Karnataka High Court

Mr N R Rayalu Chairman vs M/S Habitat Micro Build India ... on 1 June, 2022

Bench: M.Nagaprasanna

                          1



     IN THE HIGH COURT OF KARNATAKA AT BENGALURU

         DATED THIS THE 01ST DAY OF JUNE, 2022

                       BEFORE

       THE HON'BLE MR. JUSTICE M. NAGAPRASANNA

           CRIMINAL PETITION No.5749 OF 2021

BETWEEN:

1.     MR.N.R.RAYALU
       CHAIRMAN
       M/S SHIKHAR MICROFINANCE (P) LIMITED
       AGED ABOUT 73 YEARS,
       RESIDING AT: A 3/1, YARROWS
       APARTMENTS, PLOT NO.C 58/5,
       SECTOR-62, NOIDA,
       UTTAR PRADESH - UP

       ALSO AT:
       PLOT NO.42
       BLOCK NO.B/10
       POCKET 2, NEAR ISKON TEMPLE
       SECTOR-13, DWARKA
       NEW DELHI - 110 078.

2.     MR. ANIL VIDYARTHI
       DIRECTOR,
       M/S SHIKHAR MICROFINACNE (P) LIMITED
       AGED ABOUT 74 YEARS,
       RESIDING AT: NO.831, NEW MILLENIUM APT.,
       PLOT NO.2, SECTOR-23, DWARKA,
       SOUTH WEST DELHI - 110 075.

       ALSO AT:
       PLOT NO.42, BLOCK NO.B/10
       POCKET 2, NEAR ISKON TEMPLE
       SECTOR-13, DWARKA
                           2



       NEW DELHI - 110 078.
                                      ... PETITIONERS

(BY SMT.KAVERI THIMMAIAH, ADVOCATE)

AND:

M/S HABITAT MICRO BUILD INDIA
HOUSING FINANCE COMPANY
PRIVATE LIMITED
REPRESENTED BY ITS CONSTITUTED
 ATTORNEY MR. SAMEERA B,
HAVING ITS REGISTERED OFFICE AT:
1ST FLOOR, RRK JAYAM, NO.20,
28TH MAIN, 37TH CROSS,
JAYANAGAR, 9TH BLOCK,
BENGALURU - 560 041.
                                      ... RESPONDENT

(BY SRI MANU KULKARNI, ADVOCATE))



       THIS CRIMINAL PETITION IS FILED UNDER SECTION

482 OF CR.P.C., PRAYING TO QUASH THE PROCEEDINGS

IN C.C.NO.6087/2021 ON THE FILE OF XXV ADDL.C.M.M.,

BENGALURU IN SO FAR AS THE PETITIONERS ARE

CONCERNED.


       THIS CRIMINAL PETITION HAVING BEEN HEARD

AND RESERVED FOR ORDERS ON 04.03.2022, COMING
                             3



ON FOR PRONOUNCEMENT THIS DAY, THE COURT MADE

THE FOLLOWING:-

                         ORDER

The petitioners are before this Court calling in

question proceedings in C.C.No.6087 of 2021 registered

for offence punishable under the Negotiable

Instruments Act, 1881 ('the Act' for short).

2. Brief facts leading to the filing present petition,

as borne out from the pleadings, are as follows:-

The petitioners claim to be non-executive Directors

of M/s.Shikhar Microfinance (P) Limited ('the Company'

for short) and are accused Nos. 2 and 6 in a case

registered by the respondent / complainant. The 1st

accused in the said complaint is a Non-banking

Financial Company registered under the Companies

Act, 2013 and also Microfinance Company registered

with the Reserve Bank of India. 3rd, 4th and 5th accused

on behalf of the 1st accused approached the respondent

for a loan of Rs.2/- crores. Acceding to the request, the

respondent agreed to lend Rs.2/- crores on execution of

certain loan agreement and in furtherance of the said

loan agreement, cheques appear to have been

exchanged between accused Nos.4 and 5 and the

respondent. A cheque bearing No.124755 which was

issued in favour of the respondent having been

presented, is dishonoured on account of want of

sufficient funds on 04-01-2020. The complainant on

the cheque getting dishonoured, registered a private

complaint invoking Section 200 of the Cr.P.C. arraying

the petitioners as accused Nos.2 and 6 along with

others. The Court having taken cognizance punishable

under Section 138 of the Act, the petitioners/accused

Nos.2 and 6 have knocked the doors of this Court in the

subject petition.

3. Heard Smt. Kaveri Thimmaiah, learned counsel

for the petitioners and Sri Manu Kulkarni, learned

counsel for the respondent.

4. The learned counsel appearing for the

petitioners would vehemently argue and contend that

the petitioners are Non-executive Directors of the

Company and being Non-executive Directors they are

not involved in the day-to-day affairs of the Company;

they are not the signatories to the cheques for Rs.2/-

crores issued in favour of the complainant. The

cheques are signed by accused Nos.4 and 5, who are the

Managing Directors of the Company. If proceedings are

permitted to be continued, it would become an abuse of

the process of the law, is the submission of the learned

counsel. She would seek quashment of entire

proceedings insofar as it concerns the petitioners.

5. On the other hand, the learned counsel

appearing for the respondent would vehemently refute

the submissions and contend that the petitioners are

not Non-executive Directors but regular Directors of the

Company, who are on the Board of the Company and

are involved in day-to-day affairs of the Company.

Several documents produced along with the petition or

the objections would clearly demonstrate that the

petitioners are not Non-executive Independent Directors

of the Company and would, therefore, submit that it is a

matter of trial for the petitioners to come out clean.

6. I have given my anxious consideration to the

submissions made by the respective learned counsel

and perused the material on record. In furtherance

whereof, the only issue that falls for my consideration

is,

"Whether the petitioners can be proceeded

against in the impugned criminal case?

7. The afore-narrated brief facts of the transaction

between the Company and the respondent is not in

dispute and are therefore, not reiterated as the issue

that has fallen for consideration is entirely different.

The Company is the one that borrowed loan and issued

cheques in furtherance of the said loan in favour of the

respondent. M/s. Shikhar Microfinance (P) Limited is a

Company incorporated under the provisions of the

Companies Act, 2013. The agreement is entered into

between the respondent and the Company. The clause

'Representations and Warranties' in the agreement

reads as follows:

"8. REPRESENTATIONS AND WARRANTIES

8.1. The Borrower represents and warrants that:

(a) The Borrower is a (i) non-banking financial company-micro finance institution duly registered with the Reserve Bank of India and incorporated under the provisions of the (Indian) Companies Act,1956, or (ii) company duly incorporated and registered under the provisions of the (Indian) Companies Act, 1956; or (iii) Partnership Firm/Proprietorship concern/Society/Trust and existing under the laws of India, and has the power and authority to carry on its business as it is now being

carried on and to own and create security over is property and assets.

(b) The borrower has all permissions required under law to borrow money from MBIND and has the power and authority to carry on its business. It has obtained all approval and sanction from its board of directors to directors to execute this agreement. The officers and employees and agents of the Borrower executing this Agreement and the documents to be executed in pursuance hereof, are duly and properly in office and fully and duly authorized to execute the same, and MBIND shall have no cause to make enquiry or satisfy itself independently in this regard;"

(Emphasis added)

The agreement narrates that it has obtained all

approvals and sanction from its Board of Directors to

execute this agreement. The signatories to the

agreement are not the petitioners as the agreement is

entered into between accused Nos.4 and 5 and the

respondent. It is in furtherance of this agreement that

cheques are issued in favour of the respondent. The

cheque, which is also appended to the petition does not

bear the signature of the petitioners but bear the

signatures of accused Nos.4 and 5. Form DIR-12,

which depicts details of Managing Director and

Directors of the Company, the 1st petitioner is a Non-

executive Director and Chairman. Minutes of 65th

meeting of the Board of Directors held on 16th

September, 2019, reads as follows:

"MINUTES OF THE 65TH MEETING OF THE BOARD OF DIRECTORS OF SHIKHAR MICROFINANCE PRIVATE LIMITED HELD ON MONDAY, THE 16TH SEPTEMBER, 2019 AT CORPORATE OFFICE OF THE COMPANY B-15, SECTOR-2 NOIDA, AT 10.30 A.M.

Directors Present:

    1.Mr. N.R.Rayalu         -Chairman.
    2.Mr. Anil Vidyarthi     -Independent Director.
    3.Mr. Saurabh Baroi      -Nominee Director, Dia Vikas
                              Capital Private Limited.

4.Mr.Satyavir Chakrapani-Managing Director & CEO

5.Mr. Vijay Pandey -Joint Managing Director.

    6.Mr. Thomas Vinoy       -Director & CFO
     In Attendance

            Ms. Aakansha Negi      -Company Secretary.

     Special invitee:

            Mr. Ravi Shankar

SMPL/BD/65/16-09/1: Welcome remarks

Mr. N.R.Rayalu presented the welcome remarks. He was unanimously elected to act as the chairman of the meeting.

... ...."

1st petitioner is shown as the Chairman and the 2nd

petitioner is shown as an independent Director. The 1st

petitioner is unanimously elected to act as the

Chairman of the meeting. The petitioners have also

placed annual return report of the Company which in

the column reading details of Directors and key

managerial personnel, reads as follows:

"(B) (i) *Details of directors and Key managerial personnel as on the closure of financial year

Name DIN/PAN Designati Number Date of on of equity cessation (after Share(s) closure of held financial year: If any) N R RAYALU 07304106 Additional 0 director ANIL 01226257 Director 0 VIDYARTHI VIJAY PANDEY 01301383 Managing 24,242 Director SATYAVIR 02422305 Managing 24,600 CHAKRAPANI Director THOMAS 02571265 Whole-time 20,600 VINOY director THOMAS

The 1st petitioner is shown as Additional Director and

the 2nd petitioner is shown as Director. They are

accused Nos.2 and 6 in the subject case. The column

'attendance of Directors' depicts both the petitioners as

participating in the meeting of the Company as

Directors.

8. One fact that can be gathered from what is

extracted hereinabove, is that the petitioners are

nowhere described as Non-executive Independent

Directors. In the light of the aforesaid documents, what

is required to be noticed is the averments in the

complaint with regard to the petitioners. The complaint

insofar as it concerns the petitioners reads as follows:

"5. The accused Nos. 2 and 6 are responsible for the day-to-day affairs of accused No.1` and are also in-charge of and responsible for the conduct of the business of accused No.1. The accused No.1 being a de jure entity is operated on the instructions of accused Nos.2 and 6. Accused Nos. 3 and 4 are the Joint Managing Directors of accused No.1. Accused Nos. 4 and 5 signed the cheque which was dishonoured. Accused No.2 to 6 are the brain and soul of the Company and are responsible for all the acts and omissions of the Company and are also responsible to the Company for the conduct of the business of the Company. Accused Nos. 2 to 6 were in-charge of and

responsible for the conduct of Accused No.1 at the time when the offence for which the present complaint is filed was committed. The offence for which the instant complaint is filed has been committed with full knowledge, in consonance with and in furtherance of common intention by all the Accused persons named in the captioned case. It is submitted that none of the accused individuals, acting in their official capacity have exercised any due diligence to prevent the commission of the offence under the Act."

(Emphasis added) What is narrated is, accused Nos.2 to 6 are responsible

for day-to-day affairs of accused No.1/Company.

Accused Nos.2 to 6 are the brain and soul of the

Company and are responsible for all the acts and

omissions of the Company. With this note the entire

narration is against accused Nos.3, 4 and 5 as they are

Managing Directors and Joint Managing Directors of the

Company. The accused Nos.4 and 5 are also signatories

to the cheque.

9. Sworn statement of the complainant is recorded

before the learned Magistrate. The sworn statement

insofar as it concerns the role of the petitioners, reads

as follows:

"3. The accused Nos. 2 to 6 are responsible for the day-to-day affairs of accused No.1 and are also in-charge of and responsible for the conduct of the business of accused No.1. The accused No.1 being a de jure entity is operated on the instructions of accused Nos. 2 to 6. Accused Nos. 3 and 4 are the Joint Managing Directors of accused No.1. Accused Nos. 4 and 5 signed the cheque which was dishonoured. Accused Nos. 2 to 6 are the brain and soul of the company and are responsible for all the acts and omissions of the Company and are also responsible to the Company for the conduct of the business of the Company. Accused Nos. 2 to 6 were in-charge of and responsible for the conduct of accused No.1 at the time when the offence for which the present complaint is filed was committed. The offence for which the instant complaint is filed has been committed with full knowledge, in consonance with and in furtherance of common intention by all the accused persons named in the captioned case. It is submitted that none of the accused individuals, acting in their official capacity have exercised any due diligence to prevent the commission of the offence under the Act."

(Emphasis added)

Here again there is narration with regard to the

petitioners being responsible for the affairs of the

Company. The description is that, they are brain and

soul of the Company. On a coalesce of the afore-quoted

extracts from the documents appended to the petition,

the complaint and the sworn statement of the

complainant what can be gathered is that the

petitioners were aware of the day-to-day affairs of the

Company. The petitioners are nowhere described, in

any of the documents that they are the Non-executive

Independent Directors. In every document they are

shown with different designations - at one place as

Chairman, in the next as Executive Director and in the

other Chairman of the particular meeting of the Board.

There is no whisper in any of the documents depicting

the petitioners to be Non-executive Independent

Directors. Therefore, if the haze has to be warded off, it

is necessary for the petitioners to participate in the trial

and demonstrate that they have no role to play in the

day-to-day affairs of the Company and that they are not

even aware of the borrowing.

10. It is no doubt settled principle of law that if

the accused in a proceeding under Section 138 of the

Act who are not signatories to the instrument are

hauled into those proceedings and if they are Non-

executive Independent Directors, who have no role to

play in any affairs of the Company, they cannot be

prosecuted. It is in those cases the Apex Court or the

constitutional Courts have quashed such proceedings in

favour of those Non-executive Independent Directors.

The phrase "non-executive independent director" is not

even shown to exist in any of the documents appended

by the petitioners. The respondent has demonstrated

varied nomenclature of the petitioners in several

documents. Therefore, it becomes a matter of trial.

Reference being made to the judgment of the Apex Court

in the case of ASHUTOSH ASHOK PARASRAMPURIYA

v. GHARRKUL INDUSTRIES (PRIVATE) LIMITED AND

OTHERS - 2021 SCC OnLine SC 915, in the

circumstances is apposite. The Apex Court while

considering earlier judgments on the issue holds as

follows:

"23. In the light of the ratio in S.M.S. Pharmaceuticals Ltd. (supra) and later judgments of which a reference has been made what is to be looked into is whether in the complaint, in addition to asserting that the appellants are the Directors of the Company and they are incharge of and responsible to the Company for the conduct of the business of the Company and if statutory compliance of Section 141 of the NI Act has been made, it may not open for the High Court to interfere under Section 482 CrPC unless it comes across some unimpeachable, incontrovertible evidence which is beyond suspicion or doubt or totally acceptable circumstances which may clearly indicate that the Director could not have been concerned with the issuance of cheques and asking him to stand the trial would be abuse of process of Court. Despite the presence of basic averment, it may come to a conclusion that no case is made out against the particular Director for which there could be various reasons.

24. The issue for determination before us is whether the role of the appellants in the capacity of the Director of the defaulter company makes them vicariously liable for the activities of the defaulter Company as defined under Section 141 of the NI Act? In that perception, whether the appellant had committed the offence chargeable under Section 138 of the NI Act?

25. We are concerned in this case with Directors who are not signatories to the cheques. So far as Directors who are not the signatories to the cheques or who are not Managing Directors or Joint Managing Directors are concerned, it is clear from the conclusions drawn in the afore-stated

judgment that it is necessary to aver in the complaint filed under Section 138 read with Section 141 of the NI Act that at the relevant time when the offence was committed, the Directors were in charge of and were responsible for the conduct of the business of the company.

26. This averment assumes importance because it is the basic and essential averment which persuades the Magistrate to issue process against the Director. That is why this Court in S.M.S. Pharmaceuticals Ltd. (supra) observed that 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 NI Act read in the light of the powers of a Magistrate referred to in Sections 200 to 204 CrPC which recognise the Magistrate's discretion to take action in accordance with law. Thus, it is imperative that if this basic averment is missing, the Magistrate is legally justified in not issuing process.

27. In the case on hand, reading the complaint as a whole, it is clear that the allegations in the complaint are that at the time at which the cheques were issued by the Company and dishonoured by the Bank, the appellants were the Directors of the Company and were responsible for its business and all the appellants were involved in the business of the Company and were responsible for all the affairs of the Company. It may not be proper to split while reading the complaint so as to come to a conclusion that the allegations as a whole are not sufficient to fulfil the requirement of Section 141 of the NI Act. The complaint specifically refers to the point of time when

the cheques were issued, their presentment, dishonour and failure to pay in spite of notice of dishonour. In the given circumstances, we have no hesitation in overruling the argument made by the learned counsel for the appellants.

28. Indisputedly, on the presentation of the cheque of Rs. 10,00,000/-(Rupees Ten Lakhs only) dated 2nd June 2012, the cheque was dishonoured due to "funds insufficient" in the account and after making due compliance, complaint was filed and after recording the statement of the complainant, proceedings were initiated by the learned Magistrate and no error has been committed by the High Court in dismissing the petition filed under Section 482 CrPC under the impugned judgment.

29. The submission of learned counsel for the appellants that they are the non- executive Directors in the light of the documentary evidence placed on record by Form No. 32 issued by the Registrar of Companies, both the appellants are shown to be the Directors of the Company, still open for the appellants to justify during course of the trial.

30. In our considered view, the High Court has rightly not interfered in exercise of its jurisdiction under Section 482 CrPC for quashing of the complaint."

(Emphasis supplied)

It is also germane to notice a judgment earlier to the one

referred to supra in the case of N.RANGACHARI v.

BSNL - (2007) 5 SCC 108, wherein the Apex Court

holds as follows:

"21. A person normally having business or commercial dealings with a company, would satisfy himself about its creditworthiness and reliability by looking at its promoters and Board of Directors and the nature and extent of its business and its memorandum or articles of association. Other than that, he may not be aware of the arrangements within the company in regard to its management, daily routine, etc. Therefore, when a cheque issued to him by the company is dishonoured, he is expected only to be aware generally of who are in charge of the affairs of the company. It is not reasonable to expect him to know whether the person who signed the cheque was instructed to do so or whether he has been deprived of his authority to do so when he actually signed the cheque. Those are matters peculiarly within the knowledge of the company and those in charge of it. So, all that a payee of a cheque that is dishonoured can be expected to allege is that the persons named in the complaint are in charge of its affairs. The Directors are prima facie in that position.

22. In fact, in an earlier decision in Monaben Ketanbhai Shah v. State of Gujarat [(2004) 7 SCC 15 : 2004 SCC (Cri) 1857] two learned Judges of this Court noticed that: (SCC p. 17, para 4)

"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."

23. In the light of the ratio in S.M.S.

Pharmaceuticals Ltd. [(2005) 8 SCC 89 : 2005 SCC (Cri) 1975] what is to be looked into is whether in the complaint, in addition to asserting that the appellant and another are the Directors of the company, it is further alleged that they are in charge of and responsible to the company for the conduct of the business of the company. We find that such an allegation is clearly made in the complaint which we have quoted above. Learned Senior Counsel for the appellant argued that in Saroj Kumar Poddar case [(2007) 3 SCC 693 : (2007) 2 SCC (Cri) 135 : (2007) 2 Scale 36] this Court had found the complaint unsustainable only for the reason that there was no specific averment that at the time of issuance of the cheque that was dishonoured, the persons named in the complaint were in charge of the affairs of the company. With great respect, we see no warrant for assuming such a position in the context of the binding ratio in S.M.S. Pharmaceuticals Ltd. [(2005) 8 SCC 89 : 2005 SCC (Cri) 1975] and in view of the position of the Directors in a company as explained above.

24. In Rajesh Bajaj v. State (NCT of Delhi) [(1999) 3 SCC 259 : 1999 SCC (Cri) 401 : AIR 1999 SC 1216] , two learned Judges of this Court stated: (SCC p. 262, para 9)

"For quashing an FIR (a step which is permitted only in extremely rare cases) the information in the complaint must be so bereft of even the basic facts which are absolutely necessary for making out the offence."

25. In Bilakchand Gyanchand Co. v. A. Chinnaswami [(1999) 5 SCC 693 : 1999 SCC (Cri) 1034 : AIR 1999 SC 2182] this Court held that a complaint under Section 138 of the Act was not liable

to be quashed on the ground that the notice as contemplated by Section 138 of the Act was addressed to the Director of the company at its office address and not to the company itself. The view was reiterated in Rajneesh Aggarwal v. Amit J. Bhalla [(2001) 1 SCC 631 : 2001 SCC (Cri) 229 : AIR 2001 SC 518] . These decisions indicate that too technical an approach on the sufficiency of notice and the contents of the complaint is not warranted in the context of the purpose sought to be achieved by the introduction of Sections 138 and 141 of the Act.

26. In the case on hand, reading the complaint as a whole, it is clear that the allegations in the complaint are that at the time at which the two dishonoured cheques were issued by the Company, the appellant and another were the Directors of the Company and were in charge of the affairs of the Company. It is not proper to split hairs in reading the complaint so as to come to a conclusion that the allegations as a whole are not sufficient to show that at the relevant point of time the appellant and the other are not alleged to be persons in charge of the affairs of the Company. Obviously, the complaint refers to the point of time when the two cheques were issued, their presentment, dishonour and failure to pay in spite of notice of dishonour. We have no hesitation in overruling the argument in that behalf by the learned Senior Counsel for the appellant."

(Emphasis supplied)

In the light of what is held by the Apex Court in the

aforesaid judgments, the complaint (supra) clearly

narrates that the petitioners were also in-charge of the

affairs of the Company, they are the brain and soul of

the Company and at the time when they borrowed the

loan, the agreement clearly stipulated that with their

permission, including others the said loan was

borrowed and the cheque was issued and no where the

petitioners are described as Non-executive Independent

Directors. This being the factual scenario, exercise of

jurisdiction under Section 482 of the Cr.P.C. in favour