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Prosecution for cheque bouncing — Where does the nominee director stand?

T. S. Asokraj

THERE is a debate over whether a nominee director enjoys full immunity under the newly enacted provisions of the Negotiable Instruments (NI) Act.

In a prosecution under Section 141(l) of the NI Act, the crucial test is whether the person sought to be proceeded against was, at the time the offence was committed, in charge of and responsible to the company for the conduct of its business.

Considering the judicial rulings on provisions which are in pari materia with Section 141 of the NI Act, a nominee director whose position is non-executive in a company is fully protected against prosecution (and harassment) under Section 141 even in its present form thus there is no necessity to amend the NI Act further.

The Supreme Court, confirmed the quashing of a prosecution under Section 34 of the Drugs and Cosmetics Act, 1940 (which is similar to Section 141 of the NI Act) in the case of State of Haryana vs. Brij Lal Mittal and others (1998 Comp Cases (V 93) 329(SQ).

It held then that: "The vicarious liability of a person for being prosecuted for an offence committed under Section 34 of the Drugs and Cosmetics Act, 1940 by a company arises if at the material time he was in charge of and responsible to the company for the conduct of its business. Simply because a person is a director of the company it does not necessarily mean that he fulfils both the above requirements so as to 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".

The converse proposition indicated above was invoked by the Supreme Court in an earlier case of the Delhi Municipality vs. Ram Kishan (AIR 1983 SC 67), where it upheld the quashing of the proceedings against the directors of the company but reversed the decision of quashing with reference to the manager of the factory on the ground that from the very nature of his duties, the manager does not fall in the same category as the directors.

It can be safely inferred that he would undoubtedly be "vicariously liable" for the offence alleged. This proposition has applicability in the case of companies that have branches and where business and financial operations are carried out by the branches directly.

In such a case, for an offence of bouncing of cheque issued by a branch of a company, the prosecution under Section 141 of the NI Act has to be against the person in charge of the conduct of business of the concerned branch and not against the directors of the company.

Issue of process in a criminal case is not a mechanical exercise, and the Supreme Court, in the case of Pepsi Foods Ltd. vs. Special Judicial Magistrate (AIR 1998 Supreme Court 128), observed that the "summoning of an accused in a criminal case is a serious matter. Criminal law cannot be set in 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 support thereof and examine if that would that be sufficient for the complainant to succeed in bringing charge home to the accused."

In fact, while quashing a criminal complaint against the Chairman and Managing Director of a Bank under the Indian Penal Code, the Supreme Court, in Punjab National Bank vs. Surendra Prasad Sinha (AIR 1992 Supreme Court 1815), observed that: "There lies responsibility and duty on the magistracy to find whether the concerned accused should be legally responsible for the offence charged for. Only on satisfying that the law casts liability or creates offence against the juristic person or the persons impleaded, would process be issued.

"At that stage the Court would be circumspect and judicious in exercising discretion and should take all the relevant facts and circumstances into consideration before issuing process, lest it become an instrument in the hands of the private complainant as vendetta to harass the persons needlessly."

In the light of the above judicial rulings, it is clear that a nominee director, whose position is purely non-executive in the board of a company, is protected from prosecution (and harassment) under Section 141 of the NI Act.

The problem is not that of law but one of practice in that, in the Magistrate Courts, the proceedings up to the stage of Issue of Process under Section 204 of Criminal Procedure Code 1973 have become routine.

Hence, the need is not further amendment of the NI Act, but making the magistrates appreciate and follow the Supreme Court's observation in the Pepsi Foods case (supra): "It is not that the Magistrate is a silent spectator at the time of recording of preliminary evidence before summoning the accused. The Magistrate has to carefully scrutinise the evidence brought on record and may even himself put questions to the complainant and his witnesses to elicit answers to find out the truthfulness of the allegations or otherwise and then examine if any offence is prima facie committed by all or any of the accused".

In this connection, a reference may be made to the Circular No. 27 of 2002 dated February 28, 2002 issued by the Chief Metropolitan Magistrate, Esplanade, Mumbai, calling upon Additional Chief Metropolitan Magistrates and Metropolitan Magistrates to pay proper attention to the provisions of Section 141 of the NI Act while issuing process under Section 138 of the NI Act in offences committed by companies.

What is required is similar direction from High Courts to all criminal courts under their supervisory jurisdiction asking them to stick to the requirements of Section 141 of the NI Act while entertaining complaints under Section 138 of the NI Act in the case of offences committed by companies.

(The author is a legal professional in the mutual fund industry. The views are his own and do not necessarily represent that of his employer.)

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