Karnataka High Court
Shamanur Shivashankarappa vs M/S. India Sugars on 18 July, 2014
Equivalent citations: 2015 CRI. L. J. 2316, 2015 (2) AIR KANT HCR 71, (2015) 1 KCCR 1071, (2015) 3 CRIMES 286, (2015) 4 CURCRIR 72
Author: K.N.Phaneendra
Bench: K.N.Phaneendra
1
R
IN THE HIGH COURT OF KARNATAKA,
DHARWAD BENCH
DATED THIS THE 18TH DAY OF JULY, 2014
BEFORE:
THE HON'BLE MR. JUSTICE K.N.
PHANEENDRA
CRL. P. NO.100575/2014
C/W.
CRL.P. NOS.100576/2014 & 100577 OF 2014
BETWEEN
SRI SHAMANUR SHIVASHANKARAPPA
S/O. S KALLAPA, AGE: 82 YEARS,
R/O. DOOR NO. 2631/1,
MCCB BLOCK, DAVANGERE-577 004,
KARNATAKA
... PETITIONER
COMMON IN ALL THE PETITIONS
(BY SMT. POONAM PATIL, ADV. FOR
M/S.PRABHULING NAVADGI ASSOCIATES)
2
AND:
M/S. INDIA SUGARS
AND REFINERIES LTD.,
A COMPANY INCORPORATED
UNDER THE COMPANIES ACT,
HAVING ITS REGISTERED
OFFICE AT: CHITWADGI-583211
HOSPET, DIST: BELLARY
R/BY ITS MANAGER (PR & D)
SRI S SHIVAKUMAR
S/O. VEERANNA, AGE: 52 YEARS,
R/O. ISR OFFICERS COLONY,
HOSPET
... RESPONDENT
COMMON IN ALL THE CASES
(BY SMT. YOVINI RAJESH, ADV. FOR SRI D M
BANDI, ADVS.)
*****
THESE CRIMINAL PETITIONS ARE FILED
U/S 482 OF CR.P.C. SEEKING TO QUASH THE
PROCEEDINGS IN (1) C.C.NO.243/2013 (PCR
NO.1/2010), (2) C.C.NO.244/2013 (PCR
NO.2/2010) (3) C.C.NO.242/2013 (PCR
NO.19/2010) PENDING ON THE FILE OF THE
PRL. CIVIL JUDGE & JMFC COURT, HOSPET,
VIDE ANNEXURE-A, AGAINST THE
PETITIONER.
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THESE CRIMINAL PETITIONS HAVING
BEEN RESERVED FOR ORDERS ON
25.06.2014 AND COMING ON FOR
PRONOUNCEMENT OF ORDER THIS DAY, THE
COURT PASSED THE FOLLOWING:
ORDER
The petitioner who is common in Crl.P.Nos.100575, 100576 and 100577 of 2014 has sought for quashing of the entire proceedings in CC No.243/2013 (PCR No.1/2010), CC No.244/2013(PCR No.2/2010) and CC No.242/2013(PCR No.19/2010) respectively on the file of Prl. Civil Judge & JMFC, Hospet, wherein, the petitioner is arrayed as Accused No.4, who is one of the Directors of M/s.Davangere Sugar Company Limited., and Chairman of M/s.Shamanur Sugars Limited. 4
2. Looking at the array of the petitioner in the above said cases, it is revealed that in Crl.P. No.100575/2014 and Crl.P. No.100576/2014, the petitioner challenges the order of the learned Magistrate in taking cognizance and issuing summons against him as one of the Directors of M/s.Davangere Sugar Co. Ltd. Whereas, in Crl.P.No.100576/2014, the petitioner was called upon before the Court after taking cognizance and issuance of summons by virtue of he being the Chairman of M/s.Shamanur Sugars Ltd.,
3. After hearing the arguments of the learned Counsel for the petitioner and the respondent, I must express a word of appreciation that both the counsels have very 5 effectively and efficiently assisted the Court in a befitting manner, to understand legal and factual dispute to be addressed by the Court.
4. Before adverting to the points which are involved in these cases, it is just and necessary to bear in mind few facts that led to filing of the above said Criminal petitions before this Court.
5. There is absolutely no dispute that the petitioner is one of the Directors of M/s.Davangere Sugars Co. Ltd. and also Chairman of M/s.Shamanur Sugars Ltd., Davanagere.
6. The respondent herein, a rival Sugar factory running under the name and style of M/s. India Sugars and Refineries Ltd., having its 6 registered Office at Chitwadgi, Hospet, Bellary Dist., filed three private complaints against the accused persons including this petitioner arraying him as A4 in CC No.243/2013, CC No.244/2013 and CC No.242/2013. The allegations made in the complaint are that - the complainant (respondent herein) is a registered Company under the provisions of the Companies Act, established a Sugar Factory at Hospet in the year 1933 which has a crushing capacity of 2500 TCD and it has been crushing the sugar cane of the reserved area unabatedly. The sugar cane and sugar have been declared by the Government of Karnataka as Essential Commodities under the provisions of the Essential Commodities Act, 1955 (hereinafter 7 referred to as 'EC Act' for short), in exercise of the power conferred on it u/s.3 of the EC Act and also under Sugarcane (Control) Order, 1966. Clause (6) of the Sugarcane (Control) Order 1966, provides for regulation, distribution and movement of the sugarcane. The Government of Karnataka being empowered under the said Sugar (Control) Order, 1966, issued a notification called "The Karnataka Sugarcane (Regulation and Distribution) (Hospet) Order, 1974, vide order dated 28.8.2006 thereby the Government has reserved certain areas in favour of the complainant Sugar factory and the accused Sugar Factory respectively. Once an area is reserved, no grower of sugarcane can transport or export 8 sugarcane from the reserved area to any other Sugar Factory. In this regard, the Deputy Commissioner, Bellary, is empowered under the Notification dated 28.8.2006 to issue permits to export or transport sugarcane from the reserved area of the complainant. It is alleged that the accused Sugar Companies i.e. M/s. Davangere Sugars Co.Ltd., and Shamanur Sugars Ltd., in violation of the above said Act and Orders of the Government, lured the farmers of the reserved area of the complainant Sugar Factory by offering higher sugarcane price and procured sugar without any valid permits from the Deputy Commissioner, Bellary, and thereby caused heavy damage to the complainant. That, the action of the accused is deliberate, intentional 9 and thereby, they have committed the offence punishable under Section 3, 7, 8, 10 and 11 of the EC Act.
7. After filing of the complaint, the learned Magistrate recorded the sworn statements of the complainant and vide orders impugned under the above said petitions, the learned Magistrate ordered to register Criminal Cases against the accused persons for the offences punishable under Sections 7 and 8 r/w. Section 10 of the EC Act and issued summons against the accused persons. Against which orders the present petitions are preferred.
8. There is no dispute between the parties with regard to the provisions under the EC Act 10 and also with respect to the Sugar (Control) Order and Sugarcane orders and Notification issued by the Government from time to time, as noted above.
9. In all the above said cases, the legal point raised by the petitioner is that - he is one of the Directors of Davangere Sugars Co. Ltd., and Chairman of Shanamur Sugars Ltd., he has not been managing the affairs of the Company, therefore, he is not liable to be made as accused in these cases. It is specifically contended in the petitions that by virtue of his position as the Director and the Chairman, he is not liable to the acts of the Companies. Therefore, without there being any special and specific allegations against him, he cannot be prosecuted in a 11 Criminal Case. That, there is no concept of vicarious liability so far as criminal matters are concerned. This is the only strong ground taken up by the petitioner.
10. The learned Counsel who is appearing for the petitioner very strongly contended that, in ample number of rulings the apex court has resolved and set at rest the above said legal point holding that a Director or a Chairman of a Company are not ipso-facto liable for any criminal act of the Company unless any special role is given to them in the day to day affairs and management of the Company. In this regard, the learned Counsel cited several rulings which I am going to discuss little later.
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11. The learned Counsel for the respondent Company equally countenanced the arguments of the learned Counsel for the petitioner. It is contended that both M/s.Davangere Sugar Co. Ltd. and M/s.Shamanur Sugars Company are sister concerns. M/s.Davangere Sugars is managed by one of the sons of the petitioner by name Shamanur Shivshankarappa Ganesh (M.D.) and another Company M/s. Shamanur Sugars is managed by another son of the petitioner by name Shivashankarappa Bakkesh (M.D.). When both the companies are managed by the sons of the petitioner as Managing Directors and petitioner being one of the Directors and Chairman of the said companies, every act of the 13 Company would be within the knowledge of the petitioner. In view of their relationship, it cannot be said the petitioner has no knowledge of the activities of the company. Therefore, the petitioner as a Director and Chairman of the above said companies is equally liable as that of the Managing Directors. More over, if the provisions of Section 10 of the EC Act is properly understood on a meaningful interpretation, it would give rise to a preposition that all the Directors, Chairman and Managing Director, are liable for the criminal prosecution for the offence committed by the Company. The learned Counsel for the respondent also contended that the petitioners have committed similar offences during the previous years (2009-10) and that the 14 respondent has filed complaints. In that occasions also, the petitioner approached this court and challenged the orders of the learned Magistrate in taking cognizance and issuing summons, the parties went upto Supreme Court. Ultimately, the Supreme Court has given its green signal to the respondent herein to proceed against the Managing Director and the Chairman of the companies in the said criminal cases. Therefore, the petitioner as a Director and Chairman of the above said companies ipso- facto by virtue of his position and also on facts having knowledge of the affairs of the Company is liable to be prosecuted. Therefore, the present petition filed u/s.482 are not maintainable before this Court.
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12. Having heard the arguments of the learned Counsel for the parties and also on going through the entire material placed before this court for consideration, the important points that would arise for consideration by this court are:
(1) Whether the petitioner being the Director of M/s. Davangere Sugars Co.Ltd., and Chairman of M/s.
Shamanur Sugars Co. Ltd., by virtue of his position, is liable to be prosecuted in a Criminal Case.?
(2) Whether on facts, the respondent has established that petitioner is having knowledge and has a specific role and active participation in the conduct and business of the 16 Companies at the time of commission of the alleged offence by the companies?
13. Now, let me consider the above said points one by one.
14. Before adverting to the rulings relied upon by the respective parties, it is just and necessary to peep into the relevant provisions of the EC Act as to whether the Chairman, Directors and Managing Director of the Company are liable for the offence committed by the Company. It is argued before me that though there are no specific decisions under the EC Act with reference to any guidelines declaring that the Chairman, Managing Director and Directors of the Company are liable for the 17 offence by the Company. Nevertheless, the provisions under the EC Act are juxta-pose similar to that of the provisions under the Negotiable Instruments Act, 1881. Therefore, the provisions under the NI Act can be taken as in pari-materia to appreciate the provisions of the EC Act. Whenever an offence is committed under the EC Act by a Company, the liability is governed u/s.10 of the said Act, which reads as follows:
"10. Offences by companies -
(1) If the person contravening an order made under Section 3 is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the 18 business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the contravention took place without his knowledge or that he exercised all due diligence to prevent such contravention.
(2) Notwithstanding anything contained in sub-section (1), where an 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 19 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 purpose of this section -
(a) 'Company' means any body corporate, and includes a firm or other association of individuals; and
(b) 'director' in relation to a firm means a partner in the firm."
15. Before adverting to the interpretation of this provision, let me also have a glance of Section141 of the NI Act, which reads as follows: 20
"141. Offences by companies. --
(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.21
[Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.] (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 22 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
(b) "director", in relation to a firm, means a partner in the firm.]"
16. On a plain reading of the above said two provisions, putting juxt oppose to each other, it clears out the doubt that except the words "contravening" in Section10 of EC Act and "committing" in Section 141 of the NI Act, there is absolutely no difference in the above said two provisions. In this background, now let me 23 consider the important aspects considered by the Apex Court with regard to the liability of the Chairman, Directors and Managing Director of a Company. The plain reading of Section 10 of the EC Act gives a picture that every person of a Company, whether he is a Chairman, Director or Managing Director, irrespective of his position, who at the time of the contravention of the EC Act was committed, if he was in-charge and responsible to the Company for the conduct and business of the Company, he shall be deemed to be guilty of the contravention and shall liable to be proceeded against and punished accordingly. The proviso says that if it is shown to the Court that any person who was in charge of the business of the Company at the time the contravention took 24 place without his knowledge or that he exercised all due diligence to prevent such contravention, he shall not be liable. Sub section (2) of Section 10 of the EC Act is another important provision if it is understood properly. It gives a meaning that, irrespective of sub Section (1) of Section 10 of the EC Act, where an offence under this Act has been committed by a Company and it is proved that the offence has been committed with 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 also be liable to be proceeded against and punished accordingly. 25 This provision also imposes a rider that if on the basis of the material on record, if the Court can come to the conclusion that prima-facie the offence has been committed with the consent and connivance or is attributable to neglect on the part of any of the members, then they are also liable to be prosecuted. Provision has been made for Directors, Managers, Secretaries and other officers of a company to cover them in cases of their proved involvement. By virtue of this provision, persons other than the person in charge of the conduct and business of the Company are also liable to be prosecuted. Therefore, for the purpose of proceeding against the persons other than the persons who are in charge of and are responsible to the Company 26 for the conduct and business of the Company, some proof is required to prosecute them before the Court. In this background, some of the decisions of the Apex Court are to be looked into.
17. In the present case, I am concerned with the criminal liability of a Chairman or a Director. The normal rule in the case involving criminal liability is against vicarious liability, i.e., no one is to be held guilty of criminal liability for an act of another. This normal rule is however subject to exception on account of specific provision being made in the statute, extending liability to others. One such provision is Section 10 of the EC Act. Therefore, if an offence is committed by a company, it extends 27 the criminal liability to other officers of the company if the requirements contemplated under the said provision are satisfied before the liability is fastened on such Officers. Since the provision creates criminal liability, the conditions have to be very strictly and meticulously complied with. With this background, now let me go through the decisions in this regard.
18. In SMS Pharmaceuticals Ltd., Vs. Neeta Bhalla and Another reported in (2007) 4 SCC 70, the Apex Court referring to Section 141 of the NI Act, held that -
"Sec.141 of the NI Act does not say that a Director of the Company shall automatically vicariously liable for 28 commission of an offence on behalf of the Company what is necessary is that sufficient averments should be made to show that the person who is sought to be proceeded against on the premise of being vicariously liable for commission of an offence by the Company must be in charge of and shall also be responsible to the Company for the conduct of the business. Thus, the averments must say that the said person was both in-charge and responsible for the conduct of the Company business, requirements laid down u/s.141 must be read conjointly and not the liability of the Director must be determined on the date on which the offence is committed."
It was also held that -
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If the complaint petition were read in its entirity the same would show that the averments made in the complaint satisfy the requirement of sec.141 of the NI Act, but must also show as to how and in what manner the accused was responsible for the conduct of the business of the Company or otherwise responsible to it with regard to its functioning."
19. In another ruling reported in K.K. Ahuja vs. V.K. Vora and Another reported in (2009) 10 SCC 48, the Apex Court had an occasion to deal with Section 141 of the NI Act with regard to Chairman and Director. The facts are also little bit important which are as follows: 30
Appellant filed two complaints against nine persons as accused, namely the Company, its Chairman, its four directors, its Vice President, General Manager and its Deputy General Manager, respectively in regard to dishonour of cheque drawn in favour of the appellant. In the complaint, the complainant averred that "at the time of commission of offence, accused Nos.2 to 9 were in charge of and responsible for the conduct of the day-to-day business of A1"
and that therefore, they are deemed to be guilty of offence u/s.138 r/w Section 141 of the NI Act.
The Magistrate directed issuance of summons to all the accused, the respondent No.1 (A9) filed two petitions u/s.482 Cr.PC for quashing of the proceedings against him on the ground that as 31 the Deputy Manager, he was not in-charge and responsible for the conduct and business of the Company. The High Court allowed the said petition and quashed the summoning order passed by the Magistrate. The order of the High Court was challenged before the Supreme Court and the Supreme Court held as follows:
"if a mere reproduction of the wording of sec.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 accused merely making an averment that at the time when the offence was committed, they were in charge of and were responsible to the company for the conduct and business of the Company.32
That would be absurd and not intended under the Act. As the trauma, harassment and hardship of criminal proceedings in such cases, may 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 sec. 138 r/w Section 141 of the Act are not fullfilled.
The words "person in charge of the business of the company" refer to a person who is in over all control of the day today business of the Company. A person may be a Director and thus belongs to the group of persons making the policy followed by the Company, but yet may not be in charge of the business of the Company; that a person 33 may be a manager who is in charge of the business but may not be in over all in charge of 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.
Then, merely stating that "he was in charge of the business of the Company" or "he was in charge of the day today management of the Company" or "he was in charge and was responsible to the Company for the conduct of the business of the Company", he cannot be made vicariously liable u/s.141(1) of the Act."
20. The above said ruling is further fortified in a subsequent ruling between National Small Industries Corporation Ltd., vs. Harmeet 34 Singh Paintal and Another reported in 2010 (3) SCC 330 wherein the Supreme Court has held that -
"Section 138 and 142 of the NI Act, 1881 - if the complaint is against the Director of a Company the complainant should specifically spell out how and in what manner the Director was in charge of or was responsible to the accused Company for the conduct of its business - Mere bold statement that he was in charge of and was responsible to the company for conduct of its business is not sufficient. There is no presumption that every Director knows about the transaction. In the absence of specific averment as to the role of co-accused Director, trial Court's order summoning him, rightly 35 quashed by High Court. However, where the accused was the Manager or Joint Director or a Director who had signed the cheque on behalf of the accused Company, making of such specific averment, held, not sufficient."
The court also observed that -
"the mechanical repetition of the requirements of Section 141(1) of the Act will be of no assistance, but there should be necessary averments in the complaint as to how and in what manner the accused was guilty of consent and connivance or negligence and thereby responsible for the commission of the offence by the Company."
21. In fact, this Court also had an occasion to deal with similar matters under the 36 EC Act between Smt. Vidya Murkumbi and Others vs. India Sugars and Refineries Ltd., in Crl.P.No.7563/2009 dated 4.11.2009, wherein, learned brother Judge Justice Jawad Rahim, evaluated the provisions under the EC Act as well as the NI Act. Considering the averments made in the complaint etc., made the following observations:
"25. From the case laws, it is clear that the statute has to be read and interpreted in its nakedness and when we do that we find clear distinction between the pedestal on which the principal officers of the company and other Directors and the person in- charge of the business are placed. I am, therefore, satisfied that in the instant case the position of the petitioners in 37 the Company must be taken into consideration to decide whether the action is justified. As far as petitioners 3 to 11 are concerned, they fall in the category of persons referred to in sub- section (2) of section 10 of the E.C. Act and in the absence of any material allegations showing their overt acts revealing active connivance, consent or attributable negligence, it will be improper to sustain any prosecution against them. As regards petitioners 1 and 2 are concerned, first petitioner claims to be the Chairman and Director, while, second petitioner is described as a Managing Director, they stand on a different footing and would come in the category of persons referred to in sub- section (1) of section 10 of the E.C. Act. It is also noticed that by virtue of their office, they could be termed as persons 38 being in charge or responsible to the Company for its business. An element of presumption being available against them, generally they would also be proceeded against along with the Company till they rebut the presumption of guilt raised statutorily against them. However, in the instant case, there appears to be no dispute as far as petitioners 1 and 2 are concerned, who have themselves described their designations. As far as petitioner No.1 is concerned, she claims to be the Chairman and Director while the second petitioner claims to be the Managing Director."
"26. For the reasons discussed in the paras supra, petitioners shall succeed in their legal pursuit. The proceedings initiated against petitioners 39 3 to 11 in PCR No.4/2009 now converted into CC No.309/2009 on the file of Principal Civil Judge (Jr.Dn.), JMFC, Hospet for the offences punishable under Sections 403, 405, 424 and 421 of IPC and also for the offences punishable under Section 7 and 8 of Essential Commodities Act, 1955, are quashed. Consequently, the order dated 11.03.2009 summoning them to answer the charges is also quashed."
In the above said decision, the learned Judge has observed the wordings used in sub- Section (2) of Sec.10 of the EC Act - that "if proved" pre-supposes "sufficient material" that such person by his consent or connivance or attributable negligence indulged in the crime. If 40 such prima facie proof is not available in the complaint, then such person cannot be fastened with liability. However, the learned Judge has observed that the liability of the Chairman and the Director stand on a different footing and come in the category of sub Section (1) of Section 10 of the EC Act. Therefore, they could be termed as personnel being in charge of/or responsible to the Company and its business and an element of presumption is being available against them.
22. Having looked into the above said decisions, it is crystal clear that there is almost unanimous judicial opinion that necessary averments ought to be contained in the 41 complaint, particularly against a person who are not deemed to be persons in charge of a Company or looking after the day to day affairs of the Company and therefore, it is necessary to specifically aver the duties, role of each and every person to show his responsibility, his duties and functions assigned under the Memorandum of Articles of the Company.
23. It is also worth to note here, Chapter II, Section 291 of the Companies Act, 1956 (hereinafter referred to as 'Act' for short) refers to the general powers of the Board. A perusal of these provisions show that what the Board of Director is empowered to do in relation to a Company depends upon the roles and functions 42 assigned to a directors as per the memorandum and Articles of the Company. There is nothing to suggest that simply by being a Director in the Company, one is supposed to discharge a particular function on behalf of the Company. It is also possible under law that, a partner of a partnership firm or Director may be a sleeping partner or he only takes part in deciding the policy matter and rest of the day to day business of the Company would be looked after by some other authorised person. Therefore, even considering the powers under the Companies Act, there is no universal principle or presumption that a Chairman or Director of the Company is in charge of its day to day affairs. It all depends upon the respective 43 duties or roles assigned to the Officers of the Company.
24. However, the position of a Managing Director, or a Joint Managing Director, are different, the word Managing suffix to the Director itself pre-supposes that in the absence of any explanation, he is the person managing the affairs of the Company by virtue of his designation. Therefore, invariably where there is no specific averments made, but the Company which is represented by a Managing Director or the Joint Managing Director and in the absence of assigning any roles to the other Directors the Managing Director is ipso facto by virtue of his position as a Managing Director, responsible to 44 answer all the queries, with regard to the conduct and business of the Company.
25. Now let me bestow my attention regarding the role of the Chairman in a Company and it has to be considered, to ascertain whether by virtue of his position as a Chairman, ipso-facto liable for all the offences committed by the Company. For this it is just and necessary to look into the Companies Act 1956.
26. The term Chairman is not defined under the Companies Act, 1965. The Chairman is a necessary person in company meetings and is usually appointed by the articles of the Company. Generally, Chairman is the highest 45 post in the Company, who represents the name and fame of the Company. Chairman's role is to attend the meetings and to act according to the byelaws of the Company and also exercise any defined or reserved rights or duties. Regulation 76(1) of table A to Schedule-I to the Companies Act 1956, provides that the Board may elect a Chairman and determine the period for which he has to hold the office. Generally, the Directors elect one of them to be the Chairman of the Board who continues to be as such until he seizes to be a Director or some other Director who is appointed as a Chairman. Normally, the Chairman is a Director who is authorised to preside over the Board and General Meetings. In some companies, it is a practice to appoint an 46 Executive Director namely the Managing Director or whole time Director as Chairman of the Board, to conduct meetings or general meetings and there are some other companies who elect a Non-executive Director i.e. the Director who is not a whole time employee or Managing Director, as a Chairman of the Board or General Meeting. If a Managing Director or a Executive-Director or the person who has been looking after the day today affairs of the Company, if he himself act as a Chairman, then ipso-facto by virtue of the position as a Chairman, he becomes liable for the offences committed by the Company vicariously. Otherwise a Chairman is as good as a Director who is only authorised to preside over the Board 47 and general meetings. In some of the provisions under the Companies Act, the word Chairman is used. Section 175 of the Act deals with election of a Chairman. Section 177 of the Act deals with voting to be by show of hands in first instance to elect a Chairman, Section 178 of the Act refers to Chairman's declaration of result of voting by show of hands to be conclusive, with respect to any resolution conducted in the Board Meeting. Section 193 of the Act refers to minutes of proceedings of general meetings and of Board and other meetings, where the Chairman has to conduct the meeting of its Board of Directors. Section 292A of the Companies Act refers to the Audit committee wherein u/s.292A(10) of the Act says that the 48 Chairman of the Audit committee shall attend the general meetings to provide any clarification on matters relating to audit.
27. Looking to the above said provisions as a matter of convention, the Chairman of a Company presides over the meetings of the board and as a member on all the board committees and he presides over all the committee meetings. Therefore, the Chairman has the powers under the common law, such as (1) the power to preside over the meetings, (2) bring the discussion on any question and (3) the power to adjourn the meeting if necessary under the circumstances.
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28. Looking to the above said powers and duties of the Chairman, it goes without saying that the Chairman is as good as a Director, but as he is higher in position, he presides over the meetings of the Company. Therefore, unless a specific role is given to a Chairman by virtue of articles of the Company to represent the management and participate in the day to day business, conduct and affairs of the Company, he is not liable for all the offences committed by the Company.
29. As I have already referred to a decision reported in (2009) 10 SCC 48 between K.K. Ahuja Vs. V.K. Vora and another, the Apex Court though not in detail dealt with the role of 50 a Chairman, nevertheless, made an observation that in order to fasten the liability other than the Managing Director or Joint Managing Director of a Company, there should be specific allegations regarding the culpability of such members of the Company.
30. It is also worth to note a decision of the Apex Court reported (2010) 10 SCC 479 between Maharashtra State Electricity Distribution Company Ltd., Vs. Datar Switchgear Ltd., and others, wherein the Apex Court has held that -
"It is trite law that whenever by a legal fiction the principle of vicarious liability is attracted and a person, who is otherwise not personally involved in 51 the commission of an offence is made liable for the same, it has to be specifically provided in the statute concerned."
The Apex Court has also observed that, "vicarious liability of a Chairman can be fastened when the offence is committed by the Company. It is observed that complaint filed against the accused Company and its Chairman for fabricating documents produced on record in arbitration proceeding. On the basis of the arbitrator's adverse observation in the award, High Court declined to quash 52 the complaint. Presumption cannot be drawn that a Chairman of a Company is responsible for all the acts committed by or on behalf of the Company.
Wherever by a legal fiction, principle of vicarious liability is attracted, it has to be specifically provided in the statute concerned or by means of a specific averments in the complaint. Therefore, it is incumbent on the complainant to specifically aver the role of each of the accused in the Company. Absence of any such specific averment in the complaint demonstrating the role of the Chairman in commission of the offence, it cannot be held that prima facie case 53 is made out against the appellant No.2 Chairman."
31. In view of the above said ruling, in my opinion, the Chairman also stands on the same footing as that of a Director. If any liability has to be fastened on the Chairman, in law, a specific role has to be given to him and what is the overt act committed by him to share the criminal liability of the Company. Therefore, in the absence of such allegations and specific averments in the complaint, even Chairman also, ipso-facto by virtue of his position, cannot be made as an accused in a criminal case for the offence committed by the Company. 54
32. The second limb of these cases is that, there are no averments in the complaint in order to attract any of the provisions particularly under the provisions of EC Act to fasten liability on the petitioner herein. The learned Counsel for the petitioner contended that only a sweeping allegations are made in the complaint i.e. not sufficient to fasten the liability on the petitioner.
33. The learned Counsel for the respondent strenuously contends that the petitioner being the father of the Managing Directors of the above said two companies i.e. Davangere and Shamanur Sugars, the Managing Directors directly works under the nose of the Chairman, therefore, it cannot be said that the 55 offence committed by the Company was not at all within the knowledge of the petitioner. The court can draw an inference on the basis of the relationship between the parties and also on the allegations made in the complaint that the petitioner is also contributed his overt acts in the commission of the alleged offence by the Company.
34. Before adverting to the above said rival contentions, it is just and necessary to look into the decision of the Apex Court reported in (2010) 3 SCC 330 between National Small Industries Corporation Limited Vs. Harmeet Singh Paintal and another decision reported in (2007) 4 SCC 70 (SMS Pharmaceuticals case), 56 (2009) 10 SCC 48 (KK Ahuja's case) noted above invariably in all the cases, it is categorically held that -
"If a mere reproduction of the wording or mere bald statement that a Director or the Chairman was in charge of the business and was responsible to the Companies conduct of its business is not sufficient. There is no presumption that every Director knows about the transaction. In the absence of specific averment as to the specific role of the co-accused, the trial Court orders summoning him are liable to be quashed. It is also absurd that if mere reproduction of the wordings of the provisions in the complaint is sufficient to make a person virtually liable to face prosecution, virtually every 57 officer/employee of a company without exception could be impleaded as accused by merely making an averment that at the time when the offence was committed, they were in charge and were 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 Brahch was dishonoured, the officers of all the 100 branches could be made as accused by simply making an averment that at the time when the offence was committed they were in charge of and were responsible to the Company for the conduct and business of the Company. That would be absurd and not intended under the Act."58
35. The above said principle is equally applicable to the case on hand. Therefore, it goes without saying that the complaint averments shall specify the role of the Director or the Chairman of the Company at the time of commission of offence by the Company. It is not that even at the earlier point of time, any of the Directors or the Chairman was also involved in such offences is also not a good ground to fasten the liability in the subsequent proceedings also. Therefore, the argument of the learned Counsel for the respondent that because of the sons of the petitioner are Managing Directors of the said sugar companies, a deeming knowledge has to 59 be imputed on the petitioner to fasten the liability on him.
36. Now, it will take me to the contents of the complaint to ascertain whether there are sufficient specific averments, made in the complaint to call upon the petitioner to appear before the trial Court to answer the charges levelled against the Company. In all the above said three complaints, the allegations so far it relates to the petitioner is concerned is as follows:
"It is submitted that all the Directors of the accused Company are liable for proceedings in the present complaint since they are managing the affairs of the first respondent Company and as such, they are directly involved 60 in the sugar manufacturing of the first accused Company. Hence, all the accused is liable to be prosecuted in the company."
37. Except the above said averments, no other averments are available, showing what exactly the overt act or role played by the petitioner in the day-to-day affairs of the business and conduct of the above said companies. No where in the Companies Act says that Managing Director or the Joint/Managing Director has to report to the Chairman regarding each and every act of the Company in order to impute the knowledge on the part of the Chairman. Therefore, I am of the opinion, in this particular case, the above said 61 averments are not sufficient to satisfy the requirements of law as enunciated by the above said rulings.
38. Last but not the least, the learned Counsel for the petitioner also drawn my attention that on the previous occasions also the respondent has filed a complaint in the year 2009 in PC No.1/2009, later registered as CC No.208/2009. The said order of taking cognizance was challenged by the accused persons before this Court in Crl.P. Nos. 8151/2009, 7303, 7124 and 7236 of 2010. The said Crl. Petitions came to be dismissed on 17.2.2011 and in fact against that order, Special Leave Petitions were filed in SLP Nos.4786/2011 62 and 3895/2011. During the pendency of the proceedings before the Supreme Court, the respondent undertook to delete respondent Nos.3 - 7 in the Private Complaint by retaining the Managing Director and the Chairman as accused persons in the Private Complaint. The said SLPs. were dismissed accordingly.
39. The learned Counsel contends that because of the above said proceedings, the petitioner is having knowledge of the offence committed by the Company, therefore, such knowledge can be imputed to impose the liability on the respondent so far as present cases are concerned. I do not find any strong reasons to accept the said contention of the learned 63 Counsel. Because of the simple reason, in the above said cases before the Supreme Court, the liability of the Chairman has not been in detail dealt with because of the undertaking given by the respondent therein, the SLPs. were came to be dismissed and they were not on merits. But, at present, in these petitions, this court is called upon to deal with the liability of the petitioner as a Director and Chairman of the companies. Therefore, this Court is bound to give its finding by means of elaborate discussions made above. Even in the complaint averments, the knowledge of the commission of the offence by the Company is not imputed to the petitioner on the basis of the previous litigation. It should be brought on record by way of specifically 64 mentioning the circumstances and stating that those circumstances are well within the knowledge of the petitioner as a Chairman of the Company. As I have noted already, mere bald allegations that all the persons of the Company are liable is not sufficient to fasten the liability on the petitioner.
40. It is a well settled law that at the time of issuing of the process, the Magistrate is required to see the allegations in the complaint in order to ascertain whether the allegations made in the complaint constitute an offence against a person, then only the Magistrate can call upon the persons cited as accused to answer the charges. Otherwise, the complaint 65 has to be dismissed by exercising powers u/s.203 of the Code of Crl. Procedure. The said provision uses the words 'after considering' and 'the Magistrate is of the opinion that there is no sufficient ground for proceeding', these words suggests that the Magistrate has to apply his mind to a complaint at the initial stages itself to see whether a case is made out against the accused persons before issuing process to them. This in other words means that the complaint must contain materials to enable the Magistrate to make up his mind for issuing process. In this particular case, the Magistrate has in one sentence stated all the persons of the Company are liable for prosecution as they are participating in the day today affairs of the 66 business and conduct of the Company. The said observation of the learned Magistrate in my opinion is bereft facts on record. Though the learned Magistrate has cited the rulings of the Apex Court in SMS pharmaceuticals (cited above) but he failed to go through the said decision in detail as to what should be the averments in the complaint in order to take cognizance of the offence against the Directors, Chairman of a Company. Apart from that, the rulings cited above mandate that the averments should not be bald and sweeping in nature but they should be substantial in nature, so that the court can definitely come to the conclusion about the role and the participation of the accused persons in the conduct and business of 67 the Company. As I have already narrated, the same is conspicuously absent in the complaint so far as the present cases are concerned. Therefore, inevitably I have to hold that the cognizance taken by the Magistrate and the process issued against the petitioner who is a Director and Chairman of the respective companies is bad in law and the same is liable to be quashed. Hence, the following:
ORDER The petitions are hereby allowed.
Consequently, all further proceedings pending before the learned Magistrate in CC No.243/2013 (PCR No.1/2010), CC No.244/2013(PCR No.2/2010) and CC No.242/2013 (PCR No.19/2010) respectively on 68 the file of Prl. Civil Judge & JMFC, Hospet, are hereby quashed, so far as it relates to the petitioner is concerned. The trial Court is directed to proceed against the other accused persons and conclude the trial as expeditiously as possible, not exceeding one year from the date of receipt of a copy of this order.
Sd/-
JUDGE PL