OFFENCE U/S 138 of
Negotiable Instruments Act: Can AN accused company claim substITUTIon?
AnIl K KHAWARE
ADVOCATE
Law and its evolution is a
dynamic process. In the course of its voyage, law has consistently been changing
its course, facing the tide midway and hence, settling the course for a
finally, is felt imperative. Moreover, in the very onset, no one probably,
would adequately factor the tide and when such a wave is encountered, way are
devised to meet that eventuality and therefore, the dynamics of law i.e ever
changing. The amendments in Constitution and amendments in statutes, are, far
too many, owing to the reasons illustrated above. The Negotiable Instruments
Act 1881 (In short “NI Act” or “Act”) have also undergone various changes. A
substantive insertion in the Act in 1988 related to making bouncing of cheque, a
penal offence and trap of criminal law was woven around it. The Negotiable
Instruments Act 1881, was amended subsequently as well, and the Amendment in
2002, 2015 and 2018 has been crucial for multiple reasons. The issue that is
being delved herein, however, is whether an accused company after its merger
can claim its substitution in place of existing company in pending complaint
u/s 138 NI Act? The answer to the issue could only be have from the judicial
dicta or precedence from hon’ble Supreme Court or High Courts. The judicial
precedents are limited and more often than note access to that eludes many. The
judicial precedents has , though, been loud and clear, but the echo of that is
somewhat missing in the courts of magistrates and lower judiciary. The section
141-142 of NI Act and the judgments are clear, still, in several cases some of
the Magistrates are persuaded on behalf of the accused company to substitute them
in the pending proceedings. The law and procedure established by law cannot be
subject to persuasion, but law and judicial precedents shall be the only
guiding force. It is these sideways, which is required to be merged in the
mainstream to avoid any confusion and that is the objective of this instant
write up. The penchant of accused company u/s 138-142 Negotiable Instruments
Act complaint, to file application for substitution of accused company in the
pending complaint before the Court of Magistrates and courts of Magistrates in several
cases, acceding to that, though, there has not been any such stipulations
permitting as per law. Thus, substituting or impleading succeeding accused
company, in place of already arraigned company has no legal sanction. This
cannot be done, even after the arraigned company stands substituted by scheme
of amalgamation by a competent court. The criminal justice system cannot permit
such substitution. This is not the mandate of criminal law, Cr.P.C or that of
Section 141-142 of Negotiable Instruments Act (As amended and up to date).
It is no res integra that a complaint u/s 138 of NI Act can be filed by
holder of the cheque or holder in due course. Similarly, if the cheque is drawn
by a company, every persons, who are responsible for the commission of offence
or in –charge of the routine affairs of the company shall be vicariously
responsible for the offence, at the time of commission of offence. The
signatory of cheque however shall be liable without any demur. It is also a
settled proposition of law that upon demise of a party to the lis – successor
in interest or legal heirs of complainant shall continue to prosecute the case
after impleading themselves. This is so, as regards civil cases, in respect of
both plaintiff or defendant, though, there is no such mandate in criminal case
and there is no mechanism in Cr.P.C or in NI Act. Though, even in a complaint u/s
138 of NI Act, upon the demise of complainant, the case or complaint still
could be prosecuted by the legal heirs of the complainant or successors, but no
such recourse is available to accused or accused company. This is alien to
criminal jurisprudence. We know that Section 138 of NI Act proceedings are
considered as quasi criminal proceedings. Thus, the effect of accused company’s
amalgamation or succeeding the existing company by another company with all
lien and liability of the accused company vis a vis pending complaint u/s 138
of NI Act is the issue. The moot point, thus, is, whether an accused company
after taking over lien and liability in a formal proceedings before National
Company Law Tribunal (NCLT) could be substituted in place of the earlier accused
company, who stands amalgamated or succeeded in new name with all lien and liability
in a pending criminal proceedings, more particularly u/s 138-142 of NI Act?. If
any such application seeking substitution is filed by the accused company or
the succeeding company/merged company, then, what will be the situation in mainline
criminal cases? Conversely, what will be the situation in Section 138 NI Act
cases? We may note that, whereas, section 138 NI Act cases has some civil
elements in it, but at the same time, provisions of Cr.P.C is ingrained in it
as well, such as the provision of bail, exemption, examination of complainant
and defence are all governed by Cr.P.C.
SECTION 138-142 of NI ACT
Before adverting to the issue
further, it may be worthwhile to reproduce terms of section 141 of the Act
which relates to offences by companies:
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.
The Section 142 of NI Act relates to
taking cognizance against the company and its Directors, Manager, Secretary etc
who were in-charge or responsible for day to day affairs of the company.
The tenor of the provisions as aforesaid
is that the trap of section 138-142 of NI Act in case of a company, 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. Not
to digress, however, it must be
understood that offence u/s 138 of the Act shall relate to at the time of
commission of offence and therefore, it cannot plausibly be argued that the
accused company “A” stands merged in
accused company “B” during the pendency of complaint and hence it should now be
substituted. It should not be lost sight of, that the scheme of the NI Act,
lays emphasis on the commission of offence and the time of commission of
offence. The obvious corollary thereto, shall be, that, irrespective of
amalgamation or merger of company “A” in company “B”, substitution cannot be
permitted, as, the clock cannot be set back in time and the offender cannot be
changed, even if constitution of the entity i.e identity of company stands
changed and merged in another company. Therefore, whereas due to the
amalgamation and/or merger civil liability could be taken over by new entity,
but no corresponding scheme existed either in Cr.P.C or NI Act. No doubt, a
company is a juristic person, and it can sue or be sued by a natural person i.e
Managing Director and Directors and /or other authorised persons. One cannot be oblivious to the fact that
Company “A’ for instance had promoters/Directors, namely “C” “D’ & “E” and
upon merger, the new Directors in company “B” could be “F” “G” and “H”. A pause
is needed here. It is already stated above that company shall be dealt with by
natural person, namely Managing Director and Directors. The instance cited
above is that Directors are already changed. The punishment for the offence can
be meted out to Company “A’ through natural persons i,e Directors, who are no
more Directors. The Directors of company “B” may claim, that they had nothing
to do with offence committed by the Directors of company “A” and therefore they
cannot be prosecuted. The arguments cannot be brushed aside lightly in the
light of Section 141 of NI Act and the relevance of time of commission of
offence being of significance.
JUDICIAL PRECEDENTS
(1) In
Aneeta Hada Vs Godfather Travels & Tours (P) Ltd (2012) 5 SCC 661 case the
hon’ble Supreme Court has already held that to maintain a complaint against the
Directors or Managing Director of a company, arraigning company as a condition
precedent and as an accused is a must. If that is so, after merger of company
“A” in company “B” if new Directors comes in picture, they may legitimately
claim that they are not the offenders, in as much as, when the offence was
committed, they were not the Director and they can claim that they are not
responsible at all and scheme of section 138-142 shall also show as much.
Moreover, let us assume that the Directors of Company “A” and Company “B” are
one and same, then too, the Directors at this stage may claim that the Company
and Directors have integral role i.e the company who was the offender and
against which the complaint was earlier filed vide a written complaint shall be
necessary and as Company “A” is no longer a party, after permitting
substitution, the Directors of new company cannot be held liable. Thus, the
criminal complaint under the Act itself, if substitution is allowed, may have incorrigible
defect and shall be ex facie untenable. The situation could indeed be piquant and the present write up seeks
to address that. The clarity need to emerge sooner than later, since, the
courts of Magistrates and Sessions Courts are facing the dilemma and the
undersigned in several cases has witnessed the dilemma and orders are being
passed, allowing the substitution of accused, which is neither the scheme of the Cr.P.C nor that of the NI
Act. Though, there are some precedents, howsoever limited, but at bar, those
judgments are either not placed or not properly appreciated and therefore wrong
judgments are passed and overburdened board of lower courts has to further deal
with such an avoidable situation.
As narrated above, the judicial
precedents are quite limited in this regard and that is the reason, the judges in
lower courts err, and the litigation is needlessly protracted. Having made out,
as per above discussion, that the accused cannot be substituted under the NI
Act or Cr.P.C as there is no such scheme, but in view of several such wrongful
orders allowing substitution, the judicial precedents, needed quoting and
proper probe of the issue shall be a must. I do that hereinafter.
The hon’ble Supreme Court i.e the
three-judge bench of the SC in Aneeta Hada vs. Godfather
Travels & Tours (P) Ltd (2012) 5 SCC 661, has held 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, the company and its Directors are integral with a view to
maintain any complaint u/s 138 Ni Act.
It is further held by Supreme
Court in Aneeta Hada (Supra) in para
no. 53 that:
“It
is to be borne in mind that Section 141 of the Act is concerned with the
offence by the company. It makes the other persons vicariously liable for
commission of an offence on the part of the company. As has been stated by us
earlier, the vicarious liability gets attracted when the condition precedent
laid down in Section 141 of the Act stands satisfied. There can be no dispute
that as the liability is penal in nature, a strict construction of the
provision would be necessitous and , in a way the warrant”.
It is further
held by following the ratio in Aneeta Hada (supra) that that:
“ Applying the
ratio laid down in the aforesaid decision which is categorically applicable in
the present case, it is clear that it was imperative upon the complainant to
implead the company as an accused, and exercise of power u/s 319 Cr.P.C to
implead the company at the belated stage is erroneous.”
(2) The
most relevant judgment in respect of the issues raised herein passed by hon’ble
Supreme Court is reported as N. Harihara
Krishna Vs J Thomas AIR 2017 SC 4125.
Para 23 may be reproduced:
“The scheme of
the prosecution in punishing u/s 138 of the NI Act is different from the scheme
of the Cr.P.C. Section 138 creates an offence and prescribe punishment. No
procedure for the investigation of the offence is contemplated. The prosecution
is initiated on the basis of a written complaint made by the payee of a cheque.
Of course, such complaint must contain the factual allegations constituting
each of the ingredients of the offence u/s 138. Those ingredients are(1) That a
person drew a cheque on an account maintained by him with the banker; (2) That
such a cheque when presented to the bank is returned by the bank unpaid;(3)
that such a cheque when presented to the bank within a period of six months
from the date it was drawn or within the period of its validity, whichever is
earlier;(4) that the payee demanded in writing from the drawer of the cheque
the payment of the amount of money due under the cheque to payee; and (5) such
a notice of payment is made within a period of 30 days from the date of receipt
of the information by the payee from the bank regarding the return of the
cheque as unpaid. It is obvious from the
scheme of Section 138 that each one of the ingredients flows from a document
which evidences existence of such an ingredient. The only other ingredient
which is required to be proved to establish the commission of an offence u/s
138 is that in spite of the demand notice referred to above, the drawer of the
cheque failed to make the payment within a period of 15 days from the date of
receipt of demand. A fact that complainant can only assert but not prove, the
burden would essentially be on the drawer of the cheque to prove that he had in
fact made the payment pursuant to the demand”
The judgment in para no. 24 clearly held that “…therefore, the parliament declared section 142 as the
provision dealing with taking cognizance as per NI Act and provisions contained
in the Cr.P.C should give way to the procedure prescribed under section 142.
Hence, the opening of non-obstante clause u/s 142 of NI Act. It must also be
remembered that Section 142 does not either contemplate a report to the police
or authorize the Court taking cognisance to direct the police to investigate
into the complaint”.
(3) In
AC Narayanan Vs State of Maharashtra
2017(3) DCR 641( Bombay High Court), in para no. 16 it is held:
“
Thus, the Supreme Court had laid down in the above said decision that for
maintaining prosecution against a Director under section 141 of NI Act,
arraigning the company as an accused is imperative. In paragraphs 58 and 59 of
the said decision, the Supreme Court has referred to the wording of section 141
of NI Act and observed that commission of offence by company is an express
condition precedent to attract vicarious liability of others . it was further
observed that the words “as well as company” appearing in the section make it
absolutely clear that when a company is prosecuted then the persons mentioned
in other categories could be vicariously liable for the offence. Thus, the
Supreme Court has arrived at a conclusion that for maintaining a prosecution
u/s 138 of NI Act , arraigning of the company as an accused is imperative
mostly on the basis of vicarious liability of the Directors of the company and
not necessarily because company is a juristic person and it has its own
respectability.”
In the above backdrop, one cannot be oblivious
that while preferring complaint u/s 138 of NI Act, sending and serving notice
on the proposed accused is a must and only upon service of statutory cum demand
legal notice and failure in making payment as per the demand as contained in such
notice , cause of action shall arise. There is no mechanism u/s 138 of NI Act,
that cause of action may arise u/s 319 Cr.P.C or in any other manner. Thus, there is no scheme to implead or
succeed an accused u/s 138 of NI Act in any pending complaint. It is held by
hon’ble Supreme Court in Harihara
Kridshna (Supra) that the Section 138 specifies the offender and not the
offence is relevant u/s 138 of NI Act, and therefore, a written notice u/s
138(b) is not only a prescription to maintain a complaint, but a mandate.
Section 319 Cr.P.C therefore shall have no applicability. Moreover, as offence
u/s 138 NI Act is person specific, therefore, the parliament has declared that
as per section 142, provision of cognizance contained in Cr.P.C should give way
to section 142 of NI Act, and therefore it is not without reason that there is
non-obstante clause under section 142. It should be remembered that Section 142
of NI act does not contemplate a report to police or authorize the court in any
manner to direct the police to investigate into the complaint. Still further,
if any new company is allowed to be arraigned, the provision of section 141-142
itself shall have to suffer a body blow, since there shall neither be notice as
per record to the succeeding company nor the succeeding company was arraigned
as accused, being not an entity till then and any such later impleadment or
substitution shall cause a body blow to the provisions of section 138-142 of NI
Act and the complaint in such a situation may see a dead end and the clock
cannot be set back in time.
The maintainability threshold, therefore, cannot
be crossed, unless in an offence committed by a company, the company is not
arrayed. The arraying of company is therefore a pre-condition. The same ratio
was reiterated in Harihara Krishna
(Supra). That being so, let us take a situation where company “A” was arrayed
as an accused along with its Managing Director and Directors in a complaint u/s
138 of NI Act and during the pendency of the complaint, the company A is merged
or amalgamated into company B as per scheme of arrangement sanctioned by
National Company Law tribunal (NCCLT). The Company “A’ therefore does not
exist. In such a situation, therefore, company “B” files an application in the
court of Metropolitan Magistrate seeking substitution of accused company on the
premise that lien and liability of company “A” is merged into company “B” and
as company “A” not existing, the company “B” should be substituted in array of
parties. Let me state that sanctioning of scheme of arrangement and
substituting company is done as per process established by law and there is no
embargo in doing so and there shall not be any adverse fallout of it in civil
cases, but whether in criminal cases or quasi criminal cases such as u/s 138 of
NI Act, such a scheme in a criminal complaint could be worked out and can there
be substitution of accused company in a complaint is a question, which is
answered in the foregoing lines?
REMARK
The clear position that emerges
from the above discussion is that there is no provision of law of
substituting/replacing the accused company in place of already arraigned
accused company in a pending complaint u/s 138-142 of Negotiable Instruments
Act. The accused company, therefore cannot be substituted in existing
complaint. Even as per Cr.P.C, Section 319 entails addition of accused, in
case, role of additional accused is found out during trial, such additional
accused, therefore can be put to trial. The section 319 of Cr.P.C also has no
provision of replacing accused “A” to accused “B”. In conventional criminal
cases, more particularly, in warrant cases, the police report is filed and
subsequent thereto inquiry is conducted and after investigation offenders are
found out, unlike the scheme of section 138 of NI Act and charge sheet is filed
before court of law. The courts of law during trial, if found necessary may
arraign additional accused u/s 319 Cr.P.C, but no substitution of accused can
be permitted, even there. It is further necessary to point out that u/s 138 NI
Act, in case of death of complainant, the complaint could be pursued by the LRs
and in case of company, complainant company can always replace their Authorised
Representative by placing on record the certified true copy of resolution
passed by Board of Directors of complainant company However, the same cannot be
done as regards replacing accused company, either by passing any resolution by
Board of Directors or after approval of sanctions by a competent courts of law,
such as NCLT. Therefore, the order permitting substitution of accused company,
wherever it is granted by Magistrates or Sessions courts shall be contrary to
scheme of criminal law as contained in Cr.P.C and further contrary to section
138-142 of Negotiable Instruments Act and the judicial precedents reiterates,
reaffirm and reinforces that.
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