Circumstances when Section 138 NI Act complaint could be quashed

 

The Sections 138- 148 has been a complete code itself as it contained various aspects of cheque bouncing and remedies prescribed. The provision is quite unique in as much as it has the trapping of civil cases, though, it is considered as a criminal complaint. The procedure for pursuing the complaint is largely based on Cr,PC (Now BNSS- Bhartiyaq Nagrik Suraksha Sanhita). Therefore, the complaint u/s 138 of Negotiable Instruments act is also considered as quasi criminal in nature. Why the bouncing of cheque has been treated as penal offence and the reasons of bringing forth the provision in Negotiable Instruments act in 1988 are too well known to further elucidate herein. Suffice to say, that as the complaint u/s 138 of Negotiable Instruments Act has the trapping of criminal cases and the procedure as contained in Cr.PC (BNSS) shall be applicable in such complaints. What may follow inevitably, therefore, that a criminal complaint can be quashed either by recalling of summon, discharge of accused, acquittal of accused and/or by quashing of complaint. The offence is compoundable and therefore, the parties may settle the dispute before a court of Magistrate to seek culmination of case and thereby a Magistrate shall record the matter as compounded and the accused in such an event shall be acquitted of all charges. However, if a complaint is contested and if the accused believes that the complaint suffers from several lapses so as to necessitating its quashing, then, the High Court is approached by the accused for seeking quashing of such complaint u/s 482 of Cr.PC (corresponding to section 528 of BNSS).

                        CRITERIA of quashing

The criteria of quashing and circumstances leading to prospect of quashing of a complaint u/s 138 of Negotiable Instruments Act is being dealt with herein.

(1) Deviation from specifics time line

The complaints u/s 138 of Negotiable Instruments Act has to conform to the provisions stipulated therein and any deviation to the specifics may lead the complaint not maintainable and could be quashed. For instance, if complaint is filed beyond the prescribed limit of time, the complaint may not be maintainable (Ref: Patel Somabhai Vithalbhai Vs State of Gujarat 2024 latest caselaw 307 Guj = RCR/MA 13742/19. In the aforesaid case, Gujarat High Court relied upon the judgment of Supreme Court reported as Inder Mohan Goswami and Another versus State of Uttaranchal (2007) 12 SCC 1, in para 23 and 24 it is held therein as under:

"23. This Court in a number of cases has laid down the scope and ambit of courts' powers under Sec. 482 CrPC. Every High Court has inherent power to act ex debito justitiae to do real and substantial justice, for the undefined administration of which alone it exists, or to prevent abuse of the process of the court. Inherent power under Sec. 482 CrPC can be exercised: [(i) to give effect to an order under the Code;]

[(ii) to prevent abuse of the process of court, and]

[(iii) to otherwise secure the ends of justice.]”

 

“24. Inherent powers under Sec. 482 CrPC though wide have to be exercised sparingly, carefully and with great caution and only when such exercise is justified by the tests specifically laid down in this section itself'. Authority of the court exists for the advancement of justice. If any abuse of the process leading to injustice is brought to the notice of the court, then the court would be justified in preventing injustice by invoking inherent powers in absence of specific provisions in the statute”.

 

2. DO NOT ATTRIBUTE SPECIFIC ACts

 

If a complaint does not categorically contains averments to the effect that accused was responsible for day to day affairs, for instance, in the case of company, the role of Directors who are arrayed as an accused should be categorically and specifically spelt out as to in what manner the said Director was responsible for the commission of offence. It is no res integra that for want of specific roles attributed to Directors, the complaint against the Director is liable to be quashed. (Ref: JN Bhatia Vs State (2008) IITR 276(Delhi)). It is observed in JN Bhatia (Supra) that:

15. Before the decision of the Supreme Court in SMS Pharmaceuticals v. Neeta Bhalla SMAIRONLINE 2007 SC 207 , which I shall advert to and discuss in detail at the appropriate stage) the trend in case law shows parallel thinking in either direction. One line of cases indicates that once there is an imputation made to the effect that the concerned director/person imp leaded as accused was responsible for the conduct of the business of the company that would be sufficient and whether such a person was, in fact, responsible or not would be a matter of trial. At the stage of summoning when evidence is yet to be led by the parties, the High Court could not on assumption of facts come to a finding that the said person was not responsible for the conduct of the business”.

However, during the said period itself, contrary views were also being taken, such as that mere repetition of words of Section 141 of Negotiable Instruments Act shall not be enough to rope in the Directors/Manager etc, unless specific averments against their roles are made in the complaint. In other words, bald allegation with a view to meet the requirement of section 141 of Negotiable Instruments Act shall not be enough. The allegation should be a clear and unambiguous allegation as to how the directors etc. were in charge of and responsible for the conduct of the business. In case., no such details are mentioned in the complaint, the concerned person/director could not be made liable.

The Supreme Court in Smt Katta Sujatha Vs Fertilizers and Chem Travancore Ltd. 111 (2005) BC 575 (SC) after considering various earlier decisions held that complaint cannot proceed against the accused director who is not described as in charge of and responsible for the conduct of the business of the company or against whom complainant had not attributed any specific particular act in his complaint. 

However, yet another two-Judge Bench of the Supreme Court in Ashok Leyland Finance Ltd. v. R.S. Aggarwal 2003 (10) SCALE 1000, did not agree with the reasoning given in Katta Sujatha and referred the matter to a Larger Bench after formulating the following three questions:

(a) Whether for purposes of Section 141 of the Negotiable Instruments Act, 1881, it is sufficient if the substance of the allegations read as a whole fulfill the requirements of the said section and it is not necessary to specifically state in the complaint that the persons accused was in charge of, or responsible for the conduct of the business of the company?

(b) Whether a Director of a company would be deemed to be in charge of, and responsible to, the company for conduct of the business of the company and, therefore, deemed to be guilty of the offence unless he proves to the contrary?

(c) Even if it is held that specific averments are necessary whether in the absence of such averments the signatory the cheque and/or the Managing Directors or Joint Director who admittedly would be in charge of the company and responsible to the company for conduct of its business could be proceeded against?

Interestingly, the three questions as formulated remained unanswered then, in view of settlement between the parties.

Subsequently, the three bench judge had to answer the aforesaid questions, being pertinent in the context of the complaints u/s 138 of Negotiable Instruments Act.

The three judge bench specifically pointed out "the question for consideration is what should be the averments in a complaint under Section 138 and 141. It was clarified that this question assumes importance in view of the fact that, at the stage of issuing of process, the Magistrate will have before him only the complaint and the accompanying documents. It also specifically observed that since the Magistrate has power to reject the complaint at the threshold, it necessarily suggests that a complainant should make out a case for issue of process, namely, prima facie the ingredients of Section 138 and 141 are to be satisfied. The Court clarified that simply because a person is a Director in a company, he is supposed to discharge particular functions on behalf of the company is not enough. While taking note of the provisions of Companies Act  i.e Section 291 and 293 of Companies Act containing powers of the 'Board of Directors', the Supreme Court opined that a person may be a Director in a company, but, yet,  he may not know anything about the day-to-day functioning of the company. Further, merely, because, as a Director, he was attending Board meetings of the company, may not be enough in itself, in as much as, usually they decide policy matters and guide the course of business of the company in such meetings. Nothing is oral and the position in this respect was summarized in the following manner:

8. ...What emerges from this is that the role of a director in a company is a question of fact depending on the peculiar facts in each case. There is no universal rule that a director of a company is in charge of its every day affairs. We have discussed about the position of a director in a company in order to illustrate the point that there is no magic as such in a particular word, be it Director, Manager or Secretary. It all depends upon the respective roles assigned to the officers in a company. A company may have managers or secretaries for different departments, which means, it may have more than one Manager or Secretary. These officers may also be authorised to issue cheques under their signatures with respect to affairs of their respective departments. Will it be possible to prosecute a Secretary of Department B regarding a cheque issued by the Secretary of Department A which is dishonoured? The Secretary of Department B may not be knowing anything about issuance of the cheque in question. Therefore, mere use of a particular designation of an officer without more, may not be enough by way of an averment in a complaint. When the requirement in Section 141, which extends the liability to officers of a company, is that such a person should be in charge of and responsible to the company for conduct of business of the company, how can a person be subjected to liability of criminal prosecution without it being averred in the complaint that he satisfies those requirements. Not every person connected with a company is made liable under Section 141. Liability is cast on persons who may have something to do with the transaction complained of. A person who is in charge of and responsible for conduct of business of a company would naturally know why the cheque in question was issued and why it got dishonoured.

The Three bench Judge in SMS Pharmaceutical (Supra) has therefore, in view of the above discussion, answered the three (3) questions formulated earlier, as under:

(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 the 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 requirement of Section 141 cannot be said to be satisfied.

(b) The answer of the question posed in sub-para (b) has to be in the negative. Merely being a director of a company is not sufficient to make the person liable under Sectio0n 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for the 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 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.

(c) The answer to Question (c) has to be in the affirmative. The question notes that the Managing Director or Joint Managing Director would be admittedly in charge of the company and responsible to the company for the conduct of its business. When that is so, holders of such positions in a company become liable under Section 141 of the Act. By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are in charge of and responsible for the conduct of business of the company. Therefore, they get covered under Section 141. So far as the signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under Sub-section (2) of Section 141.

Clearly, if any Director of accused company is roped in as accused without specifics in terms of above, the complaint against such Directors is liable to be quashed.

The Delhi High Court has, earlier quashed the complaints u/s 138 against the Directors u/s 138 of Negotiable Instruments Act on the premise that mere repetition of the words that the person is a director of the company and responsible for the conduct of the business of the company, without specifying how he is so responsible and on what basis such allegation has been made out, would not be sufficient. The judgments rendered by the Delhi High Court  in support of the above are as under for reference:

(i) G.S. Rajgarhia v. Air Force Naval Housing Board 2004 (3) JCC 236 (NI).

(ii) V.P. Gupta v. National Small Industries Corporation 2004 (3) JCC 238 (NI).

(iii) V.K. Kaura v. K.K. Ahuja 2003 (67) DRJ 398.

(iv) Cdr. Shekhar Singh Vs N.K Wahi 2002 VI AD (Delhi) 1021

(v) Rachna Kapoor vs State of NCT of Delhi.2005 VI AD (Delhi) 71

(vi) Nucor Wires Ltd Vs HMT International 1998 DCR 391

Subsequently, the law is settled by the Supreme Court in the aforesaid lines in a matter reported as SMS Pharmaceuticals Ltd Vs Neeta Bhalla. AIRONLINE 2007 SC 207

In JN Bhatia (Supra), therefore, it is held as under:

“30. In view of the judgment of the Supreme Court in Adalat Prasad Vs Roopsingh Jindal 113 (2004) DLT 356 (SC) after summoning orders are passed by the Trial Court, it has no power to recall the same and in that case, , the remedy available to the aggrieved party is to approach the High Court alone by filing petition under Section 482 of the Code of Criminal Procedure. Because of this position in law, the responsibility of the Magistrates to carefully examine the complaint and the pre-summoning evidence before issuing the summons becomes paramount. It is observed that not only the summons are issued against all those who are imp leaded as directors where the prime accused is the company even when there are no averments there against sometimes even without taking care as to whether other ingredients under Section 138, 142 of the NI Act are prima facie satisfied or not”.

“31. Summoning an accused in a criminal case is not an empty formality. The Court issuing process under Section 204 of Cr.P.C. has to be satisfied on the basis of complaint, documents and other material on record that there are sufficient grounds for proceeding against him. In a criminal case, it is for the complainant to allege and make out all the ingredients of the offence before calling upon the Court to proceed against an accused. Only those presumptions which are permissible under the law are permitted to be raised against an accused. All other facts are required to be established by the complainant/prosecution. Summoning of an accused in a criminal case is a serious matter. Criminal law cannot be set into motion as a matter of course. It is not that the complainant has to bring only two witnesses to support his allegations in the complaint to have the criminal law set in motion. The order of the Magistrate summoning the accused must reflect that he has applied his mind to the facts of the case and the law applicable thereto. He has to examine the nature of allegations made in the complaint and the evidence, both oral and documentary, in support thereof and whether that would be sufficient for the complainant to succeed in bringing home charge to the accused. It is not that the Magistrate is a silent spectator at the time of recording of preliminary evidence before summoning of the accused. The Magistrate has to carefully scrutinize the evidence brought on record and may even himself put questions to the complainant and his witnesses to elicit answers in order to find out the truthfulness of the allegations or otherwise and then examine if any offence is prima facie committed by all or any of the accused. No doubt, the Magistrate can discharge the accused at any stage of the trial if he considers the charge to be groundless, but the accused is entitled to approach the High Court under Section 482 of the Cr.P.C. or Article 227 of the Constitution to have the proceeding quashed against him when the complaint does not make out any case against him, instead of having to undergo the agony of a criminal trial”.

In JN Bhatia (Supra) therefore, the Delhi High Court has observed that the accused No. 1 was a limited company and the accused Nos. 2 to 6 were its Directors’ and persons in charge of and are responsible for day-to-day affairs of the business of accused No. 1 company. It was the specific case of the petitioner that they were non-working Directors of the company and they had resigned from the company much prior to the issuance of the cheques in question and Form 32 was also filed with the Registrar of Companies. It is also stated that they have not signed the cheques; there are bald allegations that they were responsible for the day-to-day affairs and no material has been produced on record which would indicate that they were in charge of the affairs of the company or were vicariously liable. In view of that the summoning orders qua the petitioner i.e accused Nos. 4 and 5 were quashed and the complaint qua them was dismissed.

 

3. COMPLAINT SHOULD NOT BE QUASHED ON DISPUTED FACTS

If in a complaint disputed facts are raised, the complaint in such an event ought not to be quashed. For instance, a plea of non- service of notice is also a matter of evidence and though, service of a legal demand notice is a pre-requisite of a complaint u/s 138 of Negotiable Instruments Act, yet, the plea of non- service of notice shall be the disputed facts and evidence will have to be lead in that regard and hence, on the premise of such a plea, the complaint cannot be quashed.(Ref- Ajeet Seeds Ltd Vs K. Gopala Krishnaiah AIR 2014 SUPREME COURT 3057)

In Ajeet Seeds (Supra) it is observed by the Supreme Court that:

9. This Court then explained the nature of presumptions        under Section 114 of the Evidence Act and under Section 27 of the GC Act and pointed out how these two presumptions are to be employed while considering the question of service of notice under Section 138 of the NI Act. The relevant paragraphs read as under:

“13. According to Section 114 of the Act, read with Illustration (f) thereunder, when it appears to the Court that the common course of business renders it probable that a thing would happen, the Court may draw presumption that the thing would have happened, unless there are circumstances in a particular case to show that the common course of business was not followed. Thus, Section 114 enables the Court to presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public and private business in their relation to the facts of the particular case. Consequently, the court can presume that the common course of business has been followed in particular cases. When applied to communications sent by post, Section 114 enables the Court to presume that in the common course of natural events, the communication would have been delivered at the address of the addressee. But the presumption that is raised under Section27 of the General Clauses Act is a far stronger presumption. Further, while Section 114 of Evidence Act refers to a general presumption, Section 27 refers to a specific presumption. For the sake of ready reference, Section 27 of General Clauses Act is extracted below:

“27. Meaning of service by post.- Where any Central Act or regulation made after the commencement of this Act authorizes or requires any document to be served by post, whether the expression ‘serve’ or either of the expressions ‘give’ or ‘send’ or any other expression is used, then, unless a different intention appears, the service shall be deemed to be effected by properly addressing, pre-paying and posting by registered post, a letter containing the document, and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post”.

14. Section 27 gives rise to a presumption that service of notice has been effected when it is sent to the correct address by registered post. In view of the said presumption, when stating that a notice has been sent by registered post to the address of the drawer, it is unnecessary to further aver in the complaint that in spite of the return of the notice unserved, it is deemed to have been served or that the addressee is deemed to have knowledge of the notice. Unless and until the contrary is proved by the addressee, service of notice is deemed to have been effected at the time at which the letter would have been delivered in the ordinary course of business. This Court has already held that when a notice is sent by registered post and is returned with a postal endorsement ‘refused’ or ‘not available in the house’ or ‘house locked’ or ‘shop closed’ or ‘addressee not in station’, due service has to be presumed. [Vide Jagdish Singh Vs Nathu Singh (1992) 1 SCC 647; State of MP Vs Hiralal & Ors (1996) 7 SCC 523 and V Raja Kumari Vs P. Subbarama Naidu & Anr (2004) 8 SCC 74] It is, therefore, manifest that in view of the presumption available under Section27  of the Act, it is not necessary to aver in the complaint under Section138 of the Act that service of notice was evaded by the accused or that the accused had a role to play in the return of the notice unserved.”

The Supreme Court has held through a three bench judgment in a matter reported as C.C. Alavi Haji v. Palapetty Muhammed & Anr (2007) 6 SCC 555, that it is explicit that Section 27 of the General Clauses Act gives rise to a presumption that service of notice has been effected, when it is sent to the correct address by registered post. It is not necessary to aver in the complaint that in spite of the return of the notice unserved, it is deemed to have been served or that the addressee is deemed to have knowledge of the notice. Unless and until the contrary is proved by the addressee, service of notice is deemed to have been effected at the time at which the letter would have been delivered in the ordinary course of business.

 4. IF THE Company IS IN Liquidation

A complaint under Section 138 is not maintainable if the company has been ordered to be wound up, as the legal entity ceases to exist. If on the date of presentation of cheque or before the offence is committed, the company is already wound up, then , the complaint u/s 138 of Negotiable Instruments act may not be maintainable.  

 

The Madhya Pradesh High Court in a matter captioned as Shashikant Patel Vs Swadhyay Flex Pack Pvt Ltd M.Cr,C No. 1928/2019

The MP High Court in para 16 relying upon Anil Hada has observed as under:

16. The Hon'ble apex Court in the case of Anil Hada Vs Indian acrylic Ltd 2000 Crl.L.J. 373, in paragraph No. 12 has held as under:

"12. xxxxxxxxx The effect of reading Section 141 is that when the company is the drawer of the cheque such company is the principal offender under Section 138 of the Act and the remaining persons are made offenders by virtue of the legal fiction created by the Legislature as per the section. Hence the actual offence should have been committed by the company, and then alone the other two categories of persons can also become liable for the offence."

In para no. 17 in Shashikant Patel (Supra) is held as under:

“17. Thus, what is emphasized is that actual offence has to be committed by the company and then alone the Directors can become liable for the offence. When the company goes into liquidation and the cheque is presented thereafter, it cannot be said that the company has committed the offence as it is because of legal bar that it is precluded from making the payment. Once dishonour of the cheque by the Bank and failure to make payment of amount by the company is beyond its control, the Directors (who are in fact ex-Directors) can also not be held liable. Sustenance for this proposition can be drawn from another judgment of the Supreme Court in the case of Kusum Ingots and Alloys Ltd. etc. v. Pennar Peterson Securities Ltd. and Ors. [2000] 100 Company Cases 755(SC). That was a case where reference in respect of the company was pending before the Board of Industrial and Financial Reconstruction (for short `BIFR') under the Sick Industrial Companies (Special Provisions) Act 1985 (SICA). The Court held that mere registering the reference would not be sufficient to bar the proceedings under Section 138 of the N.I. Act even by virtue of Section 22 of SICA as Section 22 which provided that no proceedings would be instituted against the company related to only to civil proceedings and does not include criminal proceedings. However, the Court further held that position would be different if order is passed by the BIFR under Section 22A of SICA restraining the company or its Directors from disposing of the assets of the company.”

Thus, the aforesaid discussion leads to an inference that as regards company, since, arraigning company in a complaint u/s 138 of Negotiable Instruments Act is a must and since the Director shall represent the company for the offence committed by it, but, if the company itself is wound up before the cause of action regarding the complaint u/s 138 of Negotiable Instruments Act, such complaint against even the Directors shall not be maintainable. If the company is wound up subsequently and cause of action had arisen before, then, the Directors can nevertheless be prosecuted is now settled.

Therefore, it is fairly settled that complaints against u/s 138 of Negotiable Instruments Act and order of summoning can be quashed under section 482 of CrPC (Correspond to Section 528 BNSS), if the prescription under the said section and the trap of section 138-142 are not followed. The strict provision of the section as aforesaid shall have to be met before filing complaint. The situation under which the complaints and summoning order could be quashed by the High Court has already been deliberated before.  

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Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com