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Chockalingam v. M/S. Sundaram Finance Services Ltd.
Structured Summary of the Opinion
Factual and Procedural Background
The petitioner was the 4th accused in C.C. No. 2929 of 1998 before the XIII Metropolitan Magistrate, Egmore, Madras. The respondent, M/s. Sundaram Finance Service Ltd., filed a complaint under Section 138 of the Negotiable Instruments Act alleging that the 1st accused obtained bill discounting facilities and, in relation to that debt, a cheque for Rs. 22,50,000 (Cheque No. 243249 dated 27-12-1997) drawn on Indian Bank was issued and presented but returned on 30-12-1997 marked "funds insufficient". The respondent issued notices to the accused; despite a notice, the amount was not paid and a complaint was filed against accused Nos. 1 to 7.
The petitioner (4th accused) filed a petition under Section 482 Cr.P.C. seeking quashing of the criminal proceedings against him. He contended that he had ceased to be a director of the 1st accused/company and produced a Form No. 32 filed with the Registrar of Companies showing he ceased to be a director with effect from 20-3-1997. The cheque, on the case's timeline, was dated 27-12-1997 (issued after the date claimed as cessation). The complaint did not, according to the petitioner, contain any averment that he was in charge of, or responsible to, the company for the conduct of its business at the time of the alleged offence.
Procedural outcome in the opinion: The Court allowed Crl.O.P. No. 10744 of 1998 and quashed the case against the petitioner/4th accused in C.C. No. 2929 of 1998; the learned Magistrate remained free to proceed against the other accused.
Legal Issues Presented
- Whether the complaint under Section 138 of the Negotiable Instruments Act contains sufficient averments to implicate the petitioner (a former director) under Section 141(1) of the Negotiable Instruments Act — i.e., that he was "in charge of, and was responsible to the company for the conduct of the business" at the time the offence was committed.
- Whether, given documentary proof (Form No. 32) that the petitioner ceased to be a director before the date of issuance of the cheque, the proceedings against him should be quashed under the inherent jurisdiction of the High Court under Section 482 Cr.P.C. to prevent abuse of process and to secure the ends of justice.
Arguments of the Parties
Petitioner's Arguments
- The petitioner ceased to be a director of the company (claimed cessation evidenced by Form No. 32 sent to the Registrar of Companies; the Form is said to show cessation with effect from 20-3-1997).
- The cheque in question was issued on 27-12-1997, after the petitioner had ceased to be a director.
- The complaint contains no averment that, at the time of the alleged offence, the petitioner was in charge of or responsible to the company for the conduct of its business as required by Section 141(1) of the Negotiable Instruments Act.
- On these facts, the petitioner contended that he cannot be made liable under Section 141(1) and sought quashing under Section 482 Cr.P.C.
Respondent's Contentions
- The respondent pointed to the presence of the petitioner's name in the 37th Annual Report of the company, which the respondent said showed the petitioner as director up to 31-3-1996 (the opinion records this contention by the respondent).
- The respondent relied on authorities (including Rajan Kinnerkar v. Eric Cordeiro and Manju Podar v. Ashwani Kumar) for the proposition that a complaint under Section 138 cannot be quashed in a petition under Section 482 merely because a director says he ceased to be a director; the trial court should record the facts and decide.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sham Sundar v. State of Haryana, AIR 1989 SC 1982 (at 1984) | Prosecution must establish that the person was responsible for and in charge of the business at the relevant time before the proviso to Sec. 141(1) (requiring accused to prove lack of knowledge or due diligence) is attracted; it would be unjust to prosecute partners/directors without such proof. | The Court relied on this principle to emphasize that mere status as a director is not enough; absent proof or averment that the petitioner was in charge/responsible at the relevant time, he cannot be proceeded against. |
| State of Haryana v. Brij Lal Mittal, (1998) 4 Supreme 364 (at 369) | Being a director does not automatically mean the person was in charge and responsible for the conduct of business; without allegations showing that role, liability under analogous provisions cannot be prima facie established. | The Court applied this principle to hold that the complaint's bald statement of directorship, without further allegation of being in charge/responsible, is insufficient to proceed against the petitioner. |
| M/s. Senthil Kumaran Tea Industries v. Rajkumar, (1994) 1 L.W (Crl.) 278 | There must be averments to implicate directors as required under Section 141(1) of the Negotiable Instruments Act. | The Court cited this decision to support the proposition that the complaint must contain express averments to bring Section 141(1) into play; such averments were absent here. |
| Alfred Borg & Co. v. M/s. Antox India (P) Ltd., 1992 L.W (Crl.) 120 (at 125) | Initiating prosecution against sleeping partners or women (i.e., persons not shown to be in charge) cannot be sustained unless material shows they were in charge of and responsible for the conduct of the company's business. | The Court relied on this line of authority to reinforce that basic material is required to show that a director was in charge/responsible before proceeding; such material was lacking. |
| Smt. Davinder Kaur v. Small Scale Industries Development Bank of India, (1998) 3 Crimes 548 (Andhra Pradesh HC) | Where allegations indicate petitioners assisted the Managing Director and materials did not conclusively establish cessation of directorship, questions of fact cannot be decided in a Section 482 petition and such petitions may be dismissed. | The Court distinguished this authority on facts: in the instant case there was no allegation satisfying Section 141(1) and the petitioner produced documentary evidence of cessation; thus the decision was held not applicable. |
| Rajan Kinnerkar v. Eric Cordeiro, (1994) 80 CC 487 (Bombay High Court, Panaji Bench) | Fact of ceasing to be a director should be recorded by the trial court; complaint under Section 138 cannot be quashed under Section 482 simply on the director's petition. | The respondent relied on this decision; the Court noted the distinction that in the present complaint there was no allegation as contemplated under Section 141(1) and thus found the authority not directly applicable to justify continuation against the petitioner. |
| Manju Podar v. Ashwani Kumar, (1996) 86 CC 631 (Punjab & Haryana HC) | The trial court should decide whether accused directors were actually in charge; where complaint alleges they were directors and in charge, a prima facie case may exist and quashing is inappropriate. | The Court observed that in Manju Podar there were allegations that the accused were in charge; by contrast, no such allegation existed in the instant complaint, so the precedent was distinguished. |
| Habibunnisa Akthar v. S. & S. Industries and Enterprises Ltd., (1995) 83 CC 593 | An extract from Registrar showing an accused was not a partner when allegations arose is a factual matter to be decided at trial; generally the complaint is not quashed on that basis. | The Court noted that because the present complaint lacked allegations under Section 141 and there was documentary evidence indicating cessation of directorship, Habibunnisa was not factually comparable and was not applied to deny quashing. |
| Muruganandam v. State, (1998) 3 Crimes 428 | After analysis of authorities, lower court was not justified in framing charge where materials did not support it; asking the accused to face trial would be a travesty in such circumstances. | The Court cited this decision to support the proposition that framing proceedings against persons without supporting materials showing they were in charge/responsible is improper and that continuation would be unjust. |
Court's Reasoning and Analysis
The Court's analysis proceeded along the following lines, strictly reflecting the reasoning in the opinion:
- The Court identified the statutory trigger in issue: Section 141(1) of the Negotiable Instruments Act makes persons who, at the time of commission of an offence under Section 138, were "in charge of, and was responsible to the company for the conduct of the business of the company," liable to be proceeded against, subject to the proviso that they may escape liability by proving lack of knowledge or exercise of due diligence.
- The Court emphasized the settled principle (as articulated by the Supreme Court in Sham Sundar and State of Haryana v. Brij Lal Mittal) that the prosecution must first establish that the accused was, at the relevant time, in charge of and responsible for the conduct of the business; only upon such a prima facie establishment does the burden shift under the proviso to the accused to disprove knowledge or show due diligence.
- The Court examined the complaint and found there was no averment that the petitioner (4th accused) was in charge of or responsible to the company for conduct of its business at the relevant time; the complaint contained no material to prima facie show such a role.
- The Court considered the petitioner's documentary proof — Form No. 32 filed with the Registrar of Companies — showing cessation of directorship with effect from 20-3-1997, and observed that the cheque dated 27-12-1997 was issued after that date as per the petitioner's case.
- The Court reviewed authorities relied upon by both parties. It distinguished decisions where there were specific allegations that the accused were assisting/managing the company or where factual disputes (e.g., whether a person had ceased to be a director) could not be resolved on a Section 482 petition. The Court found those authorities to be inapplicable on the facts before it because in the present complaint there was no allegation fulfilling Section 141(1) and there was documentary evidence of cessation.
- On this basis, the Court concluded that proceeding against the petitioner would amount to an abuse of the process of the court and would be unjust: there was no material on the face of the complaint to implicate the petitioner under Section 141(1) and the petitioner had produced evidence indicating cessation of directorship prior to the cheque's issuance.
- The Court invoked its inherent jurisdiction under Section 482 Cr.P.C. to prevent abuse of process and to secure the ends of justice and determined that the complaint as against the petitioner should be quashed.
Holding and Implications
Holding: The complaint in C.C. No. 2929 of 1998 as against the petitioner/4th accused is quashed.
Implications and direct consequences (as expressed in the opinion):
- The petitioner is relieved from facing trial in respect of the complaint in C.C. No. 2929 of 1998.
- The learned Magistrate is permitted to proceed against the other accused in accordance with law; the quashing is confined to the petitioner (4th accused).
- The Court exercised Section 482 Cr.P.C. to prevent abuse of process and to secure the ends of justice. The decision was made on the particular facts and materials before the Court — notably the absence of averments under Section 141(1) and the documentary evidence of cessation of directorship — and the Court distinguished other authorities which were factually different.
Note: The opinion's relief and reasoning are grounded on application of existing authority and the facts before the Court; the opinion does not purport to announce a novel legal principle beyond applying those authorities to the present facts.
The petitioner, who is the 4th accused in C.C No. 2929 of 1998 on the file of the XIII Metropolitan Magistrate, Egmore, Madras, has filed this petition under Sec. 482, Cr.P.C to quash the said proceedings.
2. The respondent M/s. Sundaram Finance Service Ltd., Chennai-14, represented by its Executive S. Suresh, has filed a complaint under Sec. 138, Negotiable Instruments Act alleging that in the usual course of the complainant's business, the 1st accused availed bill discounting facility from the complainant for a sum of Rs. 22,50,000 as per bill discounting agreement dated 19-3-1993 against invoices dated 3-2-1997 and 4-2-1997. The accused towards the said loan, issued a cheque bearing No. 243249, dated 27-12-1997 for Rs. 22,50,000 drawn on Indian Bank, Alwarpet Branch, Chennai-18. The cheque was presented for payment by the complainant on 27-12-1997 in State Bank of Travancore, Mount Road, Chennai-2 and the same was returned on 30-12-1997 with an endorsement “funds insufficient”. The petitioner has issued notice to all the accused persons. Even after the receipt of the notice, the amount was not paid. Therefore, the respondent herein has filed the complaint against the accused 1 to 7.
3. The petitioner who was the 4th accused in the said complaint, on receipt of the notice from the complainant, had sent a reply dated 23-1-1998 contending that he ceased to be a director of the 1st accused/company for the last 10 years, however, the respondent has contended that the name of the 4th accused was found in the 37th Annual Report of the 1st accused/company, which shows that he was a director upto 31-3-1996. The petitioner has contended that he had informed that he had ceased to be a director of the 1st accused/company and never participated in the business of the company for the last 10 years and not attended the board meeting held by the company. The petitioner has also sent form No. 32, showing that he has ceased to be a Director of the Company, to the Registrar of Companies, Coimbatore.
4. It was argued on the side of the petitioner that the cheque dated 27-12-1997 was issued to the respondent herein for the sum of Rs. 22,50,000 and at that time the petitioner was not a director of the company and the cheque was returned unpaid on 30-12-1997 and thereafter the respondent has issued a notice to the petitioner herein for which he has issued a reply dated 31-1-1998. Sec. 141 (1) of the Negotiable Instruments Act, which deals with offences by company says:
“Offences by Companies: (1) If the person committing an offence under Sec. 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.”
5. The petitioner herein was a director of the company and from 20-3-1997 he ceased to be a director of the company. The cheque was issued later i.e, on 27-12-1997 and there is no averment in the complaint filed by the respondent herein that at the time when the offence was committed, the petitioner was in charge of or was responsible to the company for the conduct of the business of the company.
The Apex Court in Sham Sundar v. State of Haryana, AIR 1989 SC 1982 at 1984, held:
“It would be a travesty of justice to prosecute all partners and ask them to prove under the proviso to sub-sec. (1) that the offence was committed without their knowledge. It is significant to note that the obligation for the accused to prove under the proviso that the offence took place without his knowledge or that he exercised all due diligence to prevent such offence arises only when the prosecution establishes that the requisite condition mentioned in sub-sec (1) is established. The requisite condition is that the partner was responsible for carrying on the business and was during the relevant time in charge of the business. In the absence of any such proof, no partner could be convicted.”
Following the above decision, their Lordships of the Supreme Court have rendered one more decision in State of Haryana v. Brij Lal Mittal (1998) 4 Supreme 364 at 369, held:
“Simply because a person is a director of the company it does not necessarily mean that he fulfills both the above requirements so as to make him liable. Conversely, without being a director a person can be in-charge of and responsible to the company for the conduct of its business. From the complaint in question we, however, find that except a bald statement that the respondents were directors of the manufacturers, there is no other allegation to indicate, even prima facie, that they were in-charge of the company and also responsible to the company for the conduct of its business.”
Though these two decisions are respectively under Essential Commodities Act and Drugs and Cosmetics Act and the present case is one under the Negotiable Instruments Act, the principle is the same as far as the directors of the company are concerned.
6. There is no averment in the complaint filed by the respondent herein that the petitioner herein who was the fourth accused, as director of the company was in charge of and was responsible to the company for the conduct of the business of company. The petitioner has shown sufficient proof that he ceased to be a director of the company at the worst from 1997 and Form No. 32 sent to the Registrar of Companies, Coimbatore shows that he had ceased to be a director of the Company with effect from 20-3-1997.
This Court in M/s. Senthil Kumaran Tea Industries v. Rajkumar, (1994) 1 L.W (Crl.) 278, held that there must be averment to implicate the directors as shown under Sec. 141 (1) of the Negotiable Instruments Act.
In Alfred Borg & Co. v. M/s. Antox India (P) Ltd., 1992 L.W (Crl.) 120 at 125, this Court held:
“In catena of cases, the Apex Court has held, that initiating prosecution against sleeping partners or women, when the company is the main offender, cannot be sustained unless there was basic material to show that such partners or directors Were also in charge of and responsible for the conduct of the business of the company.”
7. When there is no allegation in the complaint that the present petitioner who is the 4th accused was in charge of and was responsible to the company, he cannot be held liable for the commission of the alleged offence under Sec. 138 of the Negotiable Instrument Act.
8. Learned counsel for the petitioner has relied on certain decisions, opposing the prayer made by the petitioner in this petition.
In Smt. Davinder Kaur v. Small Scale Industries Development Bank of India, (1998) 3 Crimes 548, wherein the Andhra Pradesh High Court held that there were allegations to the effect that the petitioners were assisting the Managing Director in running the business of the company and materials on record did not conclusively establish that the petitioners had ceased to be directors of the company by date of issuance of cheque, such questions of fact were decided in a petition under Sec. 482. Crl.P.C and on that ground the petition was dismissed.
In the instant case, the facts are different, first of all, there was no allegation to satisfy Sec. 141 (1) of the Negotiable Instruments Act. Secondly the petitioner has proved through documentary evidence that he ceased to be a director of the company much earlier to the date of issuance of cheque. Therefore, the decision of the Andhra Pradesh High Court is not applicable to the instant case.
The respondent has relied on a decision of the Bombay High Court - Panaji Bench in Rajan Kinnerkar v. Eric Cordeiro, (1994) 80 CC 487, wherein it was held that the fact of ceasing to be director has to be recorded by the trial court and the complaint under Sec. 138, Negotiable Instruments Act cannot be quashed in a petition filed by the director under Sec. 482, Cr.P.C
Similar view was taken by the Punjab and Haryana High Court in Manju Podar… v. Ashwani Kumar…, (1996) 86 CC 631. However, in the said case there was allegation in the complaint that the persons accused of the offence were directors and were in charge of and responsible for the conduct of the company's business and as such prima facie case has been made out and the question whether they were actually in charge of company's affairs has to be decided in the trial.
In the instant case, there is no such allegation in the complaint filed by the respondent. Therefore, it can be said that there is no evidence to connect the accused with the offence under Sec. 138, Negotiable Instruments Act.
This Court in Habibunnisa Akthar v. S. & S. Industries and Enterprises Ltd., (1995) 83 CC 593, held that on the basis of the extract from Registrar of Firms produced to show that the accused was not partner of the firm when allegations in the complaint are made out, that the accused was a partner, that question should be decided only in the trial and the complaint cannot be quashed. However, there is no allegation in the complaint as contemplated under Sec. 141 of the Negotiable Instruments Act and also there is no evidence that the accused was responsible for the issuance of the cheque which was subsequently dishonoured, and that the accused was a Director of the company on the date of the alleged offence. In such circumstances, when the facts of the present complaint are quite distinct and different from that of the facts in the case cited, the said decision is not applicable to the present case.
9. We have already seen the decisions of the Supreme Court in Sham Sundar v. State of Haryana, AIR 1989 SC 1982 and State of Haryana v. Brij Lal Mittal, (1998) 4 Supreme 364, wherein their Lordships have held that except a bald statement that the respondents were directors of the manufacturers, there is no other allegation to indicate, even prima facie, that they were in charge of the company and also responsible to the company for the conduct of its business, the case against such person shall not lie. This Court in Muruganandam v. State, (1998) 3 Crimes 428, after analysing many decisions held that on the basis of the materials placed, the lower court was not justified in framing charge against the accused. In such circumstances, it will be travesty of justice to ask the petitioner to face trial.
10. While considering the facts of the case, there is absolutely no allegation in the complaint that the petitioner was a director on the date when the offence was committed or that he was in charge of and was responsible to the company for the conduct of the business of the company and the cheque was issued by the company after the petitioner ceased to be a director of the said company. There is no justification in continuing the case in C.C No. 2929 of 1998 on the file of the XIII Metropolitan Magistrate, Egmore, Madras against the petitioner. Sec. 482 Crl.P.C empowers this Court to exercise its inherent jurisdiction to prevent the abuse of process of court or otherwise to secure the ends of justice. The present complaint against the petitioner/4th accused has to be quashed in order to prevent the abuse of process of court and also to secure the ends of justice.
11. In the result, Crl.O.P No. 10744 of 1998 is allowed, the case against the petitioner/4th accused in C.C No. 2929 of 1998 on the file of the XIII Metropolitan Magistrate is quashed. However, the learned Magistrate can proceed against the other accused in the case in accordance with law. Consequently, there are no orders necessary in Crl.M.P Nos. 4431 and 4432 of 1998.
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