLT 623-The legal notice and presentation of cheque and the intimation of dishonour at Delhi and raising invoice from place “x”. The prosecution shall continue in place “x”.

(iii)             171 (2010) DLT165-Religare Finvest Limited Vs Sambath Kumar-substantial cause of action at Delhi and the ratio is similar to above. Another judgment to the above effect is 171 (2010)DLT 447-Dindayal kayan Vs SMC global securities Ltd. And 173 (2010)DLT 185 Religare Finvest Limited Vs State & Anr

To maintain a complaint u/s 138 of Negotiable Instrument Act 1881 as amended and up to date the fait accompli is already narrated in Kusum ingots (Supra) and KK Ahuja (Supra). If any of the ingredients are not complied with or not met, the complainant shall not lie and is liable to be quashed. As regards consideration, the legally recovery debt is to be proved and the issuance of cheque was towards the recovery of legally recoverable debt shall be the integral requirement to maintain a complaint u/s 138 NI Act. What is also pertinent in the context that debt, even if was pre-existing, should not be time barred , else by virtue of law of limitation the complaint shall be ex facie time-barred and hence could be quashed. The arraying of company (in case accused is a company) is also a must to maintain a complaint against Managing Director. If the complaint against company fails to make company a party and Managing Director is made party, without arraying company as an accused, the complaint shall not lie. Still further, if there has been a loan transaction and the complainant is a money lender, but without obtaining license under The Punjab Registration of Money-lender's Act, 1938 , then too, the complaint may suffer due to lack of compliance of the requisites of the Act. Another asp3ect of vital importance is the solvency of the complainant and if there was high transaction and cash transaction without mention of the same in the corresponding Income Tax return, the complainant may not be able to maintain the complaint. The NI Act has therefore cast burden on the complainant also at the very outset to meet the procedure established by law and only if the complaint is consistent with the rigour of the law as encapsulated in section 138-142 of Negotiable Instruments Act, the complaint may not pass the test of threshold. It may be noted that the enactment under section 138 of NI Act was made part of statute book in 1988-89 in view of growing menace of bouncing of cheque and to accord sanctity to the complaint against the cheque bouncing. The Section 139 is part of the Act to prima facie draw presumption in favour of the complainant, but the presumption is rebuttable and once a probable rebuttal is shown by accused, the onus shall shift on the complainant again to further reinforce their complaint.         

REMARK

Notwithstanding the law as laid down successively by hon’ble Supreme Court, whereby the ambit of the Section 138 and liability of Directors or other persons in a company is well illustrated,  still in reality, the judgments are not followed in letter and spirit and non-application of mind by Magistrates are pervasive in many cases. Though, Adalat Prasad (supra) judgment may not enable a Magistrate to recall summon, already issued, but, what if the summons were not liable to be issued at all and still it was issued?  If at that stage, while perusing the complaint,  if summons are not issued in apt cases and filtering of the accused are resulted, then, in pre-summoning stage itself, then unnecessary names arrayed as an accused shall not stand the rigour of trial. It is within the domain of a Magistrate to peruse the complaint meticulously, apply their mind to the averments made therein and connectivity with the documents as regards role and responsibility attributed to Director, Secretary or Manager and if averments are inadequate or there are bald averments, then, summons could not be issued to such persons. The summons ones issued shall relegate an accused either to suffer the rigour of trial, despite prima facie having no role in offence. Moreover, even if such accused prefers petition to High Court and thereafter to Supreme Court, the time, energy and resources it entails could only be estimated. The court of first instance has thus a paramount responsibility to separate chauff from grain and discern the chalk and cheese.

To encapsulate settled law again, the liability of a Director, Manager and Secretary under Section 141(1) of Negotiable Instruments Act, 1881 comes into play only when it is proved that the said officer was in charge of the company or responsible for the conduct of its business. Section 141(2) of Negotiable Instruments Act, 1881is attracted only when any other officer connives or consents to dishonour of a cheque. In a catena of cases, the Supreme Court has held that an averment alleging that the Directors to be an accused in the complaint is indispensable and without it, no Director can be held liable under Section 138 of Negotiable Instruments Act, 1881. It is also settled law that even mere mentioning of role and responsibility of a Director or manger shall not be enough, unless some connectivity of such Directors or Managers to the offence is evident. Also, a Director or such aggrieved persons can approach the High Court under Section 482 of Cr.PC before the trial commences in the Magistrate Court, seeking quashing of the proceedings initiated against him under Section 138 read with Section 141 of Negotiable Instruments Act, 1881, if the foundation of the case itself is feeble.

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