Holding

Section 141 requires explicit averments that the person was in charge of and responsible for the company's business at the relevant time; a director is not liable without such averments, while a managing director/joint managing director and the cheque signatory are liable.

Summary

The Supreme Court examined a reference concerning prosecutions under Sections 138 and 141 of the Negotiable Instruments Act, 1881, focusing on the necessity of specific averments in a complaint to hold company officers liable for a dishonoured cheque. It held that a complaint must expressly state that the accused was in charge of and responsible for the conduct of the company's business at the time of the offence. A director is not automatically liable under Section 141 unless such specific averments are made, whereas a managing director or joint managing director, by virtue of their role, is deemed to be in charge and thus liable. The signatory of the cheque is also liable under sub‑section (2) of Section 141. The Court answered the three reference questions affirmatively for (a) and (c) and negatively for (b), emphasizing that liability depends on actual responsibility, not merely on title.

Issues considered

Whether a complaint under Section 141 must contain specific averments that the accused was in charge of and responsible for the conduct of the company's business at the time of the offence.
Whether a director of a company is deemed to be liable under Section 141 merely by virtue of his directorship.
Whether, in the absence of such specific averments, the signatory of the cheque and/or the managing director or joint managing director can be proceeded against.

Legislation cited

Code of Criminal Procedure, 1973s. 200, s. 203, s. 204
Companies Act, 1956s. 2(13)
Negotiable Instruments Act, 1881s. 138, s. 141

Subjects

Negotiable Instruments ActSection 138Section 141Corporate criminal liabilityVicarious liabilitySpecific avermentsDirector liabilityManaging directorCheque dishonour

Judgment

S.M.S. PHARMACEUTICALS LTD. A
V.

NEETA BHALLA AND ANR.

SEPTEMBER 20, 2005

[Y.K. SABHARWAL, ARUN KUMAR AND B.N. SRIKRISHNA, JJ.] B

Negotiable Instruments Act, 1881-Sections 138 and 141-Dishonour
of cheques-Offences by companies-Prosecution against officers who were
in charge of and responsible for conduct of business-Reference to Larger C
Bench-Whether specific averments are necessary in a complaint against a
person accu~ed that he was in charge of and responsible for the conduct of
business of the company-Whether a Director of a company can be deemed
to be held liable-Whether a signatory of a cheque and/or Managing Director
of the Company can be deemed to be held liable-Held, specific averments
against a person are necessary in a complaint-Director ofa company cannot D
be deemed to be liable unless there is specific averment in the complaint-
Signatory of a cheque and/or the Managing Director of the company are
deemed to be liable for prosecution.

A two Judge Bench of this Court made a reference for determination
of the following questions. by a larger Bench: E
"(a) whether for purposes of Section 141 of the Negotiable
Instruments Act, 1881, it is sufficient if the substance of the allegation read
as a whole fulfil the requirements of the said section and it is not necessary
to specifically state in the complaint that the persons accused was in charge F
of, or responsible for, the conduct of the business of the company.

(b) Whether a director of a company would be deemed to be in
charge of, and responsible to, the company for conduct of the business of
the company and, therefore, deemed to be guilty of the offence unless he
proves to the contrary. G
(c) even if it is held that specific averments are necessary, whether
in the absence of such averments the signatory of the cheque and or the
Managing Directors of Joint Managing Director who admittedly would
be in charge of the company and responsible to the company for conduct
371 H
372 SUPREME COURT REPORTS [2005) SUPP. 3 S.C.R.

A of its business could be proceeded against."

Answering the Reference, the Court

HELD: 1.1. Liability under Section 141 of the Negotiable Instrument
Act, 1881 is cast on persons who may have something to do with the
B transaction complained of. A person, who is in charge of and responsible
for conduct of business of a company, would know why the cheque in
question was issued and why it got dishonoured. Analysing Section 141 of
the Act, it is seen that it operates in cases where an offence under Section
138 of the Act is committed by a company. The key words which occur in
the Section are "every person". These are general words and take every
C person connected with a company within their sweep. These words have
been qualified by use of the words "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 etc". What is required is that the
D persons who are sought to be made criminally liable under Section 141 of
the Act should be at the time the offence was committed, in charge of and
responsible to the company for the conduct of the business of the company.
Every person connected with the company shall not fall within the ambit
of the provision. It is only those persons who were in charge of and
responsible for conduct of business of the company at the time of
E commission of an offence, who will be liable for criminal action. It follows
from this that a director of a company, who was not in charge of and was
not responsible for the conduct of the business of the company at the
relevant time, is not be liable under the provision. The liability arises from
being in charge of and responsible for conduct of business of the company
at the relevant time when the offence was committed and not on the basis
F of merely holding a designation or office in a company. Conversely, a
person not holding any office or designation in a company may be liable
if he satisfies the main requirement of being in charge of and responsible
for conduct of business of a company at the relevant time. Liability
depends on the role one plays in the affairs of a company and not on
G designation or status. If being a Director or Manager or Secretary was
enough to cast criminal liability, the Section would have said so.
[381-D-E; 382-A-E]

1.2, The .Legislature is aware that it is a case of criminal liability
which means serious consequences so fa'!• as the person sought to be made
H liable is concerned. Therefore, only persons who can be said to be
S.M.S. PHARMACEUTICALS LTD. v. NEETA BHALLA 373
connected with the commission of a crime at the relevant time have been A
subjected to action. A reference to sub-section (2) of Section 141 of the
Act fortifies the above reasoning because sub-section (2) envisages direct
involvement of any Director, Manager, Secretary or other officer of a
company in commission of an offence. This section operates when in a trial
it is proved that the offence has been committed with the consent or
connivance or is attributable to neglect on the part of any of the holders B
of these offices in a company. In such a case, such persons are to be held
liable. Provision has been made for Directors, Managers, Secretaries and
other officers of a company to cover them in cases of their proved
involvement. The conclusion is inevitable that the liability arises on account
of conduct, act or omission on the part of a person and not merely on C
account of holding an office or a position in a company. Therefore, in order
to bring a case within Section 141 of the Act, the complaint must disclose
the necessary facts which make a person liable. (382-D-H)

1.3. Necessary averments ought to be contained in a complaint before
a persons can be subjected to criminal process. A liability under Section D
141 of the Act is sought to be fastened vicariously on a person connected
with a Company, the principal accused being the company itself. It is a
departure from the rule in criminal law against vicarious liability. A clear
case should be spelled out in the complaint against the person sought to
be made liable. Section 141 of the Act contains the requirements for E
making a person liable under the said provision. That respondent falls
within parameters of Section 141 of the Act has to be spelled out. A
complaint has to be examined by the Magistrate in the first instance on
the basis of averments contained therein. If the Magistrate is satisfied that
there are averments which bring the case within Sections 141 of the Act,
he would issue the process. Merely being described as a director in a F
company is not sufficient to satisfy the requirement of Sections 141 of the
Act. Even a non director can be liable under Section 141 of the Act. The
averments in the compliant would also serve the purpose that the person
sought to be made liable would know what is the case which is alleged
against him. This will enable him to meet the case at the trial. G
(386-B-C-D-E-F)

State of Orissa v. Debendra Nath Padhi, (2005( 1 SCC 568; State of
Karnataka v. Pratap Chand and Ors., (1981( 2 SCC 335; Municipal
Corporation ofDelhi v. Ram Kishan Rohtagi and Ors., (1983) I SCC I; State
of Haryana v. Brij Lal Mittal and Ors., (1998( 5 SCC 343; K.P.G. Nair v. H
'

374 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A Jindal Menthol India Ltd., (2001) 10 SCC 218; Katta Sujatha v. Fertilizers
and Chemicals Travancore Ltd. and Anr., (2002) 7 SCC 655; Mohan
Ketanbhai Shah and Anr. v. State of Gujarat and Ors., [2004) 7 SCC 15;
Secunderabad Health Care Ltd. and Ors. v. Secunderabad Hospitals Pvt. Ltd.,
(1999) 96 CC (AP) 106; V. Sudheer Reddy v. State of Andhra Pradesh and
Ors., (2000) 99 CC (AP) 107; R. Kannan v. Kotak Mahindra Finance Ltd.,
B (2003) 115 CC (Mad) 321; Lok Housing and Constructions Ltd v. Raghupati
Leasing and Finance Ltd. and Anr., (2003) 115 CC (Del) 957 and Sunil Kumar
Chhaparia v. Dakka Eshwaraiah and Anr., (2002) 108 CC (AP) 687, referred
to.

1.4. Tile answers to the questions posed in the Reference are as
C under:

(a) It is necessary to specifically aver in a complaint under Section
141 of the Negotiable Instruments Act, 1881 that at the time the offence
was committed, the person accused was in charge of, and responsible for
the conduct of business of the company. This averment is an essential
D requirement of Section 141 of the Act and has to be made in a complaint.
Without this averment being made in a complaint, the requirements of
Section 141 of the Act cannot be said to be satisfied.

(b) The answer to question posed in sub-para (b) has to be in
negative. Merely being a director of a company is not sufficient to make
E the person liable under Section 141 of the Act. A director in a company
cannot be deemed to be jn charge of and responsible to the company for
conduct of its business. The requirement of Section 141 of the Act is that
the person sought to be made liable should be in charge of and responsible
for the conduct of the business of the company at the relevant time. This
F has to be averred as a fact as there is no deemed liability of a director in
such cases.

(c) The answer to question (c) has to be in affirmative. The question
notes that the Managing Director or Joint Managing Director would be
admittedly in charge of the company and responsible to the company for
G conduct of its business. 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 in charge of and responsible for the conduct of business of the
company. Therefore, they get covered under Section 141 of the Act. So
far as signatory of a cheque which is dishonoured is concerned, he is clearly
H responsible for the incriminating act and will be covered under sub-section
S.M.S. PHARMACEUTICALS LID. 1•. NEETA BHALLA [ARUN KUMAR, J.) 375
(2) of Section 141 of the Act. (386-F-G-H; 387-A-B-C-DJ A
CRIMINAL APPELLATE JURISDICTION : Criminal Appeal No. 664
of 2002.

From the Judgment and Order dated 13.12.2001 of the Andhra Pradesh
High Court in Crl.P. No. 3795 of 2000. B
With SLP (Crl) Nos. 2286/2002, 1926-1927, 2090-2091, 2214/2003,
4795, 4992, 5073, 5097, 5130/2004, 612, 613, 614, 615 and 616 of 2005.

P.S. Mishra, L.N. Rao, Avadh Behari Rohtagi, S.Chandra Shekhar, T.
Harish Varshan, D. Srinivas Prasad, Ravi Chandra Prasad, Upendra Mishra, C
Amitesh Chandra Mishra, Dhruv Kumar Jha, Anip Sachthey, Shriniwas R.
Khalap, E. Venu Kumar, Arvind Kumar, Mahesh Agarwal, Manu Krishnan,
E.C. Agrawala, H.P. Sharma, Ashok Bhan, Satbir Pillania, Sudarsh Menon,
Raj Nathan and Subramonium Prasad with them for the Appellant/Petitioners.

Ranjit Kumar, Sanjay ~arol, Guntur Prabhakar, Ms. Meenakshi Arora, D
Sandeep Narain, Shri Narain, Ms. Anjali Jha, Ms. D. Bharathi Reddy, Pranab
Kumar Mullick, Rajesh Srivastava, Naveen Kumar, Ms. Ruby Singh Ahuja
and Ravindra K. Adsure for the Respondents.

The Judgment of the Court was delivered by
E
ARUN KUMAR, J. This matter arises from a reference made by a two
Judge Bench of this Court for determination of the following questions by a
larger Bench:

"(a) whether for purposes of Section 141 of the Negotiable
Instruments Act, 1881, it is sufficient if the substance of the allegation F
read as a whole fulfill the r~irements of the said section and it is
not necessary to specifically state in the complaint that the persons
accused was in charge of, or responsible for, the conduct of the
business of the company.

(b) whether a director of a company would be deemed to be in G
charge of, and responsible to, the company for conduct of the business
of the company and, therefore, deemed to be guilty of the offence
unless he proves to the contrary.

(c) even if it is held that specific averments are necessary, whether H
376 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A in the absence of such averments the signatory of the cheque and or
the Managing Directors of Joint Managing Director who admittedly
would be in charge of the company and responsible to the company
for conduct of its business could be proceeded against. "

The controversy has arisen in the context of prosecutions launched
B against officers of Companies under Sections 138 and 141 of the Negotiable
Instruments Act of 1881 (hereinafter referred to as the "Act"). The relevant
part of the provisions are quoted as under :

"Section 138 :

c Dishonour of cheque for insufficiency, etc., offunds in the account-

Where any cheque drawn by a persons on an account maintained by
him with a banker for payment of any amount of money to another '
persons from out of that account for the discharge, in whole or in
part, of any debt or other liability, is returned by the bank unpaid,
D either because of the amount of money 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 and shall, without prejudice to any other provisions of this
Act, be punished with imprisonment for a term which may be extended
E
to two years, or with fine which may extend to twice the amount of
the cheque, or with both:

Provided that nothing contained in this section shall apply unless-
(a) the cheque has been presented to the bank within a period of six
F months from the date on which it is drawn or within the period
of its validity, whichever us earlier.
(b) the payee or the holder in due course of the cheque, as the case
may be, makes a demand for the payment of the said account of
money by giving a notice in writing, to the drawer of the cheque,
G within thirty days of the receipt of information by him from the
bank regarding the return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said
amount of money to the payee or, as the case may be, to the
holder in due course of the cheque, within fifteen days of the·
H receipt of the said notice.
S.M.S. PHARMACEUTICALS LTD. v. NEETA BHALLA [ARUN KUMAR, J.] 377

Explanation. For the purposes of this section, "debt or other A
liability" means a legally enforceable debt or other liability.

Section 141 :

Offences by companies-

(!) If the person committing an offence under section 138 is a B
company, every person who, at the time the offence was committed,
was in charge of, and was responsible to the company for the conduct
of the business of the company, as well as the company, shall be
deemed to be guilty of the offence and shall be liable to be proceeded
against and punished accordingly:
c
Provided that nothing contained in this sub-section shall render any
person liable to punishment if he proves that the offence was
committed without his knowledge, or that he had exercised all due
diligence to prevent the commission of such offence.

Provided .... D
(2) Notwithstanding anything contained in sub-section (I), where any
offence under this Act 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 E
director, manager, secretary or other officer of the company, such
director, manager, secretary or other officer shall also be deemed to
be guilty of that offence and shall be liable to be proceeded against
and punished accordingly."

It will be seen from the above provisions that Section 138 casts criminal F
liabiiity punishable with imprisonment or fine or with both on a person who
issues a cheque towards discharge of a debt or liability as a whole or in part
and the cheque is dishonoured by the Bank on presentation. Section 141
extends such criminal liability in case of a Company to every person who at
the time of the offence, was incharge of, and was responsible for the conduct
of the business of the Company. By a deeming provision contained in Section G
141 of the Act, such a person is vicariously liable to be held guilty for the
offence under Section 138 and punished accordingly. Section 138 is the
charging section creating criminal liability in case of dishonour of a cheque
and its main ingredients are :

(i) Issuance of a cheque. H
I
)

378 SUPREME COURT REPORTS (2005] SUPP. 3 S.C.R.

A (ii) Presentation of the cheque
(iii) Dishonour of the cheque

(iv) Service of statutory notice on the person sought to be made
liable, and
B (v) Non-compliance or non-payment in pursuance of the notice within
15 days of the receipt of the notice.

Sections 13 8 and 141 of the Act form part of Chapter XVII introduced
in the Act by way of an amendment carried out by virtue of Act 66 of 1988
effective from !st April, 1989. These provisions were introduced with a view
C to encourage the culture of use of cheques and enhancing the credibility of
the instruments. The legislature has sought to inculcate faith in the efficacy
of banking operations and use of negotiable instruments in business
transactions. The penal provision is meant to discourage people from not
honouring their commitments by way of payment through cheques. Section
139, occurring in the same Chapter of the Act creates a presumption that the
D holder of a cheque receives the cheque in discharge, in whole or in part, of
any debt or other liability.

In the present case, we are concerned with criminal liability on account
of dishonour of cheque. It primarily falls on the drawer company and is
E extended to officers of the Company. The normal rule in the cases involving
criminal liability is against vicarious liability, that is, no one is to be held
criminally liable for an act of another. This normal rule is, however, subject
to exception on account of specific provision being made in statutes extending
liability to others. Section 141 of the Act is an instance of specific provision
which in case an offence under Section 138 is committed by a Company,
F extends criminal liability for dishonour of cheque to officers of the Company.
Section 141 contains conditions which have to be satisfied before the liability
can be extended to officers of a company. Since the provision creates criminal
liability, the conditions have to be strictly complied with. The conditions are
intended to ensure that a person who is sought to be made vicariously liable
G for an offence of which the principal accused is the Company, had a role to
play in relation to the incriminating act and further that such a person should
know what is attributed to him to make him liable. In other words, persons
who had nothing to do with the matter need not be roped in. A company
being a juristic person, all its deeds and functions are result of acts of others.
Therefore, officers of a Company who are responsible for acts done in the
H name of the Company are sought to be made personally liable for acts which
S.M.S. PHARMACEUTICALS LTD. 1•. NEETA BHALLA [ARUN KUMAR, l.] 379

result in criminal action being taken against the Company. It makes every A
person who, at the time the offence was committed, was incharge of, and was
responsible to the Company for the conduct of business of the Company, as
well as the Company, liable for the offence. The proviso to the sub-section
contains an escape route for persons who are able to prove that the offence
was committed without their knowledge or that they had exercised all due B
diligence to prevent commission of the offence.

Section 203 of the Code empowers a Magistrate to dismiss a complaint
without even issuing a process. It uses the words "after considering" arid "the
Magistrate is of opinion that there is no sufficient ground for proceeding".
These words suggest that the Magistrate has to apply his mind to a complaint C
at the initial stage itself and see whether a case is made out against the
accused persons before issuing process to them on the basis of the complaint.
For applying his mind and forming an opinion as to whether there is sufficient
ground for proceeding, a complaint must make out a prima facie case to
proceed. This, in other words, means that a complaint must contain material
to enable the Magistrate to make up his mind for issuing process. If this were D
not the requirement, consequences could be far reaching. If a Magistrate had
to issue process in every case, the burden of work before Magistrates as well
as harassment caused to the respondents to whom process is issued would be
tremendous. Even Section 204 of the Code starts with the words "if in the
opinion of the Magistrate taking cognizance of an offence there is sufficient E
ground for proceeding ..... " The words "sufficient ground for proceeding"
again suggest that ground should be made out in the complaint for proceeding
against the respondent. It is settled law that at the time of issuing of the
process the Magistrate is required to see only the allegations in the complaint
and where allegations in the complaint or the chargesheet do not constitute
an offence against a person, the complaint is liable to be dismissed. F
As the points of reference will show, the question for consideration is
what should be the averments in a complaint under Sections 138 and 141.
Process on a complaint under Section 138 starts normally on basis of a
written complaint which is placed before a Magistrate. The Magistrate
considers the complaint as per provisions of Sections 200 to 204 of the Code G
of Criminal Procedure. The question of requirement of averments in a
complaint has to be considered on the basis of provisions contained in Sections
138 and 141 of the Negotiable Instruments Act read in the light of powers
of a Magistrate referred to in Sections 200 to 204 of the Code of Criminal
Procedure. The fact that a Magistrate has to consider the complaint before H
380 SUPREME COURT REPORTS [2005) SUPP. 3 S.C.R.

A issuing process and he has power to reject it at the threshold, suggests that
a complaint should make out a case for issue of process.

As to what should be the averments in a complaint, assumes importance
in view of the fact that, at the stage of issuance of process, the Magistrate will
have before him only the complaint and the accompanying documents. A
B person who is sought to be made accused has no right to produce any
documents or evidence in defence at that stage. Even at the stage of framing
of charge the accused has no such right and a Magistrate cannot be asked to
look into the documents produced by an accused at that stage, State of Orissa
v. Debendra Nath Padhi, [2005] I SCC 568. !

c The officers responsible for conducting affairs of companies are
generally referred to as Directors, Managers, Secretaries, Managing Directors
etc. What is required to be considered is: is it sufficient to simply state in a
complaint that a particular person was a director of the Company at the time
the offence was committed and nothing more is required to be said? For this,
D it may be worthwhile to notice the role of a director in a company. The word
'director' is defined in Section 2(13) of the Companies Act, 1956 as under:

" "director" includes any person occupying the position of director, by
whatever name called";

E There is a whole chapter in the Companies Act on directors, which is
Chapter II. Sections 291 to 293 refer to powers of Board of Directors. A
perusal of these provisions shows that what a Board of Directors is empowered
to do in relation to a particular company depends upon the role and functions
assigned to Directors as per the Memorandum and Articles of Association of
the company. There is nothing which suggests that simply by being a director
F in a Company, one is supposed to discharge particular functions on behalf of
a company. It happens that a person may be a director in a company but he
may not know anything about day-to-day functioning of the company. As a
director he may be attending meetings of the Board of Directors of the
Company where usually they decide policy matters and guide the course of
G business of a company. It may be that a Board of Directors may appoint sub-
committees consisting of one or two directors out of the Board of the Company
who may be made responsible for day-to-day functions of the Company.
These are matters which form part of resolutions of Board of Directors of a
Company. Nothing is oral. What emerges from this is that the role of a
director in a company is a question of fact depending on the peculiar facts
H in each case. There is no universal rule that a director of a company is in
S.M.S. PHARMACEUTICALS LTD. '" NEETA BHALLA [ARUN KUMAR, J.) J81

charge of its everyday affairs. We have discussed about the position of a A
Director in a company in order to illustrate the point that there is no magic
as such in a particular word, be it Director, Manager or Secretary. It all
depends upon respective roles assigned to the officers in a company. A
company may have Managers or Secretaries for different departments, which
means, it may have more than one Manager or Secretary. These officers may B
also be authorised to issue cheques under their signatures with respect to
affairs of their respective departments. Will it be possible to prosecute a
Secretary of Department-8 regarding a cheque issued by the Secretary of
Department-A which is dishonoured? The Secretary of Department-8 may
not be knowing anything about issuance of the cheque in question. Therefore,
mere use of a particular designation of an officer without more, may not be C
enough by way of an averment in a complaint. When the requirement in
Section 141, which extends the liability to officers of a company, is that such
a person should be in charge of and responsible to the company for conduct
of business of the company, how can a person be subjected to liability of
criminal prosecution without it being averred in the complaint that he satisfies
those requirements ? Not every person connected with a Company is made D
liable under Section 141. Liability is cast on persons who may have something
to do with the transaction complained of. A person who is in charge of and
responsible for conduct of business of a Company would naturally know why
the cheque in question was issued and why it got dishonoured.

The position of a Managing Director or a Joint Managing Director in
E
a company may be different. These persons, as the designation of their office
suggests, are in charge of a company and are responsible for the conduct of
the business of the company. In order to escape liability such persons may
have to bring their case within the proviso to Section 141 (I), that is, they will
have to prove that when the offence was committed they had no knowledge F
of the offence or that they exercised all due diligence to prevent the commission
of the offence.

While analysing Section 141 of the Act, it will be seen that it operates
in cases where an offence under Section 138 is committed by a company.
The key words which occur in the Section are "every person''. These are G
general words and take every person connected with a company within their
sweep. Therefore, these words have been rightly qualified by use of the
words " 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 etc." H
382 SUPREME COURT REPORTS (2005] SUPP. 3 S.C.R.

A What is required is that the persons who are sought to be made criminally
liable under Section 141 should be at the time the offence was committed, in
charge of and responsible to the company for the conduct of the business of
the company. Every person connected with the company shall not fall within
the ambit of the provision. It is only those persons who were in charge of and
responsible for conduct of business of the company at the time of commission
B of an offence, who will be liable for criminal action. It follows from this that
if a director of a Company who was not in charge of and was not responsible
for the conduct of the business of the company at the relevant time, will not
be liable under the provision. The liability arises from being in charge of and
responsible for conduct of business of the company at the relevant time when )

C the offence was committed and not on the basis of merely holding a designation
or office in a company. Conversely, a person not holding any office or
designation in a Company may be liable if he satisfies the main requirement
of being in charge of and responsible for conduct of business of a Company
at the relevant time. Liability depends on the role one plays in the affairs of
a Company and not on designation or status. If being a Director or Manager
-
D or Secretary was enough to cast criminal liability, the Section would have
said so. Instead of "every person" the section would have· said "every Director,
Manager or Secretary in a Company is liable" .... etc. The legislature is aware
that it is a case of criminal liability which means serious consequences so far
as the person sought to be made liable is concerned. Therefore, only persons
E who can be said to be connected with the commission of a crime at the
relevant time have been subjected to action.

A reference to sub-section (2) of Section 141 fortifies the above
reasoning because sub-section (2) envisages direct involvement of any Director,
Manager, Secretary or other officer of a company in commission of an offence.
F This section operates when in a trial it is proved that the offence has been
committed with the consent or connivance or is attributable to neglect on the
part of any of the holders of these offices in a company. In such a case, such
persons are to be held liable. Provision has been made for Directors, Managers,
Secretaries and other officers of a company to cover them in cases of their
G proved involvement.

The conclusion is inevitable that the liability arises on account of
conduct, act or omission on the part of a person and not merely on account
of holding an office or a position in a company. Therefore, in order to bring
a case within Section 141 of the Act the complaint must disclose the necessary
H facts which make a person liable.
S.M.S. PHARMACEUTICALS LID. 1•. NEETA BHALLA [ARUN KUMAR, J.] 383

The question of what should be averments in a criminal complaint has A
come up for consideration before various High Courts in the country as also
before this Court. Secunderabad Health Care Ltd. and Ors. v. Secunderabad
Hospitals Pvt. Ltd. and Ors., (1999) 96 C.C.(AP) 106 was a case under the
Negotiable Instruments Act specifically dealing with Sections 138 and 141
thereof. The Andhra Pradesh High Court held that every Director of a company B
is not automatically vicariously liable for the offence committed by the
company. Only such Directors or Director who were in charge of or responsible
to the company for the conduct of business of the company at the material
time when the offence was committed alone shall be deemed to be guilty of
the offence. Further it was observed that the requirement of law is that "there
must be clear, unambiguous and specific allegations against the persons who C
are impleaded as accused that they were in charge of and responsible to the
company in the conduct of its business in the material time when the offence
was committed." The same High Court in V. Sudheer Reddy v. State of
Andhra Pradesh and Ors., (2000) 99 CC (AP) l 07 held that "the purpose of
Section 141 of the Negotiablte Instruments Act would appear to be that a D
person who appears to be merely a director of the Company cannot be fastened
with criminal liability for an offence under Section 138 of the Negotiable
Instruments Act unless it is shown that he was involved in the day-to-day
affairs of the company and was responsible to the company." Further, it was
held that allegations in this behalf have to be made in a complaint before
process can be issued against a person in a complaint. To same effect is the E
judgment of the Madras High Court in R. Kannan v. Kotak Mahindra Finance
Ltd., (2003) (115) CC (Mad) 321. In Lok Housing and Constructions Ltd. v.
Raghupati Leasing and Finance Ltd. and Anr., (2003) 115 CC (Del) 957, the
Delhi High Court noticed that there were clear averments about the fact that
accused No. 2 to 12 were officers in charge of and responsible to the company F
in the conduct of day-to-day business at the time of commission of offence.
Therefore, the Court refused to quash the complaint. In Sunil Kumar Chhaparia
v. Dakka Eshwaraiah and Anr., (2002) l 08 CC (AP) 687, the Andhra Pradesh
High Court noted that there was a consensus of judicial opinion that "a
director of a company cannot be prosecuted for an offence under Section 138
of the Act in ,the absence of a specific allegation in the complaint that he was G
in charge of and responsible to the company in the conduct of its business
at the relevant time or that the offence was committed with his consent or
connivance." The Court has quoted several judgments of various High Courts
in support of this proposition. We do not feel it necessary to recount them all.

Cases have arisen under other Acts where similar provisions are H
384 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A contained creating vicarious liability for officers of a company in cases where
primary liability is that of a company. State of Karnataka v. Pratap Chand
and Ors., (1981] 2 SCC 335 was a case under the Drugs and Cosmetics Act,
1940. Section 34 contains a similar provision making every person in charge
of and responsible to the company for conduct of its business liable for
B offence committed by a company. It was held that a person liable for criminal
action under that provision should be a person in overall control of day-to-
day affairs of the company or a firm. This was a case of a partner in a finn
and it was held that a partner who was not in such overall control of the finn
could not be held liable. In Municipal Corporation of Delhi v. Ram Kishan
Rohtagi and Ors., (1983] I SCC I, the case was under the Prevention of
C Food Adulteration Act. It was first noticed that under Section 482 of the
Criminal Procedure Code in a complaint, the order of a Magistrate issuing
process against the accused can be quashed or set aside in a case where the
allegation made in the complaint or the statements of the witnesses recorded
in support of the same taken at their face value make out absolutely no case
D against the accused or the complaint does not disclose the essential ingredients
of an offence which is arrived at against accused. This emphasises the need
for proper averments in a complaint before a person can be tried for the
offence alleged in the complaint.

In State of Haryana v. Brij Lal Mittal and Ors., [1998] 5 SCC 343 it
E was held that vicarious liability of a person for being prosecuted for an
offence committed under the Act by a company arises if at the material time
he was in charge of and was also responsible to the company for the conduct
of its business. Simply because a person is a director of a company, it does
not necessarily mean that he fulfils both the above requirements so as to
F make him liable. Conversely, without being a director a person can be in
charge of and responsible to the company for the conduct of its business.

K.P.G. Nair v. Jindal Menthol India Ltd., [2001] 10 SCC 218, was a
case under the Negotiable Instruments Act. It was found that the allegations
in the complaint did not in express words or with reference to the allegations
G contained therein make out a case that at the time of commission of the ·
offence, the appellant was in charge of and was responsible to the company
for the conduct of its business. It was held that requirement of Section 141
was not met and the complaint against the accused was quashed. Similar was
the position in Kaua Sujatha v. Fertilizers & Chemiucals Travancore Ltd
and Anr., [2002] 7 SCC 655. This was a case of a partnership. It was found
H that no allegations were contained in the complaint regarding the factthat the
S.M.S. PHARMACEUTICALS LTD. v. NEETA BHALLA [ARUN KUMAR, J.] 385

accused was a partner in charge of and was responsible to the firm for the A
conduct of business of the firm nor was there any allegation that the offence
was made with the consent and connivance or that it was attributable to any
neglect on the part of the accused. It was held that no case was made out
against the accused who was a partner and the complaint was quashed. The
latest in the line is the judgment of this Court in Monaben Ketanbhai Shah B
and Anr. v. State of Gujarat and Ors., [2004] 7 SCC 15. It was observed as
under:

"4. It is not necessary to reproduce the language of Section 141
verbatim in the complaint since the complaint is required to be read
as a whole. If the substance of the allegations made in the complaint C
fulfil the requirements of Section 141, the complaint has to proceed
and is required to be tried with. It is also true that in construing a
complaint a hypertechnical approach should not be adopted so as to
quash the same. The laudable object of preventing bouncing of cheques
and sustaining the credibility of commercial transactions resulting in
enactment of Sections 138 and 141 has to be borne in mind. These D
provisions create a statutory presumption of dishonesty, exposing a
person to criminal liability if payment is not made within the statutory
period even after issue of notice. It is also true that the p"-.ver of
quashing is required to be exercised very sparingly and where, read
as a whole, factual foundation for the offence has been laid in the E
complaint, it should not be quashed. All the same, it is also to be
remembered that it is the duty of the court to discharge the accused
if taking everything stated in the complaint as correct and construing
the allegations made therein liberally in favour of the complainant,
the ingredients of the offence are altogether lacking. The present case
falls in this category as would be evident from the facts noticed F
hereinafter."

It was further observed:

"6 .. The criminal liability has been fastened on those who, at the time
of the commission of the offence, were in charge of and were G
responsible to the firm for the conduct of the business of the firm.
These may be sleeping partners who are not required to take any part
in the business of the firm; they may be ladies and others who may
not know anything about the business of the firm. The primary
responsibility is on the complainant to make necessary aVel:(llents in
the complaint so as to make the accused vicariously liable. For H
_\
386 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A fastening the criminal liability, there is no presumption that every
partner knows about the transaction. The obligation of the appellants
to prove that at the time the offence was committed they were not in
charge of and were not responsible to the firm for the conduct of the
~usiness of the firm, would arise only when first the complainant
makes necessary averments in the complaint and establishes that fact.
B The present case is of total absence of requisite averments in the
complaint."

To sum up, there is almost unanimous judicial opinion that necessary

C
averments ought to be contained in a complaint before a persons can be
subjected to criminal process. A liability under Section 141 of the Act is
sought to be fastened vicariously on a person connected with a Company, the
-
principal accused being the company itself. It is a departure from the rule in
criminal law against vicarious liability. A clear case should be spelled out in
the complaint against the person sought to be made liable. Section 141 of the
Act contains the requirements for making a person liable under the said
D provision. That respondent falls within parameters of Section 141 has to be
spelled out. 'A complaint has to be examined by the Magistrate in the first
instance on the basis of averments contained therein. If the Magistrate is
satisfied that there are averments which bring the case within Section 141 he
would issue the process. We have seen that merely being described as a
E director in a company is not sufficient to satisfy the requirement of Section
141. Even a non director can be liable under Section 141 of the Act. The
averments in the complaint would also serve the purpose that the person
sought to be made liable would know what is the case which is alleged
against him. This will enable him to meet the case at the trial.

p In view of the above discussion, our answers to the questions posed in
the Reference are as under:

(a) It is necessary to specifically aver in a complaint under Section
141 that at the time the offence was committed, the person accused
was in charge of, and responsible for the conduct of business of
G the company. This averment is an essential requirement of Section
141 and has to be made in a complaint. Without this averment
being made in a complaint, the requirements of Section 141
cannot be said to be satisfied.

(b) The answer to question posed in sub-para (b) has to be in negative.
H Merely being a director of a company is not sufficient to make
S.M.S. PHARMACEUTICALS LTD. v. NEETA BHALLA [ARUN KUMAR, J.] 387

the person liaole under Section 141 of the Act. A director in a A
company cannot be deemed to be in charge of and responsible
to the company for conduct of its business. The requirement of
Section 141 is that the person sought to be made liable should
be in charge of and responsible for the conduct of the business
of the company at the relevant time. This has to be averred as a
fact as there is no deemed liability of a director in such cases. B
(c) The answer to question (c) has to be in affirmative. The question
notes that the Managing Director or Joint Managing Director
would be admittedly in charge of the company and responsible
to the company for conduct of its business. When that is so,
holders of such positions in a company become liable under C
Section 141 of the Act. By virtue of the office they hold as
Managing Director or Joint Managing Director, these persons
are in charge of and responsible for the conduct of business of
the company. Therefore, they get covered under Section 141. So
far as signatory of a cheque which is dishonoured is concerned, D
he is clearly responsible for the incriminating act and will be
covered under sub-section (2) of Section 14 l.

The Reference having been answered, individual cases may be listed
before appropriate Bench for disposal in accordance with law.
E
B.S. Referred question answered.