A company is not known just by it's name but by the financial strength of its
management, the market reputation of the Chairman/Managing Director or the
promoter group. When a bank sanctions loans, it is these factors that they
consider. Similarly, when a company raises private loans, it is raised on the
face of the Promoter. When the company takes goods/services from a
manufacturer/supplier on the basis of post dated cheques, the goodwill of the
directors weigh.
It is on this premise/misconception that people file complaint u/s 138 of
Negotiable instruments Act, 1908 for default for dishonour of cheques against
the directors and not against the defaulting company. The prime reason for
filing complaint against the signatory/ Director/ MD/CEO is to pressurise them
to make payment for fear of criminal proceedings against them. But, the Apex
Court has categorically ruled that such a complaint u/s 138 of the NI Act
against the Directors without prosecuting the company is not maintainable.
It would be relevant to reproduce Section 138 & 141 of the NI Act, 1881 which
read as under: Section 138 in The Negotiable Instruments Act, 1881 138 Dishonour
of cheque for insufficiency, etc., of funds in the account.
Where any cheque drawn by a person on an account maintained by him with a banker
for payment of any amount of money to another person from out of that account
for the discharge, in whole or in part, of any debt or other liability, is
returned by the bank unpaid, either because of the amount of money standing to
the credit of that account is insufficient to honour the cheque or that it
exceeds the amount arranged to be paid from that account by an agreement made
with that bank, such person shall be deemed to have committed an offence and
shall, without prejudice to any other provisions of this Act, be punished with
imprisonment for a term which may be extended to two years, or with fine which
may extend to twice the amount of the cheque, or with both:
Provided that
nothing contained in this section shall apply unless:
- the cheque has been presented to the bank within a period of six months
from the date on which it is drawn or within the period of its validity,
whichever is earlier;
- the payee or the holder in due course of the cheque, as the case may be,
makes a demand for the payment of the said amount of money by giving a notice in
writing, to the drawer of the cheque, within thirty days of the receipt of
information by him from the bank regarding the return of the cheque as unpaid;
and
- the drawer of such cheque fails to make the payment of the said amount of
money to the payee or, as the case may be, to the holder in due course of the
cheque, within fifteen days of the receipt of the said notice.
Explanation: For the purposes of this section, "debt or other liability" means
a legally enforceable debt or other liability.
141 Offences by companies:
- 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 such 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.
- 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 of the company, such 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.
Explanation: For the purposes of this section:
- "company" means any body corporate and includes a firm or other
association of individuals; and
- "director", in relation to a firm, means a partner in the firm."
In would be trite to refer to the case of Aneeta Hada Vs. Godfather Travels and
Tours Pvt. Ltd. and Ors. (2012) 5 SCC 661 wherein the 3 member bench of the Apex
Court, dealing with the same subject, held as under:
58. Applying the doctrine of strict construction, we are of the considered
opinion that commission of offence by the company is an express condition
precedent to attract the vicarious liability of others.
Thus, the words "as well as the company" appearing in the section make it
absolutely unmistakably clear that when the company can be prosecuted, then
only the persons mentioned in the other categories could be vicariously
liable for the offence subject to the averments in the petition and proof
thereof. One cannot be oblivious of the fact that the company is a juristic
person and it has its own respectability. If a finding is recorded against
it, it would create a concavity it its reputation. There can be situations
when the corporate reputation is affected when a Director is indicted.
59. In view of our aforesaid analysis, we arrive at irresistible conclusion
that for maintaining the prosecution under Section 141 of the Act, arraigning of
a company as an accused is imperative. The other categories of offenders can
only be brought in the drag-net on the touchstone of vicarious liability as the
same has been stipulated in the provision itself. We say so on the basis of the
ratio laid down in C.V. Parekh which is a three-Judge Bench decision.
Thus, the
view expressed in Sheoratan Agarwal does not correctly lay down the law and,
accordingly, is hereby overruled. The decision in Anil Hada is overruled with
the qualifier as stated in para 51. The decision in Modi Distillery has to be
treated to be restricted to its own facts as has been explained by us
hereinabove."
It is apropos to refer to the case of State of Madras vs C.V. Parekh And Anr.
(1970) 3 SCC 491 in which a 3 member bench of the Apex Court dealt with Section
10 of the Essential Commodities Act and held that a director of a Company cannot
be prosecuted until the Company has been prosecuted. The Court categorically
held thus:
- Learned Counsel for the appellant, however, sought conviction of the two
respondents on the basis of Section 10 of the Essential Commodities Act
under which, if the person contravening an order made under Section 3 (which
covers an order under the Iron and Steel Control Order, 1956) is a company,
every person who, at the time the contravention 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
contravention and shall be liable to be proceeded against and punished
accordingly.
It was urged that the two respondents were in charge of, and were responsible
to, the company for the conduct of the business of the company and,
consequently, they must be held responsible for the sale and for thus
contravening the provisions of Clause 5 of the Iron and Steel (Control) Order.
This argument cannot be accepted, because it ignores the first condition for the
applicability of Section 10 to the effect that the person contravening the order
must be a company Itself. In the present case, there is no finding either by the
Magistrate or by the High Court that the sale in contravention of Clause 5 of
the Iron & Steel (Control) Order was made by the Company. In fact, the Company
was not charged with the offence at all.
The liability of the persons in charge of the Company only arises when the
contravention is by the Company itself. Since, in this case, there is no
evidence and no finding that the Company contravened Clause 5 of the Iron &
Steel (Control) Order, the two respondents could not be held responsible. The
actual contravention was by Kamdar and Villabhadas Thacker and any contravention
by them would not fasten responsibility on the respondents. The acquittal of the
respondents is, therefore, fully justified. The appeal fails and is dismissed."
The declaration of law by the Apex Court in Aneeta Hada (supra) is applicable in
all pending proceedings. The Apex Court in the case of Ajit Balse v. Ranga
Karkare, (2015) 15 SCC 748 has categorically held thus: "16. The learned counsel
appearing on behalf of the respondent while accepting that Adivasi Machua Samiti,
Sirsida on whose behalf cheque was issued was not impleaded as the accused
before the trial court, contended that the judgment in Aneeta Hada case cannot
be made applicable retrospectively in respect of cases where the conviction took
place much prior to the judgment.
However, such objection cannot be raised in the present case. Though judgment in
Aneeta Hada is prospective but is applicable in all pending cases, including the
trial, appeal, revision and special leave petition/appeal pending before this
Court.
The case of the appellants being covered by the decision in Aneeta Hada case, we
set aside the impugned judgment and conviction passed by the trial court as
affirmed by the appellate court and the impugned order dated 31-8-2012 passed by
the High Court of Chhattisgarh at Bilaspur in Criminal Revision No. 365 of
2012."
It is thus the mandate of law, as declared by the Apex Court that as per Section
138 read with Section 141 of NI Act, the Director of a company cannot be
prosecuted without making company as accused. Moreover, the aforesaid
declaration of law by the Apex Court is applicable in all pending proceedings
whether in trial, appeal, revision and SLP/ Appeal pending before the Apex
Court.
Written By: Inder Chand Jain
Ph no: 8279945021, Email:
[email protected]
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