The Chamber News

1.A Provisions of section 141 of the Negotiable Instruments Act, 1881 must be satisfied to hold the directors liable – Vicarious liability is an exception

S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and Anr. [(2007) 136 Comp Cas 268 (SC)]

The applicability and /or extent of section 141 of the Act was referred to and considered by a three-judge Bench of the Apex Court in S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla [(2005) 127 Comp Cas 563 (SC)]. It was held as under:

1. It is necessary to specifically aver in a complaint u/s. 141 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 requirement of section 141 and has to be made in a complaint, the requirements of section 141 cannot be said to be satisfied.
    

2. Merely being a director of a company is not sufficient to make the person liable u/s. 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for the 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.
    

3. The managing director or joint managing director would be admittedly in charge of the company and responsible to the company for the conduct of its business. When that is so, holders of such positions in a company become liable u/s. 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 the business of the company. Therefore, they get covered u/s. 141. So far as the signatory of a cheque that is dishonoured is concerned, he clearly responsible for the incriminating act and will be covered u/s. 141(2).

In the present case the company had sought an intercorporate deposit of Rs. 2 crores for a short period of 15 days at a rate of 25% p.a. as interest. Upon expiry of the period of deposit the managing director issued cheques for the repayment of the deposit as well as interest, which on presentation were dishonoured on the ground of insufficiency of funds. The appellant filed a complaint u/s. 138 of the Negotiable Instruments Act, 1881 against the company as well as the managing director and the other director; i.e., the respondent.

The Apex Court affirming the decision of the Andhra Pradesh High Court [(2002) 111 Comp Cas 793] and referring to its earlier decision reported in [(2005) 127 Comp Cas 563 (SC)] held that the liability of a director must be determined on the date on which the offence is committed. Only because the Respondent was a party to a purported resolution that by itself did not lead to an inference that she was actively associated with the management of the affairs of the company. The complaint petition read in its entirety would show that the only person who was actively associated in the matter of obtaining loan, signing cheques and other affairs of the company that would lead to commission of the alleged offence was the managing director. By reason of the purported resolution the managing director was only authorized to do certain acts on behalf of the company. The cheques were issued after a period of 17 months from the date of the said resolution and represented the interest payable for a total period of 15 days only calculated at the rate of 25 per cent per annum on the amount of deposit viz., rupees two crores. The statutory requirements as contemplated under section 141 of the Act were not satisfied.

1.B Director not entitled to plead ignorance where cheque issued consequent to negotiation between payee company and managing director chairman and other directors of drawer company

Everest Advertising Pvt. Ltd. vs. State Government of NCT of Delhi & Ors [(2007) 137 Comp. Cas 32 (SC)]

By an agreement between the appellant company and a company known as “Dalmia Industries Ltd” (the company) of which the second and third respondent were the chairman and managing director, the appellant company was appointed as advertising and publicity agents of the company in respect of their various products on certain terms and conditions. The appellant company carried out various jobs and releases between the period July, 1997 and December, 1997, and raised bills for the work executed by it. The company issued various post dated cheques towards part payment of the dues which on presentation to the bank admittedly were dishonoured. The appellant company filed two complaint petitions against the accused persons including Respondent Nos. 2 and 3 stating the designation of accused Nos. 1 to 5 in the company respectively, that they were in charge of and responsible to the accused company for the conduct of the business of the company and thus liable for making the payment, that the post dated cheques in question were given after accused Nos. 1 to 5 had various meetings with the appellant company, that accused Nos. 1 to 5 were in charge of and responsible for the conduct of the business and the offence was committed by the accused company with the active connivance of accused Nos. 1 to 5. Process was issued against the accused person including respondents Nos. 2 and 3, but on an application filed by the latter for recalling the processes the Magistrate recalled the order issuing summons against respondents Nos. 2 and 3. The company filed criminal Miscellaneous Applications before the High Court.

Their Lordships of the Delhi High Court dismissed the said applications holding that there was no specific averment as to how respondents Nos. 2 and 3 were actually involved in the conduct of the business of the company relating to the transaction in question or how and on what basis it could be said that it was with the active connivance of those two accused persons that the offence was committed by the company.

On appeal the Apex Court, reversing the decision of the Delhi High Court [as reported in 128 Comp Cas 787] and following its decision in S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla [(2005) 127 Comp Cas 563 (SC)]. held that the necessary ingredients of section 141 of the Negotiable Instruments Act, 1881 had been stated in the complaint petition at more than one place. The allegations had not only been made in terms of the wording of the section but also at more than one place, it had categorically been averred that the payments were made after the meetings held between the representative of the company and accused Nos. 1 to 5 which would include respondents Nos. 2 & 3 . This was, therefore, not a case where having regard to the position held by the respondents in the company, they could plead ignorance of the entire transaction. Not only were cheques issued having regard to the huge amount payable by the company to the appellant but also as a result of non-payment thereof, negotiations were held between the parties wherein respondents Nos. 2 & 3 took part, and thus there could not be any doubt that the ingredients of the provisions of section 141 of the Act stood satisfied. The Court observed that a chairman of a large company may or may not be aware of the actual transaction. If in a given situation, cheques were issued in ordinary course of business the managing director or a deputy managing director
would be deemed to be aware thereof. A chairman or a director of a company need not be.

Note: Also see the decision of the Supreme Court in the case of N. Rangachari vs. Bharat Sanchar Nigam Ltd. [(2007) 137 Comp Cas 198] wherein it has been held that a person dealing with a company entitled to presume directors are in charge. Whether the director’s powers are restricted or director deprived of them at the relevant time is for the director to prove.

2. Suit for declaration in respect of a document with no consequential relief is maintainable

Jeevanlal Ranchhoddas Tank vs. Killick
Nixon Ltd. & Anr. [(2007) 136 Comp. Cas 158 (Bom)]

In a suit filed for declaration in respect of a document, the Court directed the appellant to pay court fees on Rs. 75 per lakh as shown in the document sought for declaration. On appeal contending that there was no prayer for recovery of the money or for a money decree, the case was governed by section 6(4)(j) of the Bombay Court Fees Act, 1959. The respondent challenged the maintainability of the appeal on the ground that the company had gone before the Board for Industrial & Financial Reconstruction.

The Bombay High Court, allowing the appeal, held that if the proceedings were for winding up the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof no suit for the recovery of money or for the enforcement of any security against the industrial company would lie. The suit filed did not come under any such category and therefore the objection of the respondent had to be rejected. The appellant was merely seeking a declaration with no consequential relief, therefore, the order of the lower court was liable to be set aside and the suit was to be numbered.

3. Lessee cannot claim preferential right for purchase of leased property of company in winding up, can participate in public auction

Podar Mills Ltd. vs. State Bank of India [(2007) 137 Comp. Cas. 271 (Raj)]

A piece of land which was in the possession of the applicant had been leased out by the company in liquidation; i.e., Jaipur Spinning and Weaving Mills Ltd to the applicant. In a petition filed for winding up the company was ordered to be wound up and the official liquidator initiated proceedings to take possession of the land owned by the company in liquidation. The respondent bank, a secured creditor, filed an application before the winding court stating that in a suit filed by it in the Bombay High Court against the applicant, the High Court had appointed a court receiver over the properties and thus the proceeding initiated by the official liquidator had to be dismissed in the absence of the leave obtained from the Bombay High Court. The court impleaded the court receiver as party. Meanwhile, the recovery suit was transferred to the Debts Recovery Tribunal. The Debts Recovery Tribunal discharged the court receiver with a direction to hand over possession to the applicant. On an application for fixing the capitalized value of the land and to direct the official liquidator to disclaim the land u/s. 535 of the Companies Act, 1956.

The Court held that the applicant being the lessee had no preferential right to purchase the property. The property was required to be sold in an open auction and the applicant could take part in the auction proceedings.

4. Shares cannot be entrusted to legal heirs where trust deed specifies continuation of trust and benefit to beneficiaries from shares

Damien Subsidies & Kuries Ltd. vs. Jose Pulikken [(2007) 137 Comp Cas 288 (Ker)]

The respondent contending that he purchased one share of the Appellant company held in the name of Chacko Pulikken from his legal heirs sent the instrument of transfer along with the share certificate together with the deed of sale dated 11-11-1997, to the company for registration of transfer since the share was the subject-matter of a trust authored by Chacko Pulikken. The appellant company refused to register the transfer in the name of the respondent.

On a petition filed by the respondent u/s.111 of the Companies Act, 1956, the Company Law Board directed the company to transfer the share in favour of the respondent and issue duplicate certificate after registering the transfer [the said decision is reported in (2002) 109 Comp Cas 699].

On appeal their Lordships of the Kerala High Court reversed the decision of the Company Law Board. Their Lordships followed the dictum laid down by the Madras High Court in S. Parameswari vs. Kamadhenu Metal Rolling Mills P. Ltd. (AIR 1971 Mad 293) wherein the Court had taken the view that the object of section 153 is that a person dealing with the company may not be affected by the entry of any kind of trust in the register of members, but the company can take notice of or recognize any trust brought to its notice otherwise than by entry in the register. Thus, it was held that the prime share in the company as per share certificate No. 67 was held by Chacko Pulikken and he declared and constituted the share in the company as a trust for the benefit of Damien Institute. The trust property was to be managed by him as trustee so long as he was living and in the absence of any successor appointed by him as the trustee, by his eldest son. The trust document was filed with the company in 1957 itself and the company had been paying dividends to the beneficiary. On a perusal of the trust deed, the trust was to continue for its beneficiary even after the death of the author. The intention of the author of the trust was very clear that membership should continue and the beneficiary should continue to get the benefit from share certificate No. 67. The author of the trust had also made a provision for the elder son to manage the trust. If the intention of the author of the trust was to terminate the trust, there would not have been any such provision for the elder son to manage the trust as a trustee even after the death. The author of the trust had not expressly reserved any right or power of revocation. The facts indicated that the beneficiary had been receiving the benefit of the trust. Therefore, the share could not be entrusted to the legal heir. The company had rightly refused registration of transfer of the share in the register of members. However, the company was to take note of or recognize the trust which had been brought to its notice otherwise than by entry in the register. The Company Law Board was not justified in directing the company to transfer the share in favour of the respondent and the order of the Company Law Board was to be set aside.

5. Where each company separately registered with provident fund office, liability of one company on its failure to contribute towards Employees’ Provident Fund cannot be recovered from other company by lifting the corporate veil

Universal Pollution Control (I) P. Ltd. vs. Regional Provident Fund Commissioner & Anr. [(2007) 137 Comp Cas 319 (Bom)].

Universal Fans Ltd. (UF Ltd.) was sister concern of the Petitioner company. The contributions to the employees’ provident fund were due and payable by the company. The goods of the Petitioner were seized by the provident fund authorities in respect of the liabilities of the provident fund dues of UF Ltd. The recovery was sought to be made only on the ground that two directors of the company were common and that the Petitioner had issued a cheque when the goods of the Petitioner were seized by the provident fund authorities in respect of the liabilities of provident fund dues of UF Ltd.

On a petition challenging the order seeking the recover from the Petitioner company the dues owed by the sister concern the Bombay High Court held that under the Companies Act, 1956, each company is a separate legal entity and the dues of one company cannot be recovered from another company. The corporate veil of the Petitioner could not be lifted and liability fastened on the Petitioners. Both companies are separate legal entities under the provisions of the Companies Act, 1956 and were separately registered with the provident fund office. There was no provision under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, permitting the liability of one company to be fastened on the other company even by lifting the corporate veil. The demand of the respondent was unsustainable in law and was to be quashed and set aside.