Quashed

Nandlal B Chauhan v. State of Gujarat

Gujarat HC8 Feb 2022SCR.A/1839/2013

Case brief

AI extract

What is this about?

In this special criminal application, the applicant challenged his inclusion as an accused director in a complaint under Section 138 of the Negotiable Instruments Act regarding a dishonoured cheque. The High Court quashed the complaint against the applicant, holding he was never a director or responsible for the company's business.

What did the court decide?

Complaint No. 17 of 2011 filed before the Metropolitan Magistrate was quashed and set aside only regarding the applicant; rule made absolute.

Nandlal B Chauhan Vs State of Gujarat — Cheque Dishonour | Gujarat HC (2022)

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R/SCR.A/1839/2013 JUDGMENT DATED: 08/02/2022

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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CRIMINAL APPLICATION NO. 1839 of 2013

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FOR APPROVAL AND SIGNATURE:

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HONOURABLE MR. JUSTICE NIKHIL S. KARIEL

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1	Whether Reporters of Local Papers may be allowed to see the judgment ?	YES
2	To be referred to the Reporter or not ?	NO YES
3	Whether their Lordships wish to see the fair copy of the judgment ?	NO
4	Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ?	NO

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NANDLAL B CHAUHAN

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Versus

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STATE OF GUJARAT & 1 other(s)

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Appearance:

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MR P P MAJMUDAR(5284) for the Applicant(s) No. 1 MS M D MEHTA, APP for the Respondent(s) No. 1 MR APURVA A DAVE(3777) for the Respondent(s) No. 2

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CORAM: HONOURABLE MR. JUSTICE NIKHIL S. KARIEL

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Date : 08/02/2022 ORAL JUDGMENT

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Heard learned Advocate Mr. P.P. Majmudar for the petitioner, learned APP Ms. M.D. Mehta for the respondent-State and learned Advocate Mr. Apurva A. Dave for the respondent No.2-original complainant.

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By way of this petition the petitioner prays for quashing and setting aside of the Criminal Case No. 17 of 2011 filed by the original complainant

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R/SCR.A/1839/2013 JUDGMENT DATED: 08/02/2022

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respondent No.2 herein before the learned Metropolitan Magistrate, Negotiable Instruments Act's Court No. 4, Ahmedabad, insofar as the said complaint joins the present petitioner as accused No.4 in capacity of director of accused No.1 M/s. Platinum Metals and Trading Private Limited.

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Learned Advocate Mr. Majmudar would submit that the present petitioner was never a Director of the said company in the past nor at any point of time the petitioner was associated with the company as a Director. Learned Advocate would further submit that the petitioner is also not involved in the day-to-day affairs of the company, hence the petitioner having been wrongly arraigned as an accused, the impugned complaint deserves to be quashed and set aside. Learned Advocate would rely upon a search report issued by one M/s. Chandarana Associates, Chartered Accountants, with regard to the company in question. Learned Advocate would submit that the search report clearly shows that the present petitioner was not associated with the company in question in capacity as Director. Learned Advocate would further rely upon a report issued by one M/s. Nishi Jain and Company, Company Secretaries, showing the past and present directorship holding of the present petitioner along with his DIN number. Such information having been collected from the Ministry of Corporate Affairs. Learned Advocate Mr. Majmudar would submit that though the petitioner had been associated and is associated with number of companies in past as well as on date, yet from the certificate it is clear that the petitioner was never associated with the company in question as a Director in which capacity he has been arraigned as an accused. Learned Advocate Mr. Majmudar would submit that, under such circumstances, more particularly since there is no allegation that the cheque had been signed by the present petitioner, the impugned complaint insofar as the present petitioner requires to be quashed and set aside.

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R/SCR.A/1839/2013 JUDGMENT DATED: 08/02/2022

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On the other hand, learned Advocate Mr. Dave of behalf of the original complainant would emphasize on notice issued under Section 138 of the Negotiable Instruments Act by the complainant to the Directors of the company where the petitioner was also named as a Director. Learned Advocate would submit that the notice had been received by the petitioner at the relevant point of time and as such the petitioner having not responded to the notice, adverse inference has to be drawn that he was infact a Director of the company in question. Learned Advocate would further submit that even in proceedings against the company and its Directors initiated by the complainant-Bank before the learned DRT, wherein the petitioner had been arraigned as a Director and whereas vide order dated 29.09.2015, the defendants including the present petitioner were jointly and severally directed to repay the amount in question to the Bank. Learned Advocate would submit that since even in the proceedings before the learned DRT, Ahmedabad, since the petitioner had been joined as Director and the learned DRT, having passed an order also against the present petitioner, this Court at this state may not accept the submissions made by learned Advocate for the petitioner. Learned Advocate Mr. Dave would also draw the attention of this Court to a document which shows the details of shareholding of the petitioner and his group in the company in question. Learned Advocate would submit that the petitioner is shown as the highest shareholder in his entire group, and therefore also he would be liable.

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Heard learned Advocates for the parties who have not submitted anything further.

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The only issue which arises for consideration of this Court is whether the present petitioner has been erroneously arraigned as an accused in connection with the complaint under Section 138 of the Negotiable

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R/SCR.A/1839/2013 JUDGMENT DATED: 08/02/2022

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Instruments Act filed by the complainant-Bank.

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At the outset, it would be relevant to note that in the complaint, the status of the present petitioner, is shown as Director of the company in question i.e. M/s. Platinum Metals and Trading Private Limited. Having perused the complaint it appears that the only allegation that is made against the present petitioner is at Para No.4 of the complaint where again it is reiterated very broadly that the petitioner as well as the other accused namely accused Nos. 2 to 6 are directors of the company in question and are also managing the day-to-day affairs of the company. That in the complaint there is no specific allegation that the petitioner was a signatory of the cheque or was engaged in managing day-to-day affairs of the accusedcompany.

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This Court has also noticed the certificates issued by the Chartered Accountants as well as Company Secretary, more particularly the certificate issued by the Company Secretary which would clearly show that neither the petitioner is a director with the company nor associated with the company in question.

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This Court has also perused an affidavit-in-reply filed by the defendants in the proceedings before the learned DRT referred to hereinabove, more particularly Para 47 thereof where the defendants i.e. Managing Director of the company and others, have inter alia mentioned that the petitioner is wrongly joined as a party defendant in the original application, more particularly since the defendant concerned i.e. the petitioner was not a Director of the company which is the original borrower. It was also clarified that the petitioner was a shareholder of the defendant No.1 company. It further appears that this aspect had not been taken into consideration by the learned DRT, nevertheless what would be important to

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mention here is the fact that the defendants before the learned DRT had themselves excluded the present petitioner from the scope of the proceedings, more particularly having affirmed that the petitioner was not a director of the company in question.

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In this backdrop we shall now examine the contentions raised by the respective learned Advocates. Insofar as the principal contention raised by learned Advocate for the petitioner that the petitioner was never a Director of the accused company, and the complainant not having produced any material in support of the allegation in the complainant that the petitioner was a Director, had the matter rested there, then the present petition could have been disposed of without any elaborate finding, more particularly since by now it is a well settled position of law that even for accused who were Directors and were not signatories to the cheque, it is a necessary requirement to aver in the complaint filed under Section 138 read with Section 141 of the Negotiable Instruments Act that at the relevant point of time when the offence was committed the Directors were in charge of and were responsible for conduct of business of the company. Thus, in a complaint under the Negotiable Instruments Act where the petitioner arraigned as an accused in his capacity as Director where it is shown that the petitioner was never a Director, the complaint ought to be quashed only on that count, but as noticed above, the learned Advocate for the respondentBank had made two additional submissions i.e. the first with regard to the adverse inference since the petitioner did not reply to a notice under Section 138 of the Negotiable Instruments Act upon dishonour of the cheque and the second with regard to the petitioner being a major shareholder of the company would be liable for criminal action, which contentions require to be dealt with.

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At this stage, it would be also relevant to mention that in support of

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such ancillary contentions on behalf of the respondent-Bank, neither has the learned Advocate for the respondent-Bank submitted to this Court as to under which provision of the Negotiable Instruments Act, a person who has not replied to a notice under Proviso (b) of Section 138 of the Negotiable Instruments Act, more particularly calling upon him to make payment of the amount of cheque which had been dishonoured, could be joined as an accused, merely because he did not reply to the notice, more particularly when it is urged relying upon impeccable documents that the person concerned was never a Director of the company.

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Insofar as the contention with regard to the petitioner not replying to the notice under the Proviso (b) to Section 138 of the Negotiable Instruments Act, and therefore the petitioner being joined as an accused for the same, this Court notes and holds that as such since the petitioner was not a Director of the Company neither at the relevant point of time nor for that matter at any point of time, he was not at all required to responded to the said notice. In any case, non-response to the notice would not automatically result in the petitioner being considered as a Director of the Company. Neither Section 138 of the Negotiable Instruments Act nor the provisos to the said provision inter alia envisage liability being required to be rebutted even by a person who does not reply to a wrongly issued notice. Having regard to the fact that the provision is a penal provision, a strict construction thereof is required. Apposite at this stage would be to refer to observation of the Hon'ble Apex Court in case of M/s. Sarav Investment & Financial Consultants Pvt. Ltd. & Anr. Vs. Llyods Register of Shipping Indian Office Staff Provident Fund & Anr. , reported in 2007(14) SCC 753 , more particularly Para 16 thereof.

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" 16. Section 138 of the Act contains a penal provision. It is a special statute. It creates a vicarious liability. Even the burden of proof to some extent is on the accused. Having regard to the

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purport of the said provision as also in view of the fact that it provides for a severe penalty, the provision warrants a strict construction. Proviso appended to Section 138 contains a nonobstante clause. It provides that nothing contained in the main provision shall apply unless the requirements prescribed therein are complied with. Service of notice is one of the statutory requirements for initiation of a criminal proceeding. Such notice is required to be given within 30 days of the receipt of the information by the complainant from the bank regarding the cheque as unpaid. Clause (c) provides that the holder of the cheque must be given an opportunity to pay the amount in question within 15 days of the receipt of the said notice. Complaint Petition, thus, can be filed for commission of an offence by a drawee of a cheque only 15 days after service of the notice. What are the requirements of service of a notice is no longer res-integra in view of the recent decision of this Court in C.C. Alavi Haji Vs. Palapetty Muhammed & Anr. [JT 2007(7) SC 498]."

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The learned Advocate for the respondent-Bank also did not point out any provision of the Negotiable Instruments Act under which a major shareholder of an accused company whose cheque has been dishonoured, could be prosecuted for an offence under Section 138 of the Negotiable Instruments Act. The learned Advocate for the respondent-Bank has also not been able to show any judgment of this Court or of the Hon'ble Apex Court whereby a person could be prosecuted for an offence under Section 138 of the Negotiable Instruments Act, in the above contingency as alternatively argued by the learned Advocate for the respondentcomplainant.

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In this regard, this Court refers to a decision of the Hon'ble Apex Court in case of National Small Industries Corporation Limited Vs. Harmeet Singh Paintal and another , reported in (2010) 3 SCC 330 . The Hon'ble Apex Court in the said decision was examining the issue with regard to required averments in a complaint under Section 138 read with Section 141 of the Negotiable Instruments Act against a Director of a

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company before he can be subjected to a criminal proceeding. The observations of the Hon'ble Apex Court in paragraphs Nos. 12, 13, 14, 15, 20, 21, 36, 37, 38 and 39 are quoted below for benefit :

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"12. It is very clear from the above provision that what is required is that the persons who are sought to be made vicariously liable for a criminal offence under Section 141 should be, 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. Every person connected with the company shall not fall within the ambit of the provision. 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. It follows from the fact that if a Director of a Company who was not in- charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable for a criminal offence under the provisions. The liability arises from being in-charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company.

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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 in what manner Respondent No.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.

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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 141.

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In a catena of decisions, this Court has held that for making Directors liable for the offences committed by the company under Section 141 of the Act, there must be specific averments against the Directors, showing as to how and in what manner the Directors were responsible for the conduct of the business of the company.

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xxx xxx xxx

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Section 141 of the Act has been interpreted by this Court in various decisions. As to the scope of Section 141 of the Act, a three-Judge Bench of this Court considered the following questions which had been referred to it by a two-Judge Bench of this Court in SMS Pharmaceuticals vs. Neeta Bhalla and Anr. (2005) 8 SCC 89 :

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

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(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.

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(c) Even if it is held that specific averments are necessary, whether in the absence of such averments the signatory of the cheque and or the managing directors or joint managing director who admittedly would be in charge of the company and responsible to the company for conduct of its business could be proceeded against."

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While considering the above questions, this Court held as under:

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"18. To sum up, there is almost unanimous judicial opinion that necessary averments ought to be contained in a complaint before a person can be subjected to criminal process. A liability under Section 141 of the Act is sought to be fastened vicariously on a person connected with a company, the principal accused being the company itself. It

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is a departure from the rule in criminal law against vicarious liability. A clear case should be spelled out in the complaint against the person sought to be made liable. Section 141 of the Act contains the requirements for making a person liable under the said provision. That the respondent falls within the parameters of Section 141 has to be spelled out. A complaint has to be examined by the Magistrate in the first instance on the basis of averments contained therein. If the Magistrate is satisfied that there are averments which bring the case within Section 141, he would issue the process. We have seen that merely being described as a director in a company is not sufficient to satisfy the requirement of Section 141. Even a non-director can be liable under Section 141 of the Act. The averments in the complaint would also serve the purpose that the person sought to be made liable would know what is the case which is alleged against him. This will enable him to meet the case at the trial.

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xxx xxx xxx

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Section 291 of the Companies Act provides that,

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"291. General powers of Board. - Subject to the provisions of that 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 authorized to exercise and do:"

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A company, though 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 thecompany'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 business of the company.

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A combined reading of Sections 5 and 291 of Companies Act, 1956 with the definitions in clauses 24, 26, 30, 31 and 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:

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(a) the Managing Director/s;

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(b) the whole-time Director/s;

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(d) the Secretary;

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(e) any person in accordance with whose directions or instructions the Board of Directors of the company is accustomed to act;

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(f) any person charged by the Board of Directors with the responsibility of complying with that provision;

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Provided that the person so charged has given his consent in this behalf to the Board;

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(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:

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Provided that where the Board exercises any power under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form.

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But if the accused is not one of the persons who falls under the category of "persons who are responsible to the company for the conduct of the business of the company" then merely by stating that "he was in-charge of the business of the company" or by stating that "he was in- charge of the day-to-day management of the company" or by stating that "he was in-charge of, and was responsible to the company for the conduct of the business of the company", he cannot be made vicariously liable underSection 141(1) of the Act. To put it clear that for making a person liable under Section 141(2), the mechanical repetition of the requirements under Section 141(1) will be of no assistance, but there should be necessary averments in the complaint as to how and in what manner the accused was guilty of consent and connivance or negligence and therefore, responsible under subsection (2) of Section 141 of the Act.

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From the above discussion, the following principles emerge :

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(i) The primary responsibility is on the complainant to make specific averments as are required under the law in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is

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no presumption that every Director knows about the transaction.

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(ii) Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company.

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(iii) Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make accused therein vicariously liable for offence committed by company along with averments in the petition containing that accused were in-charge of and responsible for the business of the company and by virtue of their position they are liable to be proceeded with.

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(iv) Vicarious liability on the part of a person must be pleaded and proved and not inferred.

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(v) If accused is Managing Director or Joint Managing Director then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with.

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(vi) If accused is a Director or an Officer of a company who signed the cheques on behalf of the company then also it is not necessary to make specific averment in complaint.

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(vii) The person sought to be made liable should be incharge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases."

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Having regard to the above quoted law laid down by the Hon'ble Apex Court, in the considered opinion of this Court, the same are relevant to the facts of the present case. It becomes clear that insofar as Directors of company are concerned, if any offence is committed by the company, then only such persons would be held liable if at the time when the offence

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committed, they were in charge and were responsible to the company for the conduct of the business as well as the company. A person merely being a Director and in absence of the person being in charge and responsible for the conduct of the business of the company would not be liable. Furthermore, the Hon'ble Apex Court has set out, upon combined reading of Section 5 and 291 of the Companies Act, 1956, as to the persons who could be considered to be responsible to the company for conduct of business of the company. Furthermore, the most important requirement is that the complainant is required to make specific averments as required under the law in the complaint so as to make the accused vicariously liable. That criminal liability could be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company.

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In the instant case while it is beyond doubt that the petitioner was not a Director of the company, and whereas even in the complaint there are no averments as to how the petitioner could be liable for an offence under Section 138 read with Section 141 of the Negotiable Instruments Act. The only averment is with regard to the petitioner being a Director and general averment that the petitioner along with other Directors were responsible for day-to-day affairs of the Company. The complaint does not make any averment as to how the petitioner as a major shareholder of the company would be liable or responsible for day-to-day affairs of the company. The complaint also does not make any averment as to why the petitioner should be prosecuted only on account of the petitioner not reply to a notice under the Proviso (b) to Section 138 of the Negotiable Instruments Act.

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In any case, since the law being that even a Director for being prosecuted under Section 138 of the Negotiable Instruments Act ought to be a person who is responsible for conduct of business of the company and

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should be in charge of the company at the relevant point of time and whereas necessary averments to such effect would also be required to be made in the complaint, all of which are absent in the instant case, therefore the contentions of the learned Advocate for the respondent-complainant cannot be countenanced.

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Having regard to the discussion and reasoning as hereinabove, in the considered opinion of this Court, since the complainant-Bank could not controvert the fact that the present petitioner was not a Director of the company in question more so, since the petitioner has been joined as such in the impugned complaint, and whereas there being complete absence of averments in the complaint that the petitioner was in any way responsible for conduct of business of the company or in charge of the company, therefore the impugned complaint deserves to be interfered with.

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In this view of the matter, the impugned complaint being Criminal Case No. 17 of 2011 pending before the learned Metropolitan Magistrate, Negotiable Instruments Act's Court No. 4, Ahmedabad, is hereby quashed and set aside only qua the petitioner herein. Rule is made absolute in the above terms. Direct service is permitted.

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(NIKHIL S. KARIEL,J)

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BDSONGARA

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Nandlal B Chauhan v. State of Gujarat

Case brief

What is this about?

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Nandlal B Chauhan v. State of Gujarat

Case brief

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