DCM FINANCIAL SERVICES LTD. versus J.N. SAREEN & ANR.

5. I consider in view of the documents placed by the applicant on record showing that applicant had resigned way back in 1996 and his resignation was informed to the Registrar of Companies in October 1996 by filing the statutory Form 32, the plea of complainant that applicant was a director cannot be considered without any affidavit of the Authorized Representative of the complainant that he has verified from the Registrar of Companies and Form No.32 filed by the accused was not gen~ine. It is not a trivial matter that a person has to face trial as an accused in the court. No person can be asked to face trial in the court without there being a basis of proceedings against him merely at the wishes of a complainant. The court must be satisfied that the persons who has been called as an accused against him there was sufficient grounds to proceed. In this case I consider that complainant has taken vague plea in reply to the application of accused regarding genuineness and non-admission of Form No.32 or about his being responsible for the function of the company. In view of specific documents by the accused applicant the vague pleas of the company do not and anywhere." The Criminal Revision Application filed thereagainst, as indicated hereinbefore, has been dismissed.

6. Mr. P.S. Patwalia, learned Senior Counsel appearing on behalf of the appellant, would submit that although before the High Court no material was placed to show that the 1st re- DCM FINANCIAL SERVICES LTD. v. J.N. SAREEN & ANR. (S.B. SINHA. J.] spondent was a signatory to the cheque in question, in view of A _,j the fact that the entire records were available to the High Court, it should have been held that the First Respondent was prima- rily liable for payment of the amount thereunder:

7. Mr. J.N. Sareen, learned counsel appearing on behalf of the 1 •1 respondent, supported the impugned judgment.

8. In support of the said complaint petition one Peter N. Ballam was examined on behalf of the appellant. In relation to the 1 •1 respondent he did not make any statement as is required in terms of Section 141 of the A.ct. He merely stated :- c "8. I state that the above named accused no.1 is a Company and accused No. 2 to 8 are Directors/key executives of the accused No.1 Company and are responsible for the affairs of accused No.1 is/are guilty of offence u/s 138 of Negotiable Instruments Act & 420 of D IPC and is/are liable to be prose-::uted and punished in accordance with law." He, thus, even was not aware of the post held by the First Respondent herein at the relevant time. The learned Sessions Judge in his order dated 51h July, 2003 has noticed that no contention had been raised that the 1 •1 respondent in his capacity as an authorized signatory signed the cheque. Such a contention appears to have been raised before us for the first time. It has not been disputed that the 1st respondent resigned as a Director of the Company on or about 25th May, 1996.

9. The question which arises for consideration is as to whether an authorized signatory, in a situation of this nature, would be liable for prosecution. ….

10. The underlying purpose for which the Parliament en- acted Section 138 of the Act is not in doubt or dispute. What, however, is necessary to be borne in mind is the distinction be- tween a civil proceeding and a criminal proceeding. What is A also necessary to be borne in mind is the standard of proof in a civil suit and a criminal case.

11. Averments made in the complaint petition supported by the statements of the complainant form the basis for taking cognizance of an offence by the Magistrate. Application of mind on the averments made in the complaint petition vis-a-vis the order which is required to be passed for summoning the wit- nesses is imperative.

12. The complaint petition did not disclose as to who had c signed the cheque on behalf of the Company. Involvement of the 1s1 respondent in commission of the offence as signatory was neither averred nor stated by the authorized representa- tive of the complainant. Even the complaint petition proceeded on the basis that the averments contained in the complaint pe- D tition were sufficient to enable the learned Magistrate to sum- mon the accused. Even before the High Court such a conten- Hon has not been raised, as noticed hereinbefore. We may notice the concession m(\de by Mr. Patwalia in this behalf that such a contention has been raised before us for E the first time. This itself indicates the manner in which the com- plaint proceeded. Fairness on the part of the complainant is also expected in such a matter. It is now not in dispute that the 1s1 respondent had inti- mated the complainant as regards his resignation from the Company.

13. Section 138 of the Act reads as under :- "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 'f ,.., DCM FINANCIAL SERVICES LTD. v. J.N. SAREEN & ANR. [S.B. SINHA, J.] 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 extend to two year, or with fine which may extend to twice the amount of the cheque, or with both … "

14. For constituting an offence in terms of the said provi- sion, the following ingredients are to be satisfied:- a) A cheque must be drawn; b) It must be presented and returned unpaid inter alia with the remarks "insufficient funds"; c) A Notice for payment should be served on the accused; d) The accused has failed to make the payment of the said amount to the payee within 15 days from the date of receipt of notice.

15. First Respondent indisputably was a Director of the Company. The liability attached to him was not a personal Ii- ability. It was a constructive liability. The cheque was drawn on behalf of the Company. He might have been liable as a person incharge of the company within the meaning of Section 141 of the Act as has been held by this Court in S. M. S. Pharmaceuti- cals Ltd. vs. Neeta Bhalla and another : (2005) 8 SCC 89 whereupon strong reliance has been placed by Mr. Patwalia. One of the questions which indisputably arose for consideration therein was as to whether a signatory of the cheque would come within the purview of Section 141 of the Act, as would appear from paragraph 1 thereof.which reads:- "This matter arises from a reference made by a two-Judge · Bench of this Court for determination of the following questions by a larger Bench: "(a) Whether for purposes of Section 141 of the Negotiable c ) ~ ~ . 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. (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 c contrary. (c) Even if it is held thatspecific 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." It was opined :- 9. The position of a managing director ora joint managing director in a company may be different. These persons, as the designation of their office suggests, are in charge of a company and are responsible for the conduct of the business of the company. In order to escape liability such persons may have to bring their case within the proviso to Section 141(1), that is, they will h.ave to prove that when the offence was committed they had no knowledge of the offence or that they exercised all due diligence to prevent the commission of the offence." It was concluded :- "10. While analysing Section 141 of the Act, it will be seen that it operates in cases where an offence under Section 138 is committed by a company. The key words which occur in the section are "every person''. These are general words and take every person connected with a company DCM FINANCIAL SERVICES LTD. v. JN. SAREEN 615 & ANR. [S.B. SINHA, J.] within their sweep. Therefore, these words have been rightly qualified by use of the words: "Who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of B the business of the company, as well as the company, shall be deemed to be guilty of the offence, etc." What is required is that the persons who are sought to be made criminally liable under Section 141 should be, at the time the offence was committed, in charge of and C responsible to the company for the conduct of the business of the company. Every person connected with the company shall not f~ll within the ambit of the provision. It is only those persons who were in charge of and responsible for · the conduct of business of the company at the time of D commission of an offence, who will be liable for criminal action. It follows from this 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 under the provision. The liability E arises from being in charge of and responsible for the conduct of 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. Conversely, a person not holding any office or designation in a company may be liable if he satisfies the main requirement of being in charge of and responsible for the conduct of business of a company at the relevant time. Liability depends on the role one plays in the affairs of a company and not on designation or status. If being a G director or manager or secretary was enough to cast criminal liability, the section would have said so. Instead of "every person" the section would have said "every director, manager or secretary in a company is liable" .. ., etc. The legislature is aware that it is a case of criminal H .,x liability which means serious consequences so far as the person sought to be made liable is concerned. Therefore, only persons who can be said to be connected with the commission of a crime at the relevant time have been subjected to action." 16. We may also notice a decision of this Court in N. Rangachari vs. Bharat Sanchar Nigam Ltd. : (2007) 5 SCC 108 wherein it was held :- "21. A person normally having business or commercial c dealings with a company, would satisfy himself about its creditworthiness and reliability by looking at its promoters and Board of Dir~ctors and the nature and extent of its business and its memorandum or articles of association. Other than that, he may not be aware of the arrangements within the company in regard to its management, daily routine, etc. Therefore, when a cheque issued to him by the company is dishonoured, he is expected only to be aware generally of who are in charge of the affairs of the company. It is not reasonable to expect him to know whether the person who signed the cheque was instructed to do so or whether he has been deprived of his authority to do so when he actually signed the cheque. Those are matters peculiarly within the knowledge of the company and those in. charge of it. So, all that a payee of a cheque that is –.+ dishonoured can be expected to allege is that the persons named in the complaint are in charge of its affairs. The Directors are prima facie in that position." It was further held :- 27. We think that, in the circumstances, the High Court has rightly come to the conclusion that it is not a fit case for exercise of jurisdiction under Section 482 of the Code of Criminal Procedure for quashing the complaint. In fact, an advertence to Sections 138 and 141 of the Negotiable Instruments Act shows that on the other elements of an offence under Section 138 being satisfied, the burden is DCM FINANCIAL SERVICES LTD. v. J.N. SAREEN & ANR. [S.B. SINHA, J.] on the Board of Directors or the officers in charge of the affairs of the company to show that they are not liable to be convicted. Any restriction on their power or existence of any special circumstance that makes them not liable is something that is peculiarly within their knowledge and it is for them to establish at the trial such a restriction or to show that at the relevant time they were not in charge of the affairs of the Company. Reading the complaint as a whole, we are satisfied that it is a case where the contentions sought to be raised by the appellant can only be dealt with after the conclusion (sic commencement) of c the trial." 17. We are, however, concerned with a different situation hereat. 18. Section 141 of the Act provides for a constructive Ii- ability. A legal fiction has been created thereby. The statute being a penal one, should receive strict construction. It requires strict compliance of the provision. Specific averments in the complaint petition so as to satisfy the requirements of Section 141 of the Act are imperative. Mere fact that at one point of time some role has been played by the accused may not by itself be sufficient to attract the constructive liability under Sec- tion 141 of the Act. (See K. Srikanth Singh vs. Mis. North East Securities Ltd. and another: JT 2007 (9) SC 449). 19. We may also notice that this Court in N. K. Wahi vs. Shekhar Singh and others : (2007) 9 SCC 481 has observed "8. To launch a prosecution, therefore, against the alleged Directors there must be a specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegation as to how the Directors are in-charge and responsible for the conduct of the business of the company. The description should be clear. It is true that precise words from the provisions of the Act need not be reproduced and the [2008) 8 S.C.R. court can always come to a conclusion in facts of each case. But still, in the absence of any averment or specific evidence the net result would be that complaint would not be entertainable." [Emphasis supplied] 20. The cheque in question was admittedly a post dated one. It was signed on 3rd April, 1995. It was presented only sometimes in June, 1998. In the meantime he had resigned from the directorship of the Company. The complaint petition C was filed on or about 201h Augu!?,t, 1998. Intimation about his resignation was given to the complainant in writing by the 1 •1 respondent on several occasions. Appellant was, therefore, aware thereof. Despite having the knowledge, the 1•1 respon- dent was impleaded one of the accused in the complaint as a D Director lncharge of the affairs of the Company on the date of commission of the offence, whic;h he was not. If he was pro- ceeded against ~s a signatory to the cheques, it should have been disctosed before th¢ learned Judge as also the High Court so as to enable hini to apply his mind in that behalf. It was not doneC. Although, therefore, .. it may be that as an authorized E signatory he will be deemed to be person incharge, in the facts and circumsfances of the case, we are of the opinion that the said contention should not be permitted to be raised for the first time before us. A person who had resigned with the knowledge of the complainant in 1996 could not be a person incharge of F the Company in 1998 when the cheque was dishonoured. He had no say in the matter of seeing that the cheque is honoured. He could not ask the Company to pay the amount. He as a Di- rector or otherwise could not have been made responsible for payment of the cheque on behalf of the Company or otherwise. G (See also Shiv KumarPoddar vs. State (NCT of Delhi) : (2007) 3 SCC 693: Everest Adveristing Pvt. Ltd. vs. State (NCT of Delhi) : (2007) 5 SCC 54 and Raghu Lakshminarayanan vs. Fine Tubes : (2007) 5 SCC 103. 21. Mr. Patwalia, however, submitted that a situation may DCM FINANCIAL SERVICES LTD. v. JN. SAREEN 619 & ANR. [S.B. SINHA, J.] JI.. arise where change in the management is effected only to avoid A such constructive liability. Firstly we are not concerned with such a hypothetical case. Secondly, as noticed by this Court in Rangachari's case (su- pra) that a person normally having business or commercial deal- ings with a company, would satisfy himself about its creditwor- thiness and reliability by looking at its promoters and Board of Directors and the nature and extent of its business and its memo- randum or articles of association. 22. When post dated cheques are issued and the same c are accepted, although it may be presumed that the money will be made available in the bank when the same is presented for encashment, but for that purpose, the harsh provision of con- structive liability may not be available except when an appropri- …, ate case in that behalf is made out. 23. Section 140 of the Act cannot be s:iid to have any ap- plication whatsoever. Reason to believe on the part of a drawer that the cheque would not be dishonoured cannot be a defence. But, then one must issue the cheque with full knowledge as to when the same would be presented. It appears to be a case where the appellant has taken undue advantage of the post dated cheques given on behalf of the company. The statute does not envisage misuse of a privilege conferred upon a party ,._ to the contract. Submission of Mr. Patwalia made in view of the decision of this Court in Ada/at Prasad v Roop/al Jindal and F Others [(2004) 7 sec 338] is misplaced. Had such a conten- tion been raised even in terms of Ada/at Prasad (supra), the respondents could have filed an application for quashing in terms of Section 482 of the Code of Criminal Procedure at that stage. Again such a contention had not been raised before the G High Court. No such ground appears to have been taken even in the Special Leave Petition. While examining the issue, we have considered the case from a broader angle. Having found that the prosecution of the respondents being mala fide despite the fact that on technical grounds it may be lawful to set aside H A the order of the High Court, it, in our opinion, should not be done. Jurisdiction of this Court in terms of Article 136 of the Constitu- tion of India need not be exercised only because it would be lawful to do so. Various factors including the conduct of the appellant will be relevant therefor. Having regard to the facts B and circumstances of this case, it is not a fit case where we should allow the appellants to raise additional contentions which have not been raised before the courts below. 24. For the reasons abovementioned we are of the opin- ion that no case has been made out for interference with the c impugned judgment. 25. The appeal fails and is dismissed. S.K.S. Appeal dismissed