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Total Number of Subscribers: 1626 |
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Date: 3rd April 2010 |
Compiled by: M Sathya Kumar |
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Offences by Company Proper and smooth functioning of all
business transactions, particularly of cheques as instruments primarily
depends upon the integrity and honesty of the parties. Undoubtedly, dishonour
of a cheque by the bank causes incalculable loss, injury and inconvenience to
the payee and the entire credibility of the business transactions within and
outside the country suffers a serious setback. A company being an artificial
person created by law acts through its directors and officers who are
responsible for the conduct of the business of the company. A criminal
liability on account of dishonour of cheque primarily falls on the drawer
company and is 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 Negotiable
Instrument Act,1881 (“NI Act”) regulates offences by companies. The Act has created a deemed offence under a
legal fiction, whenever a cheque drawn by a person on an account maintained
by him bounces either for insufficiency of the funds in the account or it
exceeds the arrangements made. It is apparent that the person who has drawn
the cheque on an account maintained by him alone is liable in the event of
bouncing of the cheque later. When the company is the drawer of the cheque,
such company is the principal offender, and the remaining persons are made offenders
by virtue of the legal fiction created by the legislature as per the said
section. The actual offence should be committed by the company and then alone
the other two categories would also become liable for the offence.[1] Penal
statues provide constructive vicarious liability and should be construed much
more strictly. When conditions are prescribed for extending such constructive
criminal liability to others, the Courts will insist upon strict literal
compliance. There is no question of inferential or implied compliance. In this Article, with the assistance of
latest decisions of the Hon’ble Supreme Court of India, we shall be
examining the provisions relating to section 141(1) and shall attempt to
determine who are the persons who shall be responsible and can be made liable
for an offence done by a company? Who is responsible to the company for the
conduct of its business, and who could be said to be in-charge thereof? How
does one identify such persons? Is it that a person by virtue of being a
director, manager or secretary of a Company automatically becomes liable
under this section? Is it necessary to have an averment in the complaint that
at the time when this offence was committed, such a person was in charge of and
was responsible to the company for the conduct of business of the company? Provision Section 141 of the NI Act, 1881 regulates
offences by Companies. It reads as follows (1) If the person committing an offence
under section 138 is a company, every person who, at the time the offence was
committed, was in charge of, and was responsible to the company for the
conduct of the business of the company, as well as the company, shall be
deemed to be guilty of the offence and shall be liable to be proceeded
against and punished accordingly: Provided that nothing contained in this
sub-section shall render any person liable to punishment if he proves that
the offence was committed without his knowledge or that he had exercised all
due diligence to prevent the commission of such offence. (2) Notwithstanding anything contained in
sub-section (1), 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
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. Explanation. - For the purposes
of this section, - (a) 'Company’ means any body corporate
and includes a firm or other association of individuals; and When a cheque issued by a company 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: a. 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; b. Any Director, Manager, Secretary or other
officer of the company with whose consent and connivance, the offence under
section 138 had been committed; and c. Any Director, Manager, Secretary or other
officer of the company whose negligence resulted in the offence under section
138 being committed by the company Analysis 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 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. The key words which occur in the Section are
"every person". These are 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." 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 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 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 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 who can be said to be connected with the commission
of a crime at the relevant time have been subjected to action.[2] The Supreme Court in various cases held that
the words “was in-charge of, and was responsible to the company for the
conduct of the business of the company” refer to a person who is in
overall control of the day-to-day business of the company. The Court pointed
out that, though a person may be a director and, thus, belongs to the group
of persons making the policy followed by the company, 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 It is, however, observed by the Supreme Court that
the words in section 141(1) of the Act need not be incorporated in a
complaint as magic words. But, at the same time, the substance of the
allegations read as a whole, should answer and fulfil the requirements of the
ingredients of the said provision.[3] If a mere reproduction of the wording of
section 141 (1) in the complaint is sufficient to make a person liable to
face prosecution, virtually every officer / employee of a company without
exception could be impleaded as on accused by merely making an averment that
at the time when the offence was committed he was in-charge of and was
responsible to the company for the conduct and business of the company. This
would mean that if a company had 100 branches and the cheque issued from one
branch was dishonored, 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 an absurd thing and not intended under the Act. As the trauma,
harassment and hardship of a criminal proceedings in such cases, can be more
serious than the ultimate punishment, it is not proper to subject all and
sundry to be impleaded as accused in a complaint against a company, even when
the requirements of section 138, read and section 141,are not fulfilled.[4] There is no universal rule that a director
of a company is in charge of its everyday affairs. 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 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-B regarding a cheque issued by the Secretary of Department-A which
is dishonoured? The Secretary of Department-B 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 enough by way of an
averment in a complaint.[5] A provision similar to Section 141 of the NI
Act can be found in several enactments dealing with offences by companies
i.e. section 278 B of the Income-Tax Act, 1961; section 22 C of the Minimum
Wages Act, 1948; section 86 A of the Employees State Insurance Act, 1948;
section 14 A of the Employees Provident Fund and the Miscellaneous Provisions
act, 1952; section 29 of the Payment of Bonus Act, 1965; section 40 of the
Air (Prevention and Control of Pollution) Act, 1981 and section 47 of the
Water (Prevention and Control of Pollution) Act, 1974; but neither section
141 (1) 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. To decipher and understand the meaning of
the “persons in charge’ as defined in section 141(1) of the NI
Act, we may have to examine the provisions of Companies Act, 1956, the law
relating to and regulating the companies. A company, though a legal entity,
yet can act only through its board of directors. Section 291 of the Companies
Act, 1956 provides that subject to the provisions of this Act, the board of
directors of a company shall be entitled to exercise all such powers, and to
do all such acts and things, as the company is authorized to exercise and do.
A director may be attending meetings of the Board of Directors of the Company
where usually they decide policy matters and guide the course of 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 in each case. There is no
universal rule that a director of a company is in charge of its everyday
affairs. A visit to some provisions of Companies
Act,1956 shall enable us to appreciate the role and functions of certain key
managerial personnel as engaged by companies. a. "Director" includes any person
occupying the position of director, by whatever name called. Section 2(13) b. "Manager" means an individual
(not being the managing agent) who, subject to the superintendence, control
and direction of the Board of directors, has the management of the whole, or
substantially the whole, of the affairs of a company, and includes a director
or any other person occupying the position of a manager, by whatever name
called and whether under a contract of service or not. Section 2(24) c. "Managing director" means a
director who, by virtue of an agreement with the company or of a resolution
passed by the company in general meeting or by its Board of directors or, by
virtue of its memorandum or articles of association, is entrusted with
substantial powers of management which would not otherwise be exercisable by
him, and includes a director occupying the position of a managing director,
by whatever name called provided. Section 2(26) d. "Officer" includes any
director, manager or secretary, or any person in accordance with whose
directions or instructions the Board of directors or any one or more of the
directors is or are accustomed to act. Section 2 (30) e. "Secretary" means a Company
Secretary within the meaning of clause (c) of sub-section (1) of section 2 of
the Company Secretaries Act, 1980 (56 of 1980) and includes any other
individual possessing the prescribed qualifications and appointed to perform
the duties which may be performed by a secretary under this Act and any other
ministerial or administrative duties [Section 2(45) A combined reading of section 5 and 291 of the Companies Act
read with the definitions in clauses (24), (26), (30), (31) and (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 whole-time director /s; c. the manager d. the secretary; e. Any person in accordance with whose directions or
instructions the board of directors of the company is accustomed to act; f. Any person charged by the board with the responsibility of
complying with the provisions (and who has given his consent in that behalf
to the board); and g. Where any company does not have any of the officers specified
in clauses (a) to (c), any director or directors who may be specified by the
board in this behalf or where no director is so specified is so specified,
all the directors. The Supreme Court summarized the position under
section 141 of theNI Act as follows i. If the accused is the managing director
or a joint managing director, it is not necessary to make an averment in the
complaint that he is in-charge of and is responsible to the company for the
conduct of the business of the company. It is sufficient if an averment is
made that the accused was the managing director or joint managing director at
the relevant time. This is because the prefix ‘managing’ to the
word ‘director’ makes it clear that they were in-charge of and
were 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 on behalf of the company, would
give rise to responsibility under sub-section (2) of section 141. iii. In the case of a director, secretary or
manager (as defined in section 2 (24) of the 1956 Act) or a person referred
to in clauses (e) and (f) of section 5 of 1956 Act, an averment in the
complaint that he was in-charge of and was responsible to the company, for
the conduct of the business of the company is necessary to bring the case
under section 141 (1) of the 1881 Act. No further averment would be necessary
relating to consent and connivance or negligence in the complaint to bring
the matter under that sub-section. iv. Other officers of a company cannot be
made liable under sub-section (1) of section 141; they can be made liable
only under sub-section (2) of section 141, by averring in the complaint their
position and duties in the company and their role in regard to the issue and
dishonor of the cheque, disclosing consent, connivance or negligence. 4. To sum up, there is almost unanimous
judicial opinion that necessary averments ought to be contained in a
complaint before a person 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. Section141 of the Act contains the requirement for making
a person liable under the said provisions. That the respondent falls within
the 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. Merely
being described, as a 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. 4.1 The scheme of the Act, therefore, is
that a person who is responsible to the company for the conduct of the
business of the company and who is in-charge of business of the company is
vicariously liable by reason only of his fulfilling the requirement of sub
section (1) of section 141; 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 the company, then he can be made liable only if the offence
was committed with his consent or connivance or was as a result of his
negligence. Article
by G.P.Sahi, a renowed lawyer and a company secretary. |
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