The Allahabad High Court, in Jatinder Pal Singh v. M/s Statcon Power Controls Ltd. and Ors., No. 10245 of 2021, decided on 08.03.2021, held that an accused cannot be prosecuted under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 merely because he is a Director of the Defaulting company.
FACTS
Mr. Jatinder Pal Singh (hereinafter referred to as “the Applicant”) placed a purchase order bearing no. GET/11-009/12-13/362 dated 04.07.2012 on M/s Statcon Power Controls Ltd. and Ors. (hereinafter referred to as “the Respondent”) for the supply of two sets of Battery Bank, Charger, and accessories for a total amount of Rs. 4,58,42,880/-; part of which were supplied to the Applicant on 25.04.2013.
For the said goods, the Applicant issued two cheques of Rs. 1,00,00,000, bearing No. 404847 and 404848 respectively, in the favour of the Respondent. Both the cheques, upon presentation before the respective bank, were dishonoured with a remark “Exceeds Arrangement”.
Upon the failure of the Applicant to pay the amount of the dishonoured cheques within the stipulated time of 15 days, the Learned Magistrate summoned the Applicant to the trial for the offence under Section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred to as the “NI Act”).
The Applicant was an Independent Director of the accused company, appointed on 24.04.2012 and resigned on 19.01.2014.
That the Applicant aggrieved by the summons order filed a Criminal Revision Petition No. 72 of 2019 that was dismissed by the Special Judge. Thereafter, aggrieved by the Order of the Special Judge, the Applicant filed the present application under Section 482 of the Criminal Procedure Code (hereinafter referred to as “CrPC”).
ISSUE BEFORE THE HIGH COURT
Whether an accused can be held liable for an offence under Section 138 by virtue of Section141 of the NI Act solely on the ground that he/she is a Director of the Defaulting Company?
CONTENTIONS OF THE PARTIES
The Applicant contended that the Learned Magistrate failed to identify that there was no special averment as per the requirement of Section 141 of the NI Act for impugning the Applicant under Section 138 of the NI Act.
The Applicant contended that he is an Independent Director of the company and is neither in charge, nor responsible for the everyday affairs of the company. Further, the Applicant submitted that he is not even the signatory of the dishonoured cheque in question.
The Applicant referred to K Shrikanth Singh v. North East Securities Limited (2007) 12 SCC 788, wherein the Supreme Court held that for the applicability of Section 141 of the NI Act, vicarious liability cannot be inferred and must be proved.
Further, since Section138 and 141 of the NI Act are penal provisions that need to be construed quickly, the Applicant placed reliance on DCM Financial Services Limited v. J.N. Sareen and Anr, (2008) 8 SCC 1 wherein the Supreme Court stated that pleadings under Section 138 read with Section 141 of the NI Act must “sufficiently specify the role of the individual that is being impleaded as an accused.”
The Applicant by virtue of Pooja Ravinder Devidasani v. State of Maharashtra and Anr. (2014) 16 SCC 1 submitted that a non-executive director of a company cannot be held liable for the offence under Section 138 of the NI Act unless “he/she was in-charge or responsible to the company for the conduct of it business or prove that the offence a committed with consent/connivance of or a attributable to any negligence on part of the director concerned.”
On the contrary, the Respondent submitted that it is within the power of the Magistrate to summon an accused if he/she is satisfied with the material on record.
The Respondent contended that there is no illegality in summons order and referred to S.M.S. Pharmaceuticals Ltd. v. Neta Bhalla and Anr. (2005) 8 SCC 89 wherein the Supreme Court held that:
“for s.141 of the NI Act, if the allegations as a whole fulfil the requirements and it is not necessary for the complaint to specifically state that the accused was in-charge of/responsible for the conduct of business of the company… A director is deemed to be in charge unless he proves otherwise.”
DECISION AND FINDINGS
The High Court rejecting the Respondent’s contentions held that there is no specific averment against the Applicant and only a general allegation that the Applicant is a Director of the said company.
Subsequently, there were no such evidence on record to show that the Applicant was involved in the everyday affairs of the company, and he was simply a nominee director who had resigned.
Relying on previous precedents that specific allegations about the accused is a necessary condition for prosecution under Section 138 of the NI Act, the Court held that the Summons order passed by the Learned Magistrate is unjust, illegal and cannot be sustained.
The Court thereby allowed the present petition and set aside the Magistrate’s order, and further summoning order was passed as well.
AMLEGALS REMARKS
Both Sections 138 and 141 of the NI Act are penal provisions and therefore, the provisions must be strictly construed. Courts cannot read more than what is mandated under these provisions as held in Aparna Shah v. Sheth Developers (P) Ltd., (2013) 8 SCC 71.
In A.K. Singhania v. Gujarat State Fertilizer Company Ltd. and Anr, (2013) 16 SCC 630, the Supreme Court held that for prosecution of Directors under Section 138 of NI Act although there is no requirement to specifically prove the role of the Director in the particular transaction, it is necessary that the complaint alleges that such individuals were and in charge of the conduct of business of the company.
Further, there are numerous Supreme Court precedents like Sarav Investment & Financial Consultancy (P) Ltd. v. Lloyd’s, Register of Shipping, Indian Office, Staff President Fund and Anr., (2007) 14 SCC 753 and Shailendra Swarup v. Deputy Director, Enforcement Directorate, (2020) 16 SCC 561 wherein its has been laid down that a Director of a company is not impugned merely because of his title but only when the ingredients under Section 141 of the NI Act, of being in-charge of or responsible for the conduct of business of company is satisfied.
More so, when it comes to non-executive directors, who are not part of the day-to-day affairs of the business, the ingredients of Section141 clearly do not apply and it is the onus of the complainant to prove to the contrary.
– Team AMLEGALS assisted by Ms. Sriya Polepally (Intern)
For any query or feedback, please feel free to get in touch with chaitali.sadayet@amlegals.com or mridusha.guha@amlegals.com.
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