The Supreme Court bench comprising Justices Surya Kant and J.B. Pardiwala was recently hearing an Appeal in a case of Dishonour cheque and held that if the partner keeps quiet and does not say anything in reply to the mandatory notice given to him/her, then the complainant has all the reasons to believe that what he has stated in the notice has been accepted by the notice. The burden is on the Board of Directors or the officers in charge of the affairs of the company/partners of a firm to show that they were not liable to be convicted.
The Appellant herein (original complainant) was engaged in the business of milk and milk products. The respondent herein was one of the partners of a Partnership Firm running in the name of Sira Marketing Services. The firm used to purchase milk and milk products from the appellant/complainant on a credit basis. The appellant has to recover an amount of Rs. 10,71,434.60 from the partnership firm. The firm issued a cheque duly signed by the original accused No. 02 (partner/authorised signatory) in favour of the appellant for the amount of Rs. 10,00,000/- dated 05.05.2017. The cheque came to be dishonoured as there was no sufficient balance in the account maintained by the firm. The Appellant issued a statutory notice dated 14.08.2017 to the firm and the two partners of the firm. Despite service of notice to the firm as well as the two partners (accused persons) the amount was not paid to the Appellant and therefore, the Appellant was left with no other option but to file the complaint in the Judicial Magistrate Fast Track Court No. II, Erode for the offence punishable under Section 138 r/w 141 of the NI Act, 1881.
The Respondent herein (original accused No. 03/partner) preferred an application under 482 of the Code in the High Court and prayed that the criminal proceedings instituted against her may be quashed as she has no liability under the law. The principal argument of the respondent herein before the High Court was that much before the cheque came to be issued, the firm had been dissolved. The accounts of the firm were also settled on 13.02.2017 following the dissolution. The High Court quashed the proceedings against the respondent herein mainly on the ground that there was nothing to indicate as to how and in what manner the respondent at the relevant point of time was in-charge and responsible for the conduct of the business of the firm. The High Court took the view that the complaint can be prosecuted against the respondent herein only if the allegations made in the complaint fulfil the requirements of Section 141 of the NI Act. The High Court took the view that merely by reciting the words used under Section 141 of the NI Act in the complaint no vicarious liability can be fastened on the partner of the firm. In such circumstances above, the High Court allowed the application filed by the respondent herein and terminated the proceedings as far as the respondent was concerned.
Appellant’s Submission:
The learned counsel appearing for the Appellant vehemently submitted that the High Court committed a serious error in passing the impugned Order quashing the proceedings against the respondent herein. He submitted that the entire premise on which the High Court proceeded could be termed as erroneous in law. The learned counsel further submitted that in the statutory notice issued to the respondent as well as in the body of the complaint, there were specific averments that the accused Nos. 02 and 03 respectively, being the partners of the partnership firms, were in-charge and responsible for the day-to-day affairs of the firm. He pointed out there are specific averments made in the complaint that the partners which include the respondent herein were regularly looking after and actively taking part in the day-to-day business of the firm. He further pointed out that there was a specific averment that in order to discharge the liability, the original accused No.02 had issued the cheque within the knowledge and consent of the respondent herein. It was argued that if the substance of the allegation made in the complaint fulfil the requirements of Section 141 of the NI Act, the complaint was to proceed and was required to be tried. The learned counsel vociferously argued that while construing a complaint the Court should not adopt a hyper-technical approach and quash the same.
The learned counsel further pointed out that three individual notices were issued under Section 138 of the NI Act before the filing of the complaint. He submitted that the statutory notice was duly served upon the respondent herein. However, the respondent thought it fit not to give any reply to the notice. It was argued that if the respondent had anything to say as regards her role in the firm, she could have given an appropriate reply that she was a sleeping partner and not involved in the day-to-day affairs of the firm. It was argued that the respondent herein could also have clarified in her reply that the firm had already been dissolved much before the cheque was issued and, in such circumstances, no liability could be fastened on her. In the absence of any reply to the statutory notice, the respondent could not have argued before the High Court for the first time about her involvement in the affairs of the firm. The learned counsel submitted that the High Court committed a serious error in accepting such submission canvassed on behalf of the respondent at the preliminary stage.
The learned counsel further submitted that once the necessary averments were made in the complaint, the onus thereafter would shift on the accused to establish by producing some unimpeachable and incontrovertible evidence which may clearly indicate that the respondent herein as one of the partners of the firm, could not have been concerned with the issuance of the cheque in question.
Respondent’s Submission:
The learned counsel appearing for the respondent (accused) on the other hand has vehemently opposed the present appeal submitting that no error, not to speak of any error of law, could be said to have been committed by the High Court in passing the impugned order. She submitted that mere bald averments in the complaint were not sufficient to fasten the vicarious liability on the partner of the firm as envisaged under Section 141 of the NI Act. The learned counsel submitted that the case on hand is squarely covered by the decision of the Supreme Court in the case of SMS Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89. Relying on the said decision of the Supreme Court, the learned counsel submitted that the deeming fiction creating criminal liability and vicarious liability was a departure from the usual principles of criminal law and that a clear case should be spelt out and the accused person should be made aware of the case alleged against him or her. The learned counsel submitted that this was therefore necessarily required averments in addition to the statement that the accused was in-charge of and responsible for the affairs of the company/firm.
Court’s Analysis:
The Apex Court noted that the only question that fell for their consideration was whether the High Court committed any error in passing the impugned order?
The Bench noted that there was no dispute that the aforesaid notice issued to the respondent was duly acknowledged by her, however, the respondent thought fit not to give any reply to the same. The acknowledgement receipt has also been placed on record. The learned counsel appearing for the respondent fairly submitted that her client was in receipt of the notice however, no reply has been given to the same.
It was also admitted fact that Accused No.1 was a Partnership Firm, the accused Nos. 2 and 3 were the partners and in charge and responsible for the day-to-day affairs of the firm, the accused Nos. 2 and 3 were regularly looking after and actively taking part in the Day-to-day business of the firm. In order to discharge the part liability, the accused No. 2 on behalf of the firm and with the consent and knowledge of the accused No. 3 issued the cheque drawn on the Tamilnad Mercantile Bank Ltd., Thiruvanmiyur Branch, Chennai-41.
As for the requisite evidence, the burden upon the prosecution would be discharged under subsection (1) when a person is proved to be in charge of and responsible to the company in the conduct of its business and would shift upon the accused to prove that he was ignorant or diligent if that be his defence; whereas under subsection (2) the prosecution would be required to allege and prove the consent, connivance or neglect and holding of the office by the accused. There is nothing to suggest that the same person cannot be made to face the prosecution either under subsection (1) or subsection (2) or both. A director or manager can be arraigned and proved to be guilty as the person in charge of and responsible to the company as well as the director of the company who, as such, might have consented to, connived at or been negligent in respect of the offence of dishonour of cheque, be logically deduced that a person can be arraigned in a complaint as the accused along with the company if it prima facie appears that he was in charge of and responsible to the company for the conduct of its business, although he may or may not be or may not have continued to be a director or other officer of the company, as mentioned in subsection (2). It would be sufficient if the complaint indicates that such person has been arraigned on the basis of averments which disclose him or her to be the person in charge of and responsible to the company in the conduct of its business at the time the offence was committed. Evidently, a person who signs the cheque or who has the authority to sign the cheque for and on behalf of the company, regardless of his office or capacity, can, prima facie, be assumed to be in charge of and responsible to the company in the conduct of its business. And, where such person is prosecuted, then, if it is his defence that the offence was committed without his or her knowledge or that he or she has exercised all due diligence to prevent the commission of the such offence, the burden to prove that would be on him or her and can only be discharged at the stage of evidence.
The seminal issue raised and requires to be settled in the present case was one relating to a person liable to be proceeded against under the provisions of subsection (1) of Section 141 for being in-charge of and responsible to the company “at the time the offence was committed.” It would, therefore, be important to find out the “time” when the offence under Section 138 can be said to have been committed by the company. It is common place that an offence means an aggregate of facts or omissions which are punishable by law and, therefore, can consist of several parts, each part being committed at a different time and place involving different persons. The provisions of Section 138 would require a series of acts of commission and omission to happen before the offence of, what may be loosely called “dishonour of cheque” can be constituted for the purpose of prosecution and punishment.
The Apex Court noted that the logical question in the present case was who would be liable through the company for this offence? Can the company itself be prosecuted for this offence? Answering this question, Section 141 says, ‘every person who was in charge of’ and ‘was responsible to the company for the conduct of the business shall be deemed to be guilty of the offence.
The Supreme Court found clear and specific averments not only in the complaint but also in the statutory notice issued to the respondent. There were specific averments that the cheque was issued with the consent of the respondent herein and within her knowledge. The Supreme Court noted this was sufficient to put the respondent herein to trial for the alleged offence. The Supreme Court noted that at the time of issuance of the cheque or at the time of the commission of the offence, the Respondent was in no manner concerned with the firm or she was not in-charge or responsible for day-to-day affairs of the firm cannot be on the basis of mere bald assertion in this regard. The same was not sufficient. To make good her case, the respondent herein was expected to lead unimpeachable and incontrovertible evidence. Nothing of the sort was adduced by the respondent before the High Court to get the proceedings quashed. The High Court had practically no legal basis to say that the averments made in the complaint were not sufficient to fasten the vicarious liability upon the respondent by virtue of Section 141 of the NI Act.
The Apex Court noted that no reply was given by the respondent to the statutory notice served upon her by the appellant. In the proceedings of the present type, it was essential for the person to whom statutory notice is issued under Section 138 of the NI Act to give an appropriate reply. The person concerned was expected to clarify his or her stance. If the person concerned has some unimpeachable and incontrovertible material to establish that he or she has no role to play in the affairs of the company/ firm, then such material should be highlighted in the reply to the notice as a foundation. If any such foundation is laid, the picture would be clearer before the eyes of the complainant. The complainant would come to know as to why the person to whom he has issued notice says that he is not responsible for the dishonour of the cheque. Had the respondent herein given an appropriate reply highlighting whatever she has sought to highlight before us then probably the complainant would have undertaken further enquiry and would have tried to find out what was the legal status of the firm on the date of the commission of the offence and what was the status of the respondent in the firm. The object of notice before the filing of the complaint is not just to give a chance to the drawer of the cheque to rectify his omission to make his stance clear so far as his liability under Section 138 of the NI Act is concerned.
The Supreme Court noted that once the necessary averments are made in the statutory notice issued by the complainant in regard to the vicarious liability of the partners and upon receipt of such notice, if the partner keeps quiet and does not say anything in reply to the same, then the complainant has all the reasons to believe that what he has stated in the notice has been accepted by the noticee.
The primary responsibility of the complainant is to make specific averments in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no legal requirement for the complainant to show that the accused partner of the firm was aware about each and every transaction. On the other hand, the first proviso to subsection (1) of Section 141 of the Act clearly lays down that if the accused is able to prove to the satisfaction of the Court that the offence was committed without his/her knowledge or he/she had exercised due diligence to prevent the commission of the such offence, he/she will not be liable of punishment.
The complainant is supposed to know only generally as to who was in charge of the affairs of the company or firm, as the case may be. The other administrative matters would be within the special knowledge of the company or the firm and those who are in charge of it. In such circumstances, the complainant is expected to allege that the persons named in the complaint are in charge of the affairs of the company/firm. It is only the Directors of the company or the partners of the firm, as the case may be, who have the special knowledge about the role they had played in the company or the partners in a firm to show before the court that at the relevant point of time they were not in charge of the affairs of the company. Advertence to Sections 138 and Section 141 respectively of the NI Act shows that on the other elements of an offence under Section 138 being satisfied, the burden is on the Board of Directors or the officers in charge of the affairs of the company/partners of a firm to show that they were not liable to be convicted. The existence of any special circumstance that makes them not liable is something that is peculiarly within their knowledge and it is for them to establish at the trial to show that at the relevant time they were not in charge of the affairs of the company or the firm.
The Supreme Court observed that the final judgement and order would depend on the evidence adduced. Criminal liability is attracted only to those, who at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the firm. But vicarious criminal liability can be inferred against the partners of a firm when it is specifically averred in the complaint about the status of the partners ‘qua’ the firm. This would make them liable to face prosecution but it does not lead to an automatic conviction. Hence, they were not adversely prejudiced if they were eventually found to be not guilty, as a necessary consequence thereof would be acquittal.
Supreme Court bench further observed that if any Director wants the process to be quashed by filing a petition under Section 482 of the Code on the ground that only a bald averment is made in the complaint and that he/she is really not concerned with the issuance of the cheque, he/she must in order to persuade the High Court to quash the process either furnish some sterling incontrovertible material or acceptable circumstances to substantiate his/her contention. He/she must make out a case that making him/her stand the trial would be an abuse of the process of Court.
As a result, a present Appeal was allowed. The impugned order passed by the High Court was set aside.
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