2010 (9) TMI 228 - HC - Companies Law

Dishonour of cheques for insufficiency of funds in accounts - Held that - A person normally having business or commercial dealings with the company would satisfy himself about its creditworthiness and reliability by looking at its promoters and Board of Directors 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 the aware generally of who are incharge 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 that cheque that is dishonoured can be expected to allege is that the persons names in the complaint are in charge of its affairs. The Directors are prima facie in that position. Appeal dismissed.

Summary

Issues Involved:
1. Summoning of Directors under Section 138 of the Negotiable Instruments Act (NI Act).
2. Procedure for trial under Section 138 of the NI Act.
3. Responsibility and liability of Directors in cheque dishonor cases.
4. Role of the Board of Directors (BoD) under the Companies Act.
5. Burden of proof in cases involving dishonor of cheques.

Detailed Analysis:

1. Summoning of Directors under Section 138 of the NI Act:
The petitioners were summoned by the Metropolitan Magistrate on a complaint under Section 138 of the NI Act due to cheque dishonor. The court referenced its judgment in Rajesh Agarwal v. State, emphasizing that trials under Section 138 should proceed in a summary manner. The court stated that documents from banks regarding cheque dishonor are sufficient unless the accused claims forgery or lack of account. The evidence provided at the pre-summoning stage should be read at the post-summoning stage unless the court finds it necessary to recall witnesses.

2. Procedure for trial under Section 138 of the NI Act:
The court outlined a five-step summary trial procedure for Section 138 cases:
- Step I: Scrutinize the complaint and documents, take cognizance, and issue summons if an offense is made out.
- Step II: Upon the accused's appearance, ensure bail and take notice under Section 251 Cr.P.C., then fix the case for defense evidence.
- Step III: Decide on applications under Section 145(2) of the NI Act for recalling witnesses.
- Step IV: Hear arguments from both sides.
- Step V: Pass the order/judgment.

3. Responsibility and liability of Directors in cheque dishonor cases:
The petitioners argued that no specific averments were made regarding their responsibility for the dishonor of the cheque. The court noted that Directors often try to prolong trials under Section 138. The Supreme Court in Damodar S. Prabhu v. Syed Babalal H. emphasized the legislative intent to provide a strong criminal remedy to deter cheque dishonor. The court highlighted that the law is often not implemented seriously, leading to more harassment for complainants than accused, especially when companies use their resources to prolong litigation.

4. Role of the Board of Directors (BoD) under the Companies Act:
The court examined the role of BoD, stating that a company acts through its BoD, which has collective responsibility. The BoD has various powers under the Companies Act, and Directors cannot be superseded by shareholders. The court emphasized that the internal management and delegation of responsibilities within the BoD are not public knowledge, and thus, Directors are presumed responsible for the company's actions unless proven otherwise.

5. Burden of proof in cases involving dishonor of cheques:
The court discussed Section 141 of the NI Act, which holds every person responsible for the conduct of the company's business liable for the offense. The burden of proving non-responsibility lies with the Director, as internal management details are within their special knowledge. The court referenced Section 106 of the Indian Evidence Act, stating that facts within a person's special knowledge must be proven by them. The court concluded that Directors must prove their non-involvement in the company's business to seek discharge from the case.

Conclusion:
The petitions were dismissed, with the court reiterating that Directors must prove their lack of responsibility for the company's business to avoid liability under Section 138 of the NI Act. The court emphasized the need for a summary trial procedure to ensure swift justice and deter the high incidence of cheque dishonor.