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NIKHIL P GANDHI Versus STATE OF GUJARAT AND 2

2016 (6) TMI 726 - GUJARAT HIGH COURT

Offence under Section 138 of Negotiable Instruments Act - Cheques were dishonoured by the bank on the ground that the drawer’s signatures were incomplete or that no image was found or that the signatures did not match. - Vicarious liability - Liability of the authorized signatory or every person who were in charge in case of a Comapny including office bearer and nominated directors.

Held that:- ‘Vicarious liability’ in legal parlance means the liability of the master for the acts of t .....

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agent. [Sheo Prasad 1956 (5) TMI 33 - ALLAHABAD HIGH COURT]

In K.K. Ahuja [2009 (7) TMI 758 - SUPREME COURT OF INDIA], the Supreme Court has explained the vicarious liability of persons of the company.

In view of the aforesaid dictum of law explained by the Supreme Court, the other accused who have been arrayed as accused by virtue of Section 141 of the N.I. Act could not be held liable.

In complaints filed for the offence under Section 138 of the N.I. Act, all .....

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serious thought and make enquiries and ascertain the fact as to whether a particular Director was incharge of and responsible to the affairs and conduct of the business of the company. Routinely roping in all the Directors by merely repeating the words used in Section 141 of the N.I. Act without ascertaining the facts is a serious matter which has to be deprecated.

Some of the applicants before me are indisputably nonexecutive Directors of the company. A nonexecutive Director is no do .....

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e cheque will be filled in or used according to the understanding or agreement between the parties. If there is a prima facie reason to believe that the said trust is not honoured, then the continuation of prosecution under Section 138 of the N.I. Act would be the abuse of the process of law. It is in the interest of justice that the parties in such cases are left to the civil remedy.

All the petitions succeed and are allowed. The order of the issuance of the process under Section 138 .....

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VATI, ADVOCATES FOR THE RESPONDENT : MR ABAD PONDA, SENIOR ADVOCATE WITH MR MUKUL TALY, MR JAYESH BAROT, MR BM PATEL, MR HARESH H PATEL, ADVOCATES CAV COMMON JUDGMENT 1 Since the issues raised, in all the captioned applications, are more or less the same, and the relief prayed for is also to quash the selfsame criminal case, those were heard analogously are being disposed of by this common judgment and order. 2 The facts of this case may be summarized as under: 2.1 The complainant M/s. Sharda St .....

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t. The accused Nos.2 to 19 shown in the complaint are the Directors and other Office Bearers of the company. 2.3 Sometime in the decade of early 90 s, the company started constructing a Jetty at the Pipavav Port. An agreement was entered into between the complainant firm and the accused company for supply of Steel, Cement, etc for the purpose of the construction of the Port. 2.4 At the relevant point of time i.e. the applicant of the Criminal Miscellaneous Application No.968 of 2014, in his capa .....

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ending as on date. In the year 2008 with the consent of the parties, the learned Civil Judge passed an order in the Special Civil Suit No.36 of 2000 appointing M/s. Chhajed & Doshi Company, Chartered Accountants, having its Head Office at Mumbai, as a mediator for the purpose of settling the accounts. 2.6 M/s. Chhajed & Doshi Company submitted its report dated 28th April 2009, according to which, the accused company owes a sum of ₹ 15,82,23,865/( Rupees Fifteen Crore Eighty Two Lac .....

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the amount of ₹ 15,82,23,858/drawn in favour of the Sharda Steel Corporation. The complainant negotiated the cheque in question through its banker Dena Bank which was dishonoured with an endorsement of account closed . 2.8 The complainant, thereafter, issued a statutory notice dated 23rd April 2013, and called upon the company to make good the amount mentioned in the cheque. The drawer of the cheque, namely, Mr. Nikhil P. Gandhi (original accused No.2) gave a reply dated 6th May 2013 denyi .....

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company and the Directors named in the complaint for the offence under Section 138 of the Negotiable Instruments Act. On process being issued, the case came to be ultimately registered as the Criminal Case No.1710 of 2013. 2.9 Hence, these applications by the company and the Directors for quashing of the criminal proceedings initiated for the offence punishable under Section 138 of the Negotiable Instruments Act. 3 At the outset, I may state that the learned counsel appearing for the complainan .....

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tioner No.3 and original accused No.8) Criminal Miscellaneous Application No.1756 of 2014 1. Mr. Sunil Chawla (petitioner No.1 and original accused No.11) 2. Mr. Anup Sheth (petitioner No.2 and original accused No.10) 3. Dinesh Kumar Lal (petitioner No.3 and original accused No.7). 4 The aforesaid concession at the end of the complainant was given on the ground that at the time when the offence is alleged to have been committed, they were no way concerned with the daytoday affairs and management .....

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not in dispute that a signed blank cheque leaf was given to the complainant sometime in the year 199495. Except the signature of the then Managing Director Shri Gandhi, the other parts of the body were blank. 8 Let me take note of some of the admissions in the complaint itself. 4) For and on behalf of accused No.1 Company, the accused No.2 had given cheque as security. In the year 2000 some cheques had arisen between the complainant firm and the accused No.2 and the accused No.1 Company did not .....

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accused as security to the complainant. The partner of complainant firm wrote a detailed letter dated 922013 to the accused and requested the accused to make payment of legitimate dues else the complainant intend to present aforesaid cheque to the banker of accused for its clearing for ₹ 15,82,23,858/in favor of the complainant. Still, however, the accused did not make payment of dues to complainant, hence, the complainant filled up necessary details in the said cheque and deposited afores .....

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0 drawn on Dena Bank, Industrial Finance Branch, Bombay400 005. The said cheques were given by way of security towards payment of the price of the said goods sold and delivered by our clients to You No.1 from the office of our clients from Mahuva. Thye said cheques were signed by You No.2 as Director and on behalf of You No.1. 10 In the reply to the statutory notice issued by the complainant, the following was informed by the drawer of the cheque, namely, Shri Gandhi. 2.1 That the Management of .....

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r. Sunilt Tandon has already resigned as Managing Director of GPPL Company as back as in October, 2001 and Mr. Nikhil P. Gandhi has already resigned as Director of GPPL Company with effect from 13.4.2005 and their resignations were duly accepted and acted upon by GPPL Company. 2.2 You may also be pleased to note that a similar notice (as aforesaid) was issued by your client on 5.1.2010 to GPPL Company and GPPL Company has elaborately replied on 8.4.2010 negating all the allegations including the .....

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he Civil Court at Amreli), the erstwhile Management of the GPPL Company has already filed its Written Statement wherein the company has specifically negated all the claims of your client. On the contrary, the company has filed a Courter Claim against your client. Moreover, there is serious dispute raised by the GPPL Company for the accommodation bills issued by your client upon GPPL Company. The said accommodation bills are to the extent of ₹ 4.36 crores (approximately) for which your clie .....

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.3.2013. Under Section 118 of the Negotiable Instruments Act, 1881, there is a lawful presumption under Clause (b) of Section 118 that Every Negotiable Instrument bearing a date was made or drawn on such date. Undisputedly, on 25.3.2013, Mr. Nikhil P. Gandhi was not the Director of GPPL Company and he cannot sign the negotiable instrument (cheque) as the Director of GPPL Company for the simple reason that he has already resigned as Director of GPPL Company and h is resignation was duly accepted .....

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was also closed long back by the new Management of GPPL Company. Therefore, your client ought not to have utilized the said cheque for the simple reason that the dispute between the parties is still pending before the Civil Court, claims and counter claims are yet to be adjudicated, liabilities of any of the parties have still to be determined by the Civil Court and, therefore, there is not question of issuance of a cheque dated 25.3.2013 of the alleged amount by our client in favour of your cl .....

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ectors and other officers of GPPL Company for unlawful claim of your client in the pending Civil Suits. 11 Thus, the picture that emerges from the materials on record and certain admissions on the part of the complainant is as under: (a) For the purpose of construction of a Port by the accused company, materials like Steel, Cement, etc, were purchased from the complainant. (b) The agreement in this regard was entered into sometime in 90 s i.e. 199495. It is evident from the cheque in question th .....

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shi, Chartered Accountants, having its Head Office at Mumbai. Many objections have been raised by the accused company as regards the report of M/s.Chhajed & Doshi, Chartered Accountants. (e) The entire management of the accused company got changed with effect from 30th May 2005 and was taken over by the A.P. Moller Group upon purchase of the shares and execution of the Transfer Agreement. This fact has been admitted in para - 2 of the complaint itself. (f) No sooner the management of the ent .....

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drawn by Nikhil Gandhi : 2532013 CRIMINAL MISCELLANEOUS APPLICATION NO.1754 OF 2014 Petitioner No.: Gujarat Pipavav Port Ltd Petitioner No.2: Prakash Tulsiani (Managing Director) Date of Appointment : 2812009 CRIMINAL MISCELLANEOUS APPLICATION NO.1755 OF 2014 Petitioner No.1 - Mr. Pravain K Laheri (NonExecutive Director) Date of Appointment : 2982008 - till date. Petitioner No.2 - Pradeep Srikrishna Mallick (NonExecutive Director) Date of appointment : 492012. Petitioner No.3 - Rabinda Gaitonde .....

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Date of Appointment : 1732008 Date of Retirement : 17122009 Petitioner No.3 : Dinesh Lal (Additional Director) Date of Appointment : 162004 was Director on date of complaint - now retired. CRIMINAL MISCELLANEOUS APPLICATION NO.1067 of 2014 Petitioner No.1 - Christian Moller Laursen (Nominee Director) Date of appointment : 1352005 Date of retirement : 492012 Petitioner No.2 - Per Jorgensen (NonExecutive Director) Date of Appointment : 2982008 Date of Retirement: 162013. ● SUBMISSIONS ON BE .....

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to him, the complainant could not have filled up the cheque on its own after a period of almost seventeen years according to his whims and fancies. Mr. Nanavati submitted that the signed blank cheque could be termed as an incomplete document or inchoate instrument. He submitted that the complainant had no implied authority to fill up a signed blank cheque by way of security and present it for encashment. 14 Mr. Nanavati submitted that Section 20 of the Negotiable Instruments Act would not apply .....

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the instructions to the bank by the new management. 16 Mr. Nanavati submitted that since the cheque was issued by way of security, it could not be said that there was any existing debt or liability. 17 Mr. Nanavati placed reliance on Section 118(b) of the N.I. Act which provides that until the contrary is proved, it shall be presumed that every negotiable instruments bearing a date was made or drawn on such date. 18 Mr. Nanavati submitted that the presumption which is available in the law, by vi .....

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company or the the drawer of the cheque and without any implied authority, would amount to material alteration, as explained in Section 87 of the N.I. Act. 20 Mr. Nanavati, in support his submissions, placed reliance on two decisions of the Supreme Court (1) D.C.M. Financial Services Limited v. J.N. Sareen and another [2008 (8) SCC 1] and (2) Indus Airways Pvt Ltd v. Magnum Aviation Private Limited [2014 (2) 12 SCC 539]. 21 Mr. Nephde, the learned senior advocate appearing for some of the accuse .....

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manner connected with the daytoday affairs and management of the company. 23 Mr. Nephde placed strong reliance on the following decisions: (1) M.S. Narayan Menon @ Mani v. State of Karnataka and another [2006(6) SCC 39] (2) Sudhir Kumar Bhalla v. Jagdish Chand and others [2008(7) SCC 137] (3) Urban Cooperative Credit Society v. State of Gujarat through its Manager Jayrajbhai [2003 (2) GLH 629] (4) B. Suresh Yadav v. Sharifa Bee and another [2007(13) SCC 107] (5) N.K. Wahi v. Shekhar Singh and ot .....

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. Vora [2009(10) SCC 48] (2) National Small Industries Corporation Limited v. Harmeet Singh Paintal and another [2010 (3) SCC 330] 25 Mr. Mahendra Anand, the learned senior advocate appearing for some of the accused also submitted that his clients are not liable to be prosecuted for the offence punishable under the N.I. Act by virtue of Section 141 of the N.I. Act. 26 In such circumstances referred to above, all the learned senior advocates appearing for the applicants submitted that the prosecu .....

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ank cheque would remain a bill of exchange till the date is filled up in the said instrument. 29 Mr. Ponda submitted that the drawer of the cheque cannot absolve himself from the liability only on the ground that he ceased to be the Managing Director of the company in the year 2005. According to Mr. Ponda, although he ceased to be the Managing Director much before the cheque was filled up and presented, yet being the drawer, his liability would continue. 30 Mr. Ponda submitted that except the fe .....

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482 of the Cr.P.C., this Court may not quash the proceedings at this stage. 32 Mr. Ponda vehemently submitted that even if the cheque is issued by way of security, it would still attract the provisions of Section 138 of the N.I. Act. He submitted that neither the Section 138 nor explanation to it suggests that the debt or other liability should be in existence on the date of issuance of the cheque, i.e. on the date of its delivery to the drawee. 33 Mr. Ponda laid much emphasis on the fact that .....

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fore, the argument that the cheque was issued only for the purpose of security should fail. 34 Mr. Ponda, in support of his submissions, placed reliance on the following judgments: (1) Hiten P. Dalal v. Bratindranath Banerjee [2001 (6) SCC 16] (2) I.C.D.S. Ltd v. Beena Shabeer and another [AIR 2002 SC 3014] (3) K. Bhaskaran v. Sankaran Vaidhyan Balan and company [1999 (7) SCC 510] (4) Rangappa v. Sri Mohan [2010 (11) SCC 441] (5) S.M.S. Pharmaceuticals Limited v. Neeta Bhatt and another [2005 (8 .....

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appearing for the parties and having considered the materials on record, the following questions fall for my consideration: (i) Whether Section 20 of the Negotiable Instruments Act applies to a cheque as well? (ii) Whether filling up of a signed blank cheque leaf would amount to a material alteration within the meaning of Section 87 of the N.I. Act? (iii) Is there an implied authority to a person who receives a signed blank cheque leaf to fill up the same showing any amount as he likes? (iv) Wh .....

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ur, had no say in the matter of seeing that the cheque is honoured? Whether he could have asked the company to pay the amount? (vi) Whether mere reproduction of the wordings of the Section 141(1) of the N.I. Act in the complaint is sufficient to make a person liable to face prosecution for the dishonour of the cheque? ● DISCUSSION: THE ISSUE AS REGARDS SECTIONS 20 AND 87 OF THE NEGOTIABLE INSTRUMENTS ACT: 36 Section 20 of the N.I. Act reads as under: 20. Inchoate stamped instruments Where .....

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instrument, in the capacity in which he signed the same, to any holder in sue course for such amount : provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder. 37 Section 20 deals with the inchoate stamped instruments, and the scheme of that section is that when a person signs and delivers to another person an inchoate document which is properly stamped in accordance .....

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person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder. It will be noticed that the right given to complete the document is given to the holder and the holder contemplated in this section is not the holder as defined in the Act itself because it is clear that that definition cannot apply to this expression in Section 20, but "holder" is used in this section in the literal s .....

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ession of the document, the document being an inchoate document, and that right is the right to complete it. The other right conferred is upon the holder in due course, and that right is that even though the holder in due course might come in possession of a negotiable instrument which was not wholly completed by the maker, he has the same right against the maker as if he had himself written out the whole of the document, if the document has been completed by a person who has come into possessio .....

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tute an inchoate stamped instrument within the purview of Section 20 Negotiable Instruments Act it shall have the following ingredients. (1) The instrument shall be stamped. (2) It should be stamped in accordance with law relating to the negotiable instruments then in force in India. (3) The instrument should either be wholly blank or contains an incomplete instrument and (4) The instrument is signed and delivered to another making him holder of such instrument. Before an instrument acquires the .....

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in due course of that document. It follows therefore, that he cannot render liable the maker or the person who signed that blank document as a person who is liable under the Negotiable Instruments Act within the meaning of the second part of Section 20. (ii) Until the drawee s name is inserted before filing of the suit, the instrument is not a promissory note in the eye of law; the holder cannot recover the amount on the instrument; even the permission granted by the court to fill the name woul .....

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ide that the party so signing is bound to be a holder in due course even though the holder was authorized to fill for a certain amount, and be in fact inserts a greater amount, but it is necessary that sum ought not to exceed the amount covered by the stamp. 39 Section 6 of the N.I. Act defines a cheque as under: A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated chequ .....

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course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. Explanation II. For the purposes of this section, the expression "clearing house" means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.] 40 Section 5 of the N.I. Act de .....

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name is not written in the instrument, that instrument cannot even be termed to be a bill of exchange. Therefore, if it is only a signed blank cheque leaf, it cannot be said to be a cheque within the meaning of Section 6 of the Act. 41 Section 13 of the N.I. Act defines a negotiable instrument as under: A "negotiable instrument" means a promissory note, bill of exchange or cheque payable either to order or to bearer. Explanation to Section 13 also would make it clear that it must be an .....

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ordance with law relating to the negotiable instruments. As such the contention that, whether it is wholly blank or filled up partly making it an incomplete document and that handing over of the same would give authority to the holder thereof to make or complete the instrument as the case may be for any amount specified therein and not exceeding the amount covered by the stamp, cannot be sustained. So far as a cheque is concerned, if it is a signed blank cheque leaf it may be filled up showing a .....

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he N.I. Act would not apply to a cheque. I may quote the observations in paras 14 and 15 as under: 14. Learned counsel for the plaintiff then argued that even the case of the fourth defendant is that he had entrusted cheque duly signed by the fourth (defendant) and the fourth defendant was authorised to issue the cheque on behalf of the Firm. He relied on Section 20 of the Negotiable Instruments Act and contended that on the basis of that the defendants are estopped from denying their liability .....

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. Learned counsel for the plaintiff then submitted that even if the principles under Section 20 of the Negotiable Instruments Act do not apply, the general principles of law of estoppel will apply. Learned counsel also cited some decisions to show that the general principles of law of estoppel will apply. But according to us, for the application of such principles, it is highly necessary that the cheque was issued and filled up as authorised.. 45 It can be argued that when a person takes a bill .....

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the holder to fill up the same according to his whims and fancies. Filling up of a signed blank cheque leaf may not attract section 87 of the N.I. Act, for, there was no insertion, interlineation, erasure, alteration etc, because there was no completed negotiable instrument within the meaning of sections 5, 6 and 13 of the N.I. Act. Therefore, neither section 20 nor section 87 applies to a blank signed cheque leaf. If so, the question must turn round to the actual execution of the instrument. 46 .....

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the exact amount covered by the bill showing the price of the article sold then it cannot be said that what was handed over by the drawer of the cheque is only a signed blank cheque leaf. In such cases an implied authority to the trader/seller of the article to fill up the cheque leaf can certainly be inferred. Similarly, there may also be cases where at the time of settlement of the accounts, a particular amount was found payable by the drawer of the cheque to the other party and if a signed bl .....

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the drawer. Simply because the cheque is seen filled up or written in the hand writing of another person it cannot lead to a conclusion that only a signed blank cheque leaf was given. The person signing the cheque may have difficulty due to many reasons to write the cheque and it might have been filled up by the payee or by another. In such cases it cannot be said that what was handed over was only a signed blank cheque leaf. In all such cases the ultimate conclusion may depend upon the proof of .....

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ertainable to discharge the debt or liability. Therefore, there may be such cases where implied authority can be inferred. But the contention that when a signed blank cheque leaf is handed over, it can never be filled up and that if it is filled up it would amount to a material alteration within the meaning of using Section 87 of the N.I. Act, does not stand to rhyme or reason. Similarly, the contention that Section 20 of the N.I. Act is applicable to an unfilled or blank cheque leaf also cannot .....

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gh Court observed that a bare reading of Section 20 of the Negotiable Instruments Act would go to show that it would apply only to a stamped instrument viz., pronote and bill of exchange and not to the cheques. Therefore, Section 20 will have no application to the cheques issued after signing by the drawer. It has been further observed therein as follows: ".... there is no law which prescribes that a cheque shall be filled up by the drawer himself. If such proposition is accepted, no unlett .....

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due course giving thereby ample authority to the latter to fill up the content of the instrument as intended by the maker thereof. 10. Even in case of a cheque, as there is no clear provision in the Negotiable Instruments Act, in the light of the above discussion, the court finds that if a drawer of a cheque gives authority to the payee or holder in due course or a stranger for that matter to fill up the cheque signed by him, such an instrument also is valid in the eye of law. There is no bar fo .....

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and does not consent thereto, unless the alteration was made in order to carry out the common intention of the original parties. The provision to that effect contained in section 87 has to be read in harmony with section 20 which permits and authorizes the holder of a negotiable instrument to complete the instrument for any amount and renders the drawer liable to the holder in due course to the extent of the amount intended by the drawer to be paid under such instrument. It is clear from plain .....

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en a cheque bearing only signature of the drawer is delivered and received by a payee for the discharge, in whole or in part, of any debt or liability, there is an implied authority for the person receiving such cheque to complete it by filling the blanks and the amount having been filled up under such implied authority would be the amount intended by him to be paid thereunder. The focus in such cases would shift to the aspect of such amount being for the discharge, in whole or in part, of any l .....

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putting his signature on it, would not be a cheque in the first place, because of not being a bill of exchange as it did not contain direction to a certain person to pay a certain sum of money to or to the order of a certain person or to the bearer of the instrument. When the Negotiable Instruments Act expressly permits and authorizes by a substantive provision the completion of an inchoate instrument by section 20 with the safeguard provided in section 87, provisions of sections 5 and 6 definin .....

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various provisions of the N.I. Act shows that even under the scheme of the N.I. Act, it is possible for the drawer of a cheque to give a blank cheque signed by him to the payee and consent either impliedly or expressly to the said cheque being filled up at a subsequent point in time and present the same for payment by the drawee. 51 The first three questions are answered accordingly. ● EXISTING DEBT OR ANY OTHER LEGAL LIABILITY: 52 Let me now proceed further to consider whether there was .....

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it cannot be said that it was a bill of exchange prior to 25th March 2013. 53 The key differences between a cheque and a bill of exchange are as under: (1) An instrument used to make payments, that can be simply transferred by hand delivery is known as cheque. An acknowledgment prepared by the creditor to show the indebtedness of the debtor who accepts it for payment is known as a bill of exchange. (2) A Cheque is defined in section 6 while Bill of Exchange is defined in section 5 of the Negotia .....

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heque, as the amount is paid at the time of presentment of cheque. 3 days of grace are allowed in bill of Exchange. (8) A cheque does not need acceptance whereas a bill requires to be accepted by the drawee. 54 There are clearcut admissions on the part of the complainant in the complaint itself, as well as the statutory notice issued under Section 138 of the Act by which the presumption that the cheque was for a consideration has itself been rebutted by the complainant by making a truthful discl .....

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t had to file three civil suits in that regard. If the liability had already been determined within the meaning of Section 138 of the Act, then there was no reason for the complainant as such to wait for seventeen odd years. I am of the view that only with a view to shortcut the suit proceedings in which the Civil Court is yet to fix the liability, the complainant, on the strength of the report of the Chartered Accountants, misused the blank signed cheque. The account, on which the cheque was dr .....

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N.I. Act. 57 Mr. Ponda vehemently submitted that even if a cheque is issued by way of security, and if such a cheque is dishonoured, the Section 138 would be attracted. This submission is sought to be fortified by the decision of the Supreme Court in the case of I.C.D.S. Limited (supra). In that case, the husband of the accused/respondent No. 1 had obtained a car under a hire purchase agreement from the complainant. The accused was a guarantor for payment of the amount by her husband and toward .....

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ge, however, has been rather specific as regards the intent of the legislature. The commencement of the section stands with the words "Where any cheque". The above noted three words are of extreme significance, in particular, by reason of the user of the word "any" the first three words suggest that in fact for whatever reason if a cheque is drawn on an account maintained by him with a banker in favour of another person for the discharge of any debt or other liability, the hi .....

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th or even referred to in the impugned judgment. 11. The issue as regards the coextensive liability of the guarantor and the principal debtor, in our view, is totally out of the purview of Section 138 of the Act, neither the same calls for any discussion therein. The language of the statute depicts the intent of the lawmakers to the effect that wherever there is a default on the part of one in favour of another and in the event a cheque is issued in discharge of any debt or other liability there .....

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d thus has overlooked the true intent and purport of Section 138 of the Act. The judgments recorded in the order of the High Court do not have any relevance in the contextual facts and the same thus do not lend any assistance to the contentions raised by the respondents." 58 The Supreme Court in I.C.D.S. Limited (supra) considered the provisions of the law and held that when the cheque is issued by the guarantor in discharge of such other liability, the provisions of section 138 are applica .....

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r the discharge of "other liability" case would be covered by Section 138. 59 In Indus Airways Private Limited (supra), the Supreme Court explained in details the expression for discharge of any debt or other liability occurring in Section 138 of the N.I. Act: 9. The explanation appended to Section 138 explains the meaning of the expression debt or other liability for the purpose of Section 138. This expression means a legally enforceable debt or other liability. Section 138 treats dis .....

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purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise, and material or goods for which purchase order was placed is not supplied, in our considered view, the cheque cannot be held to have been drawn for an exiting debt or liability. The payment by cheque in the nature of advance payment indicates that at the time of drawal of cheque, there was no existing liability. 10. In Swastik Coaters[2] , the single .....

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Court in Shanku Concretes[3] dealing with Section 138 of the N.I. Act held that to attract Section 138 of the N.I. Act, there must be subsisting liability or debt on the date when the cheque was delivered. The very fact that the payment was agreed to some future date and there was no debt or liability on the date of delivery of the cheques would take the case out of the purview of Section 138 of the N.I. Act. While holding so, Gujarat High Court followed a decision of the Madras High Court in B .....

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ey 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 under Section 138 of the Act. The explanation reads that for the purposes of this section, debt or other liability means a legally enforceable debt or liability. 13. The Kerala High Court in Ullas Supply House v. Ullas [2006 CriLJ 4330(Ker)] had an occasion t .....

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one issued in discharge of the liability to the tune of the amount covered by it, which was really issued, as is revealed by Ext. D1, as the price amount for 28 numbers of mixies, which the complainant had not supplied. ….. 14. The reasoning of the Delhi High Court in the impugned order is as follows: 8. If at the time of entering into a contract it is one of the conditions of the contract that the purchaser has to pay the amount in advance then advance payment is a liability of the purc .....

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payment either by draft or in cash. Since giving cheque is a mode of payment like any other mode of payment, it is normally accepted as a payment. The issuance of a cheque at the time of signing such contract has to be considered against a liability as the amount written in the cheque is payable by the person on the date mentioned in the cheque. Where the seller or manufacturer, on the basis of cheques issued, manufactures the goods or procures the goods from outside, and has acted upon the cont .....

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ider that if the liability is not construed in this manner, the sole purpose of making dishonour of the cheque as an offence stands defeated. The purpose of making or enacting Section 138 of the N.I. Act was to enhance the acceptability of cheque in settlement of commercial transactions, to infuse trust into commercial transactions and to make a cheque as a reliable negotiable instrument and to see that the cheques of business transactions are not dishonoured. The purpose of Negotiable Instrumen .....

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to keep in mind the fine distinction between civil liability and criminal liability under Section 138 of the N.I. Act. If at the time of entering into a contract, it is one of the conditions of the contract that the purchaser has to pay the amount in advance and there is breach of such condition then purchaser may have to make good the loss that might have occasioned to the seller but that does not create a criminal liability under Section 138 For a criminal liability to be made out under Sectio .....

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e of enacting Section 138 of the N.I. Act would stand defeated if after placing orders and giving advance payments, the instructions for stop payments are issued and orders are cancelled. In what we have discussed above, if a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise and material or goods for which purchase order was placed is not supplied by the suppl .....

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0(Ker)] is the correct view and accords with the scheme of Section 138 of the N.I. Act . 60 Thus, a cheque may be issued under two circumstances. First, it may be issued for a debt in presenti, but payable in future. Secondly, it may be issued for a debt which may become payable in future upon the occurrence of a contingent event. The difference in the two kinds of cheques would be that the cheque issued under the first circumstance would be for a debt due, only payment being postponed. The latt .....

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sue which I am called upon to decide. A learned Single Judge of the High Court even considered the Supreme Court decision in I.C.D.S. Limited (supra). Considering the same, the learned Single Judge held in paras 3, 4 and 5 as under: 3. The very scheme of procedure adopted shows that the cheques are not issued in respect of any current existing ascertained liability. The words "for discharge of any debt or other liability" in Sec. 138 of N.I. Act should be interpreted to mean current ex .....

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eld that the liability of the guarantor would also come within the ambit of words "the other liability". In the instant case the issue is altogether different. The accused had issued a blank cheque not in respect of any current or ascertained liability but it was issued in respect of uncertain future liability. In such situation the provisions of Section 138 of the Act would not attract and if a cheque so issued is dishonoured, no offence u/S. 138 of the Negotiable Instruments Act can .....

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que, the drawer gives authority to the drawee to fill up the agreed liability. If the drawee were to dishonestly fill up any excess liability and the extent of liability if it becomes bona fide matter of civil dispute in such case, the drawer has no obligation to facilitate the encashment of cheque. In the instant case the reply Ex. P. 40 discloses that long before presentation of cheque, the extent of liability was disputed but ignoring the objection, the company filled up the cheque for an amo .....

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may not be any existing debt or liability, but in the year 2013 when the cheque was filled up, the liability had got determined, and therefore, on the date when the cheque was filled up and presented, there was a existing debt. In fact, as observed earlier, it could be said that the signed blank cheque as such was misused by the complainant after almost a period of seventeen years. Such misuse can be inferred from the indirect threats given in the statutory notice itself that if the amount is no .....

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report of the Chartered Accountants fixing some liability on the accused company to be discharged towards the complainant, but the report of the Chartered Accountants cannot be termed as final. The civil suits are still pending, and are yet to be adjudicated. 65 I also take notice of the two decisions of the Supreme Court, which are helpful to the drawer of the cheque. 66 In D.C.M. Financial Services (supra), the cheque in question was a postdated one. It was drawn in 1995 and was presented in 1 .....

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as given to the complainant in writing by the 1st respondent on several occasions. Appellant was, therefore, aware thereof. Despite having the knowledge, the 1st respondent was impleaded one of the accused in the complaint as a Director Incharge of the affairs of the Company on the date of commission of the offence, which he was not. If he was proceeded against as a signatory to the cheques, it should have been disclosed before the learned Judge as also the High Court so as to enable him to appl .....

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ng that the cheque is honoured. He could not ask the Company to pay the amount. He as a Director or otherwise could not have been made responsible for payment of the cheque on behalf of the Company or otherwise. (See also Shiv Kumar Poddar v. State (NCT of Delhi) : (2007) 3 SCC 693 : Everest Advertising Pvt. Ltd. v. State (NCT of Delhi) : (2007) 5 SCC 54 and Raghu Lakshminarayanan v. Fine Tubes : (2007) 5 SCC 103. 22. Mr. Patwalia, however, submitted that a situation may arise where change in th .....

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heques are issued and the same 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 constructive liability may not be available except when an appropriate case in that behalf is made out. 24. Section 140 of the Act cannot be said to have any application whatsoever. Reason to believe on the part of a drawer that the cheque would not be dishonoured cannot be a defence. But .....

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in terms of Adalat 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 High Court. No such ground appears to have been taken even in the Special Leave Petition. 67 I can appreciate a situation that a Director of a company who drew the cheque on behalf of that company thinks it fit to tender resignation after having received the notice of dishon .....

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Section 138 of the Act becomes complete only if the payment is not made within fifteen days of the receipt of the statutory notice, yet since the Director who tendered the resignation could pay the amount covered by the dishonoured cheque and then resigned. 68 The situation in the case on hand is altogether different. Much before the statutory notice was issued i.e. almost eight years before the issue of statutory notice, the drawer of the cheque had ceased himself to be the Managing Director of .....

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In taking the aforesaid view of the matter, I am supported by a decision of this Court rendered by a learned Single Judge in the case of Alka N. Shah v. State of Gujarat and another [2001 (2) GLR 1023. The short facts of the said case are that the complainant had placed fixed deposit with the company by the name of M/s. Piramal Finance Services Limited, wherein the accused was the Managing Director. The company had issued four cheques by way of repayment of the fixed deposit. Those four cheques .....

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ecision of the Supreme Court: 9. The short contention raised on behalf of the present applicant [accused No.1] is that even according to the complainant, the offence is committed by the company and the accused No.1 is only liable on account of her position as Managing Director of the company. On a plain reading of section 141 of the Negotiable Instruments Act, it becomes obvious that every person "at the time the offence was committed, was in charge of and was responsible to the company&quo .....

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esponsible to the company, at the time the offence was committed. 10. Another aspect of the matter is as to precisely when the offence came to be committed. It is obvious that the offence could only be committed on the presentation of the cheques on due dates, on the dishonour of the cheques, and the consequential notice being issued u/s 138 of the said Act. It is not possible to contend that the offence could be said to have been committed on the dates when the cheques were issued irrespective .....

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on period started running from the date of receipt of the first notice by the drawer, by discussing and deciding that the cause of action arose for the purpose of filing a complaint u/s 138, when the first notice is issued to the drawer and not complied with by the latter. The necessary implication which flows from this decision is, that it is the dishonour of the cheque, the issuance of the notice u/s 138, and the noncompliance thereof which furnishes the complainant with the cause of action. T .....

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licant held no position whatsoever of the company when the cause of action in fact accrued against the company. 71 The decision of the Supreme Court in D.C.M. Financial Services Limited (supra) has been considered by a Division Bench of the Bombay High Court in the case of Suhas Bhand v. State of Maharastra reported in 2010 (1) BankCas 207. The Division Bench, while answering the reference made by a learned Single Judge, observed in para - 32 as under: In the case of DCM Financial Service Ltd. v .....

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n of the Director was accepted by the Company. The agreement of purchase/lease was entered into between the Company and the complainant in April 1995. The PDCs were issued in April 1995 itself. The Director resigned in May 1996. The complainant was informed of his resignation. One of the cheques was postdated to January 1998 which came to be presented in June 1998 and was dishonoured. The resignation of the Director was not challenged as not genuine. Hence, there was no rebuttal of the presumpti .....

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ecuted. Such a Director cannot be taken to be incharge of and responsible to the Company for the conduct of the business of the Company merely because at one point of time he played the role of a Director. It was further observed that person who had resigned to the knowledge of the complainant could not be taken to be a person incharge of the Company when the cheque was dishonoured. It may be mentioned that that was also a case where there was no dispute as to the factum of resignation of that D .....

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imited. The first respondent before the Hon'ble Supreme Court resigned from the Directorship of the Company on 25th of May, 1996. One of the postdated cheques, which was issued in April, 1995, i.e., before he resigned from the Directorship of the Company, was dated 28.1.1998. The cheque when presented in the Bank for encashment was dishonoured. The payment to the complainant was not made despite issue of Notice of Demand by it. The complaint against the first respondent before the Hon'bl .....

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a Director of the Company much prior to dishonour of the cheque in question. The learned Additional Sessions Judge took note of Form No.32 and also noted that the complainant had not filed any affidavit to the effect that it had verified from the Registrar of Companies and Form No.32 filed by the accused was not genuine. A Criminal Revision Petition filed against the order of the learned Additional Sessions Judge was dismissed by the High Court. Relying upon its earlier decisions in the case of .....

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nts 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 Section 141 of the Act." 12. In the case before the Hon'ble Supreme Court, the respondent No.1 had resigned from the Directorship of the Company under intimation to the complainant and, in these circumstances, the Hon'ble Supreme Court was of the view that a person who had resigned with .....

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f the Company, on the date the offence under Section 138 of Negotiable Instruments Act was committed. He having resigned from the directorship much prior to even presentation of the cheque for encashment, he cannot be vicariously liable for the offence committed by the Company, unless it is alleged and shown that even after resigning from directorship, he continued to control the affairs of the company and therefore continued to be person in charge of and responsible to the company for the condu .....

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y when the cheque is issued by the company in discharge of its debt or liability and is not signed by him in his personal capacity. If the contention of the learned counsel for the complainant/respondent is accepted, even an employee of the Company, who on account of his being an authorized signatory signs a cheque issued by the Company towards discharge of the debt or other liability of the Company, would be liable to prosecution and conviction under Section 138 of Negotiable Instruments Act ev .....

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g that the offence had been committed with his consent or connivance or was otherwise attributable to any neglect on his part. 73 Mr. Ponda placed strong reliance on the decision of the Supreme Court in the case of Laxmi Dyechem v. State of Gujarat and others [2012 (13) SCC 375] to meet with the contention as regards the drawer of the cheque ceasing to be the Managing Director much before the blank signed cheque was filled up and presented in the bank. In Laxmi Dyechem (supra), the case of the a .....

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e appellant s further case was that the respondent - company had issued under the signatures of its authorized signatories, several postdated cheques towards the payment of the amount aforementioned. Several of those cheques (1017) when presented were dishonoured by the bank on which the same were drawn, on the ground that the drawer s signatures were incomplete or that no image was found or that the signatures did not match. The appellant informed the respondents about the dishonour in terms of .....

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the case, the Supreme Court, while negativing the contention, held as under: 18...Just because the authorised signatories of the cheques have taken a different line of defence than the one taken by the company does not in our view justify quashing of the proceedings against them. The decisions of this Court in National Small Industries Corporation Limited v. Harmeet Singh Paintal and Anr., (2010) 3 SCC 330 : (AIR 2010 SC (Supp) 569 : 2010 AIR SCW 1508) and S.M.S. Pharmaceuticals Ltd. v. Neeta Bh .....

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. When that is so, holders of such positions in a company become liable under Section 141 of the Act. By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are incharge of and responsible for the conduct of business of the company. Therefore, they get covered under Section 141. So far as the signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under subsection (2) of Section 141 .....

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ed reliance on the decision of the Supreme Court in the case of D.C.M. Financial Services Limited (supra) and the Division Bench decisions of the Bombay High Court as well as the Delhi High Court. It appears that in Laxmi Dyechem (supra), there is no reference of the decision of D.C.M. Financial Services Limited (supra). 75 The observations of the Supreme Court in Laxmi Dyechem have to be read in the context in which they were made. 76 It is well settled that a judgment cannot be read like a Sta .....

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ot every observation made in the context of the facts of a particular case under consideration of the court, which constitutes a binding precedent. The Supreme Court in P.S. Sathappan v. Andhra Bank Ltd., AIR 2004 SC 5152 has held as follows: "138. While analyzing different decisions rendered by this Court, an attempt has been made to read the judgments as should be read under the rule of precedents. A decision, it is trite, should not be read as a statute. 139. A decision is an authority f .....

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of India and Ors. v. Dhanwanti Devi and Ors. , (1996) 6 SCC 44 : (1996 AIR SCW 4020) Dr. Nalini Mahajan v. Director of Incometax (Investigation) and Ors., [2002] 257 ITR 123 (Delhi) (2003 Tax LR 18 (Del) State of U.P. and Anr. v. Synthetics and Chemicals Ltd. and Anr. , 1991 (4) SCC 139 , AOne Granites v. State of U.P. and Ors., 2001 AIR SCW 848 and Bhavnagar University v. Palitana Sugar Mill (P) Ltd. and Ors., (2003) 2 SCC 111 : (AIR 2003 SC 511) 140. Although, decisions are galore on this poin .....

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t necessary for me to go into this issue in view of the discussion on other points, but there are few NonExecutive Directors and Office Bearers, like Chief Operating Officer, Chief Financial Officer, Financial Controller, nominated Directors who have been arrayed as accused since they all came into picture after the new management took over the company. Whether they could be held liable under Section 141 of the N.I. Act is the question? ● SCOPE OF SECTION 141 OF THE NEGOTIABLE INSTRUMENTS .....

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efore, the complainant has filed SPL. Civil Suit No.35 of 2000, 36/2000 and 37/2000 in the Civil Court at Amreli for recovery of dues, wherein the Court granted exparte interim injunction below Ex. 5 in SPL. Civil Suit No.36 of 2000... xxx xxx xxx 17) ...The accused No.3 to 13 and 17 and 17 to 19 are the directors of accused No.1 company, and they are in charge of daytoday management of affairs of accused No.1 company hence, they are also responsible persons for the management of accused No.1 co .....

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mpany. These accused persons had also attended various meetings on behalf of accused No.1 company. If the minutes of meeting Board of Directors dated 1812010 are considered, then it is clear that there is mention therein about the dues of complainant and the cheque given for payment thereof. Therefore, it is clear that the accused No.3 to 13 and 17 to 19 were aware about the issuance of cheque by accused No.1. 79 Two classes of persons are liable to be prosecuted under Section 138. First, those .....

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e company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. (vide Section 141 of the Negotiable Instruments Act). In Anil Hada v. Indian Acrylic Ltd [2000 Cri. LJ 373 (SC) : (2001) 1 SCC 1, it has been pointed out that three categories of persons can be discerned as brought within the purview of the penal liability, through the legal fiction envisaged in Section 141 of the Negotiable Instruments Act. They are: (1) The company which .....

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ty of the company and its directors, for committing offence of dishonour of cheque, has held that normally an offence can be committed by human beings who are natural persons. Such offence can be tried according to the procedure established by law. But there are offences which could be attributed to the juristic persons also. If the drawer of a cheque happens to be a juristic person like a body corporate it can be prosecuted for the offence under Section 138 of the Act. Now there is no scope for .....

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In this context the phrase as well as used in subsection (1) of Section 141 of the Act has some importance. The said phrase would embroil the persons mentioned in the first category within the tentacles of the offence on a par with the offending company. Similarly the words shall also in subsection (2) are capable of bringing the third category persons additionally within the dragnet of the offence on an equal par. The effect of reading Section 141 is that when the company is the drawer of the c .....

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on 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. Section 141(2) provides, where any offence 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, suc .....

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s from which a reasonable inference of their vicarious liability cane be drawn. [Ashok Muthanna v. Exports Finance Ltd (2001) 2 Crimes 602 (Mad)] Vicarious liability in legal parlance means the liability of the master for the acts of the servant or agent done in the course of employment. Section 141 makes a natural person vicariously liable for the contravention committed by a company provided such person has some nexus with the crime either because of his connivance with it or due to by crimina .....

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y (incorporated under the Companies Act, 1956) is dishonoured, in addition to the company, the following persons are deemed to be guilty of the offence and shall be liable to be proceeded against and punished : (i) 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; (ii) any Director, Manager, Secretary or other officer of the company with whose consent and connivance, the offence under Sectio .....

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siness of the company and who is in charge of business of the company is vicariously liable by reason only of his fulfilling the requirements of subsection (1). But if the person responsible to the company for the conduct of business of the company, was not in charge of the conduct of the business of 11 the company, then he can be made liable only if the offence was committed with his consent or connivance or as a result of his negligence. 17. The criminal liability for the offence by a company .....

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averment complying with the requirements of Section 141 is imperative. As pointed out in K. Srikanth Singh vs. North East Securities Ltd 2007 (12) SCC 788, the mere fact that at some point of time, an officer of a company had played some role in the financial affairs of the company, will not be sufficient to attract the constructive liability under Section 141 of the Act. 18 Subsection (2) of section 141 provides that a Director, Manager, Secretary or other officer, though not in charge of the .....

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part. 19 This takes us to the next question under subsection (1) of section 141, as to (i) who are the persons who are responsible to the company for the conduct of the business of the company, and (ii) who could be said to be in charge and was responsible to the company for the conduct of the business of the company. The words "every person who, at the time of the offence was committed, was in charge of, and was responsible for the conduct of the business of the company" occurs not o .....

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ollution) Act, 1974. But neither section 141(1) of the Act, nor the pari materia provisions in other enactments give any indication as to who are the persons responsible to the company, for the conduct of the business of the company. Therefore, we will have to fall back upon the provisions of Companies Act, 1956 which is the law relating to and regulating companies. 20 Section 291 of the said Act provides that subject to the provisions of that Act, the Board of Directors of a company shall be en .....

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for the conduct of the company's business. 21 A combined reading of Section 5 and 291 of Companies Act, 1956 with the definitions in clauses (24), (26), (30), (31), (45) of section 2 of that Act would show that the following persons are considered to be the persons who are responsible to the company for the conduct of the business of the company : ( a) the managing director(s); (b) the wholetime director(s); (c) the manager; (d) the secretary; (e) any person in accordance with whose directi .....

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mpany, cannot be said to be persons who are responsible to the company, for the conduct of the business of the company. 22 Section 141 uses the words "was in charge of, and was responsible to the company for the conduct of the business of the company". It is evident that a person who can be made vicariously liable under subsection (1) of Section 141 is a person who is responsible to the company for the conduct of the business of the company and in addition is also in charge of the busi .....

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s in overall control of the day to day business of the company. This Court pointed out that a person may be a director and thus belongs to the group of persons making the policy followed by the company, but yet may not be in charge of the business of the company; that a person may be a Manager who is in charge of the business but may not be in overall charge of the business; and that a person may be an officer who may be in charge of only some part of the business. 23 Therefore, if a person does .....

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ng a person in law (under the statute governing companies) responsible to the company for the conduct of the business of the company and also fulfill the 'factual requirement' of being a person in charge of the business of the company. 24 Therefore, the averment in a complaint that an accused is a director and that he is in charge of and is responsible to the company for the conduct of the business of the company, duly affirmed in the sworn statement, may be sufficient for the purpose of .....

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he business of the company', he cannot be made vicariously liable under section 141(1) of the Act. 25 It should, however, be kept in view that even an officer who was not in charge of and was responsible to the company for the conduct of the business of the company can be made liable under subsection (2) of Section 141. For making a person liable under Section 141(2), the mechanical repetition of the requirements under Section 141(1) will be of no assistance, but there should be necessary av .....

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ple, a person falling under category (e) and (f) of section 5 of Companies Act, 1956. When in SMS Pharma (I), this Court observed that 'conversely, a person not holding any office or designation in a company may be liable if he satisfies the requirement of being in charge of and responsible for conduct of the business of the company', this Court obviously had in mind, persons described in clauses (e) and (f) of section 5 of Companies Act. Be that as it may. 27 The position under section .....

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ey were in charge of and are responsible to the company, for the conduct of the business of the company. (ii) In the case of a director or an officer of the company who signed the cheque on behalf of the company, there is no need to make a specific averment that he was in charge of and was responsible to the company, for the conduct of the business of the company or make any specific allegation about consent, connivance or negligence. The very fact that the dishonoured cheque was signed by him o .....

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ssary in the complaint, though some particulars will be desirable. They can also be made liable under section 141(2) by making necessary averments relating to consent and connivance or negligence, in the complaint, to bring the matter under that subsection. (iv)Other Officers of a company can not be made liable under subsection (1) of section 141. Other officers of a company can be made liable only under subsection (2) of Section 141, be averring in the complaint their position and duties in the .....

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ct and business of the company. This would mean that if a company had 100 branches and the cheque issued from one branch was dishonoured, the officers of all the 100 branches could be made accused by simply making an allegation that they were in charge of and were responsible to the company for the conduct of the business of the company. That would be absurd and not intended under the Act. 29 As the trauma, harassment and hardship of a criminal proceedings in such cases, may be more serious than .....

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Operating Officer, Chief Financial Officer, Financial Controller. Some of the Directors are nominated Directors and also NonExecutive. 82 I am also not impressed by the argument of Mr. Ponda that as the inherent powers of this Court under Section 482 of the Cr.P.C. are circumscribed, and should be exercised only in cases where the Court finds an abuse of the process of law, all the applications deserve to be outright rejected, leaving all the legal contentions open to be canvassed before the tr .....

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by the High Court in exercise of its jurisdiction under Section 482 or for that matter in exercise of revisional jurisdiction under Section 397 of the Code. It is fairly settled now that while exercising inherent jurisdiction under Section 482 or revisional jurisdiction under Section 397 of the Code in a case where complaint is sought to be quashed, it is not proper for the High Court to consider the defence of the accused or embark upon an enquiry in respect of merits of the accusations. Howev .....

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ution is a serious matter; it affects the liberty of a person. No greater damage can be done to the reputation of a person than dragging him in a criminal case. 84 I take notice of the fact that in complaints filed for the offence under Section 138 of the N.I. Act, all the Directors of the company and even the Office Bearers are routinely being proceeded against by invoking the provisions under Section 141 of the N.I. Act by glibly repeating the words in the section that certain Director was inc .....

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repeating the words used in Section 141 of the N.I. Act without ascertaining the facts is a serious matter which has to be deprecated. 85 Some of the applicants before me are indisputably nonexecutive Directors of the company. A nonexecutive Director is no doubt a custodian of the governance of the company, but does not involve in the daytoday affairs of the running of its business and only monitors the executive activity. [See: Pooja Ravinder Devidasani v. State of Maharastra, AIR 2015 SC 675] .....

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N.I. Act, making a person vicariously liable has to ensure strict compliance of the statutory requirements. The Superior Courts should maintain purity in the administration of justice and should not allow abuse of the process of the Court. The High Court ought to have quashed the complaint against the appellant which is nothing but a pure abuse of process of law. 87 A Division Bench of this Court (to which I was a party) in the case of Ionic Metalliks and others [Special Civil Application No.645 .....

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is as under : A. Classification under the Companies Act Categories of Directors The Companies Act refers to the following two specific categories of Directors: 1. Managing Directors; and 2. Wholetime Directors. A Managing Director is a Director who has substantial powers of management of the affairs of the company subject to the superintendence, control and direction of the Board in question. A Wholetime Director includes a Director who is in the wholetime employment of the company, devotes his .....

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of Directors: 1. First Directors: Subject to any regulations in the Articles of a company, the subscribers to the Memorandum of Association, or the company's charter or constitution ("Memorandum"), shall be deemed to be the Directors of the company, until such time when Directors are duly appointed in the annual general meeting ("AGM"). 2. Casual vacancies: Where a Director appointed at the AGM vacates office before his or her term of office expires in the normal course, .....

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Additional Directors together shall not exceed the maximum strength fixed in the Articles for the Board. 4. Alternate Director: If so authorized by the Articles or by a resolution passed by the company in general meeting, the Board may appoint an Alternate Director to act for a Director ("Original Director"), who is absent for whatever reason for a minimum period of three months from the State in which the meetings of the Board are ordinarily held. Such Alternate Director will hold off .....

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ector may be treated as an 'officer in default' under the Companies Act. 6. De facto Director: Where a person who is not actually appointed as a Director, but acts as a Director and is held out by the company as such, such person is considered as a de facto Director. Unlike a 'shadow' Director, a de facto Director purports to act, and is seen to the outside world as acting, as a Director of the company. Such a de facto Director is liable as a Director under the Companies Act. 7. .....

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by the Central Government in case of oppression or mismanagement. The extent of a nominee Director's rights and the scope of supervision by the shareholders, is contained in the contract that enables such appointments, or (as appropriate) the relevant statutes applicable to such public financial institution or bank. However, nominee Directors must be particularly careful not to act only in the interests of their nominators, but must act in the best interests of the company and its sharehold .....

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and whether such nominee Director is to be regarded as being in control or in charge of the company and its activities. This determination ultimately turns on the specific facts and circumstances involved in each case. B. Classification under the Listing Agreement The Securities Contracts (Regulation) Act, 1956, read with the rules and regulations made thereunder, requires every company desirous of listing its shares on a recognized Indian stock exchange, to execute a listing agreement ("Ag .....

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., one who devotes his whole time of working hours to the company and has a significant personal interest in the company as his source of income), or a Managing Director (i.e., one who is employed by the company as such and has substantial powers of management over the affairs of the company subject to the superintendence, direction and control of the Board). In contrast, a nonexecutive Director is a Director who is neither a Wholetime Director nor a Managing Director. Clause 49 of the Agreement .....

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to any promoter or person occupying management positions at the Board level or at one level below the Board, at least onehalf of the Board of the company shall consist of independent Directors. Independent Directors The Agreement defines an "Independent Director" as a nonexecutive Director of the company who: a. apart from receiving Director's remuneration, does not have material pecuniary relationships or transactions with the company, its promoters, its Directors, its senior mana .....

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or the internal audit firm that is associated with the company, and ii. the legal firms and consulting firms that have a material association with the company; e. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect the independence of the Director; or f. he is not a substantial shareholder of the company, i.e., owning two percent (2%) or more of the block of voting shares; and g. he is not less than twentyone (21) years of age. Nominee .....

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se is a serious matter. Criminal law cannot be set into motion as a matter of course. It is not that the complainant has to bring only two witnesses to support his allegations in the complaint to have the criminal law set into motion. The order of the Magistrate summoning the accused must reflect that he has applied his mind to the facts of the case and the law applicable thereto. He has to examine the nature of allegations made in the complaint and the evidence both oral and documentary in supp .....

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s prima facie committed by all or any of the accused. This has assumed all the more significance in view of the recent trend found that in respect of offences under Section 138 of the Negotiable Instruments Act alleged against a company, all the Directors of the company are being routinely roped in as accused with a statement that they are incharge of and responsible to the business of the company as required under Section 141 of the Negotiable Instruments Act. In fact, it has been seen that som .....

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ormal allegations in the complaint such Directors have been summoned to face the trial, they must be afforded an opportunity at least at the earliest stage to show with reference to the material which may be placed before the Court that they are not incharge of and are not responsible to the business of the company and on that basis seek their discharge from the array of the accused. In such cases, I think it will be a great injustice if they are asked to go through the ordeal of the trial and p .....

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le if at the time when offence is committed he was in charge and was responsible to the company for the conduct of the business of the company as well as the company. Merely being a Director of the company in the absence of above factors will not make him liable. 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 D .....

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ts earlier decisions on Section 141 of the N.I. Act, summarized its conclusion as under: a) Once in a complaint filed under Section 138 read with Section 141 of the NI Act the basic averment is made that the Director was in charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed, the Magistrate can issue process against such Director; b) If a petition is filed under Section 482 of the Code for quashing of such a complaint by th .....

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do so having come across some unimpeachable, uncontrovertible evidence which is beyond suspicion or doubt or totally acceptable circumstances which may clearly indicate that the Director could not have been concerned with the issuance of cheques and asking him to stand the trial would be abuse of the process of the court. Despite the presence of basic averment, it may come to a conclusion that no case is made out against the Director. Take for instance a case of a Director suffering from a termi .....

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Such cases may be few and far between but the possibility of such a case being there cannot be ruled out. In the absence of such evidence or circumstances, complaint cannot be quashed; d) No restriction can be placed on the High Court's powers under Section 482 of the Code. The High Court always uses and must use this power sparingly and with great circumspection to prevent inter alia the abuse of the process of the Court. There are no fixed formulae to be followed by the High Court in this .....

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ned who are NonExecutive Directors including the Office Bearers concerned with the Accounts Department of the company. 92 The plain reading of Section 138 of the N.I. Act would clearly go to show that by reason thereof, a legal fiction had been created. A legal fiction, as is wellknown, although is required to be given full effect, yet has its own limitations. It cannot be taken recourse to for any purpose other than the one mentioned in the statute itself. Section 138 of the Act moreover provid .....

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