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Kerala High Court · body

2012 DIGILAW 1021 (KER)

Ravindran Pillai v. Hi-Lite Builders Pvt. Ltd.

2012-11-21

S.S.SATHEESACHANDRAN

body2012
Judgment : 1. Petitioners are directors of a company who are proceeded with that company and its managing director in a complaint, for the offence under Section 138 of the Negotiable Instruments Act,1881, for short, ‘the Act’. First respondent, which is also a company, is the complainant. Petitioners have filed the petition to quash the criminal proceedings against them contending such proceedings are an abuse of the process of the court, under Section 482 of the Code of Criminal Procedure, for short, ‘the Code’. 2. Complainant a private limited company, is a builder and developer of property. That company entered into Annexure B agreement with the first accused, another private limited company, on 18.12.2007, for joint development of a property belonging to that accused, situate in Kasaba village, Kozhikode Taulk, for putting up a multi storied commercial complex, named, ‘The Blue Diamond Mall’. The Director Board of first accused, then, consisted of the second accused as its managing director and his two sons as directors. Complainant advanced an amount of Rs.3 crores and spent another sum of Rs.61,33,752/-for the betterment of first accused. The first accused under Annexure B agreement has to pay back the amount advanced and spent on completion of the project or on realization of sale revenue from the project, whichever is ealier. In addition the agreement stipulated that the first accused has to pay the complainant 10% of the total sale proceeds collected by sale of the developed space. While so petitioners, who are accused 3 to 6 in the complaint, purchased the Blue Diomond Mall by transfer of shares, for a total consideration of Rs. 85 crores. On such sale two directors of first accused, two sons of the second accused, retired, and petitioners stepped in as Directors. The first accused, then, according to complainant was liable to it for Rs.3 crores, received as advance, and further sum of Rs.8.5 Crores – 10% of 85 crores, the value paid for transfer of share of that company. Towards part payment of that liability a cheque for Rs.2 crores from the account maintained by first accused was issued to the complainant, that cheque presented for encashment was dishonoured due to insufficiency of funds, and notice of dishonour and demand made to accused nos. Towards part payment of that liability a cheque for Rs.2 crores from the account maintained by first accused was issued to the complainant, that cheque presented for encashment was dishonoured due to insufficiency of funds, and notice of dishonour and demand made to accused nos. 2 to 6 was responded with reply from accused nos,3 to 6 denying their liability, is the case of the complainant to proceed against first accused company and its directors for the offence under Section 138 of the Act. Cheque was issued with the knowledge, consent, concurrence and approval of accused nos. 3 to 6, all of them had participated in the deliberations held in the negotiations for sale of Blue Diomand Mall by 2nd accused and others, accused persons 3 to 6 with the second accused are in charge of the affairs of first accused and after issue of cheque accused nos.2 to 6 requested the directors and officers of complainant company to defer presentation of the cheque till June 2011 on account of financial constraints of first accused, is the further case of complainant to prosecute the directors, accused nos.2 to 6, with the first accused for the offence imputed. 3. The magistrate took cognizance of the offence on the complaint and issued process to the accused. Receiving summons petitioners (A3 to A6) have filed the petition to quash the criminal proceedings against them. Complaint is not maintainable against them since they were not in charge of the company when the liability was allegedly incurred, and, further, Annexure B agreement entered by the first accused with complainant company has been annulled and cancelled by a subsequent agreement (Annexure F) between the complainant and another company M/S Swargachitra Property Developers Private Ltd., for short, ‘Swargachitra’, in which also the second respondent is the managing director, according to them. First petitioner (A3)is a nonresident Indian, second petitioner (A4) is his wife and petitioners 3 and 4 (A5 and A6) are his children, who are students, and, none of them was in charge and responsible to the company in respect of the transaction or liability covered by the cheque, is their case to quash the proceedings. 4. I heard the counsel on both sides. 4. I heard the counsel on both sides. Learned counsel for petitioners (A3 to A6) contended that the complaint is not maintainable against them, and their prosecution solely based on the statements made in the complaint that as directors they knew about the transaction and they were in charge of or responsible to the first accused for the conduct of its business, is gross abuse of process of the court and patently unsustainable. Allegations raised that these petitioners had participated directly in the negotiations for transfer of shares of the first accused company, they knew about the pre-existing liability of that company entered with the complainant and after issue of cheque they along with second respondent requested for deferring its presentation to the bank, according to the counsel have been incorporated in the complaint only to rope in petitioners, directors of first accused, as co-accused with the company and the second accused, its managing director. Under Annexure F agreement entered by Swargachitrs, another company of second respondent, and the complainant company, Annexure B agreement was cancelled, and a further covenant made that the liability arising from the terms of Annexure B agreement had been taken over by the other company, according to the counsel. When that be so, it is contended that no prosecution would lie against the petitioners over the dishonoured cheque issued by the second accused. Per contra, learned counsel appearing for the complainant company placing emphasis on the averments made in the complaint contented the defences projected can be considered only at the stage of trial, and the grounds canvassed for quashing the proceedings cannot at all be appreciated or taken into consideration to impeach the process issued against the accused. Learned counsel contending that the offence under Section 138 of the Act is committed when the bank returns the cheque as unpaid, submitted that at that stage these petitioners, all of them, have become directors of the company and they continued in charge of the company. Learned counsel contending that the offence under Section 138 of the Act is committed when the bank returns the cheque as unpaid, submitted that at that stage these petitioners, all of them, have become directors of the company and they continued in charge of the company. Where specific allegations are imputed that these petitioners were directly involved in the transaction over the issue of cheque and on their joint request with the second accused its presentation was deferred and that they were put in charge of the affairs of the company on transfer of shares of the company in their favour, factual disputes canvassed disowning their liability can be decided only at the stage of trial, and, therefore, this court will not be justified in quashing the proceedings against the petitioners invoking its inherent powers under Section 482 of the Code, is the submission of the counsel. Learned counsel has relied on Malwa Cotton and Spinning Mills Ltd. V. Virsa Singh Sidhu ((2008)17 SCC 147) and Rallis India Ltd. V Poduru Vidya Bhusan ((2011) 13 SCC 88) to contend that where the magistrate being satisfied from the allegations made in the complaint ordered process against the accused, this court, at the threshold of the complaint, should not interfere with the cognizance taken by the magistrate on the challenges canvassed by accused persons over disputed facts, which can be decided only in trial. So much so, the petition moved by petitioners for quashing the criminal proceedings against them is only to be dismissed, is the submission of the counsel. 5. Learned counsel for second accused, who as managing director of first accused, and signatory, issued the cheque, which on dishonour gave rise to the complaint against him, the company and petitioners, in his submissions, resisted the challenges put forth by petitioners to quash the proceedings contending that on transfer of shares of first accused petitioners have been put in charge of that company. 6. Challenger raised to assail the complaint and proceedings thereof are two fold. Of them, the main thrust of attack is that the petitioners are directors of the company, that alone, with no materials showing that they were in charge of the company when the offence over the dishonoured cheque was committed, they are not liable to be prosecuted for the cheque issued in the name of first accused by its managing director, the second accused. That challenge is resisted not only by the complainant but by the second accused as well. Both of them contend that the cheque was issued with the knowledge and consent of the petitioners and after their induction in the director board they are in charge of the company. Challenge against the prosecution on the ground that the petitioners, directors, were not in charge of the complainant contending that where specific averments are made in the complaint to the contrary, that is a matter to be considered by the magistrate in trial of the case and it cannot be canvassed to quash the proceedings invoking the inherent powers of this court. Both sides have relied upon a good number of judicial pronouncements in support of the respective submissions made as aforesaid, to press for and accept the rival case projected by them. Whether an enquiry on the disputed question regarding the charge of petitioners over the affairs of the company at the time when the offence in relation to the cheque issued was committed, is called for or not, has to be considered after taking note of the next limb of attack raised by the petitioners to assail their prosecution. Petitioners have contended relying on Annexure F agreement entered by the complainant and the second accused, to contend that the liability arising under the cheque had been acknowledge and treated as part of the liability of a different company under the charge of the second accused and that being so, petitioners are not to be prosecuted for the offence solely for the reason that they are directors of the first accused company. Annexure F agreement is admittedly executed by the complainant and second accused, but, in his capacity as managing director of another company, namely, Swargachithra. That agreement treats the liability covered under the Cheque involved in the complaint as the liability of the aforesaid company in charge of second accused and previous agreement (Annexure B) entered by second accused with the complainant with respect to the funding for the construction of Blue Diamond Mall had been cancelled, is the case of petitioners banking upon the aforesaid agreement (Annexure F)to contend that first accused company is not liable for the cheque issued by the second accused as its managing director. When company is not liable, petitioners, its directors, too cannot be prosecuted, is their case. When company is not liable, petitioners, its directors, too cannot be prosecuted, is their case. What is stated under Annexure F agreement with respect to the cheque covered by the case and also cancellation of the previous agreement entered between the first accused company represented by the second accused and the complaint has no bearing to the present case where the complaint relats to the cheque issued by first accused company by its managing director, the second accused, and the offence thereof was committed at a time when the petitioners, directors, continued in charge of that company, is the submission of the learned counsel for the complainant. What are the circumstances under which Annexure F agreement was executed by the complainant and second accused and what is the true import to be given to the terms covered by that agreement, all of them, are matters of evidence in trial, after giving opportunity to the complainant to explain them, is the further submission of the learned counsel for the complainant to contend that no significance can be attached to that agreement in considering the question whether prosecution of petitioners on the complaint imputing the offence under Section 138 of the NI Act is liable to be quashed as an abuse of process invoking the inherent powers of this Court. 7. Taking note of the challenges canvassed to assail the prosecution with reference to th submissions made by the counsel on both sides, I find, in the given facts of the case, where Annexure F agreement entered into by the complainant and second accused is admitted and, it is shown to be an incontrovertible document, challenge canvassed by petitioners to assail their prosecution banking upon that agreement, if so found acceptable, then, the other question whether they have been in charge or otherwise of the company will pale into insignificance and it is not at all a matter required to be considered by this court. I say so for the reason that the dishonour of a cheque giving rise to an offence under Section 138 is governed by the statutory provisions engrafted in Chapter XVII of the act. The offence under section 138 of the Act is primarily intended to give sanctity to commercial transactions by use of cheques and punishing any offender thereof after a speedy trial. The offence under section 138 of the Act is primarily intended to give sanctity to commercial transactions by use of cheques and punishing any offender thereof after a speedy trial. With that avowed object First Class judicial Magistrate has been empowered to try the offence under Section 138 summarily, and, then, impose sentence on the offender, not exceeding one year and an amount of fine exceeding Rs.5,000/. Sections 260 to 265 in Chapter XXI of the Code deal with summary trial of cases. In summary trials the magistrate need only record the substance of evidence and not the statements given by witnesses in verbatim. Under the code, for cases summarily tried, maximum sentence cannot exceed sentence of imprisonment of three months. But by statutory mandate offence under Section under Section 138 of the Act is triable summarily, and sentence against the offender on conviction can be awarded exceeding what is stated under the code. The argument canvassed by the learned counsel for complainant will be able to show and explain the circumstances surrounding the execution of Annexure F agreement, prime facie, has no merit. Offering of such explanation and consideration over the acceptance of such explanation, if so offered, in respect of Annexure F agreement as against what is expressly stated in such document is outside the province of a magistrate in a case tried summarily. Any adjudication over disputes with reference to the statements made in the agreement with any explanation offered to show what is stated therein should not be accepted as it is, but, in a different manner, normally, is not possible nor advisable in a summary trial, but only in a trial by other procedures provided in the Code or before a civil forum in appropriate proceedings thereof. 8. Annexure B is the agreement entered by first accused company represented by its managing director with the complainant. By that agreement and in compliance of the terms thereof complainant advanced funds to the first accused company for construction of a shopping mall. Among the terms settled under the agreement 10% of total sales revenue was agreed to be paid to the complainant by the first accused. If the first accused company does not opt for sale then other conditions are made, with which we are not concerned. Through transfer of shares, for values of Rs.85 crores, petitioners have obtained the shares of the first accused company. If the first accused company does not opt for sale then other conditions are made, with which we are not concerned. Through transfer of shares, for values of Rs.85 crores, petitioners have obtained the shares of the first accused company. They have also been inducted in the director board of that company after replacing two previous directors, two sons of second accused. A cheque issued by second accused for the first accused company as its managing director, after transfer of shares in favour of petitioners, for a sum of Rs.2 crores, on its dishonour, has given rise to the present complaint. Annexure E is copy of the complaint. Allegations set out in the complaint would indicate that value of shares on transfer paid by the petitioners is treated as sale proceeds, over which the complainant company claims 10% in terms of Annexure B agreement, with the sum paid for construction. In part payment of such liability cheque in the present case was issued by the first accused company by its managing director, the second accused, as the signatory of that instrument, is its case. Petitioners have produced Annexure F agreement to contend that whatever liability that had been agreed and acknowledged by the complainant and second accused, both of them, as the liability of another company, Swargachithra, which is managed and controlled by second accused as its managing director. Annexure F agreement executed by the complainant and first accused is dated 19-01-2011. Cheque involved in the complaint is dated 21-01-2011. I do take note that learned counsel for complainant has stated that it was a post dated cheque. There is no whisper in the complaint of the date when the cheque was issued. Leaving that aspect what are the essential terms covered by Annexure F agreement which is shown to have been entered at least two days before the date shown in the cheque has to be taken note of. 9. Annexure F agreement specifically refers to Annexure B agreement in the following terms “1) Whereas the first party represented by Mr. P.D. Abraham as managing director of M/S Traders Tower Constructions and Property Developers Private Ltd., another company owned by Mr. 9. Annexure F agreement specifically refers to Annexure B agreement in the following terms “1) Whereas the first party represented by Mr. P.D. Abraham as managing director of M/S Traders Tower Constructions and Property Developers Private Ltd., another company owned by Mr. P.D. Abraham and family, had entered into an agreement dated 18-12-2007 under which, Traders Tower Constructions and property Developers Private Ltd. And Second party has agreed to develop “Blue Diamond Mall’ in a land admeasuring 111 cents at Rs.5.24.1216/48, survey 83/1/A2, in Kalathikunnu Desom of Kozhikode Taluk”. Then, adverting to the advances made for constructions of the mall project and also making reference to the agreement to pay 10% of the total sale revenue to the complainant in addition to capital repayment and stating the amount due to the complainant settlement arrived by the parties is recorded. Second party in the agreement, complainant, has agreed to write off 78 lakhs of its investments made in the project. Rest of the amount due, a sum of Rs.11.5 Crores, (Rs.3 Crores towards repayment of capital investment and Rs.8.5 crores towards 10% commission) has been settled by the parties thus: “5. WHEREAS The First Party has paid Rs.6 Crores (six) towards the payment mentioned clause 4 above (a) cheque of Rs.2 crores bearing No.992893 dated 29-11-2010 drawn on federal Bank, (b) cheque of Rs.2 Crores bearing No.199065 dated 21-01-2011 drawn on Federal Bank, (c) cheque of Rs.1 Crore bearing No.70870 dated 24-01-2011 drawn on IDBI Bank, and (d) cheque of Rs.1 Crore bearing No.070870 dated 28-02-2011 drawn on IDBI Bank and the second party acknowledged the receipt of same. 6. WHEREAS the balance payment of Rs.5.5 Crores shall be treated as Second Party’s capital investment in the proposed new project in the Schedule property hereunder’. 10. Cheque of Rs. 2 crores bearing no.199065 dated 21-01-2011 drawn on Federal Bank, mentioned in clause (5) above in the agreement , is the instrument, which on dishonour, form the basis for the complaint. Annexure F agreement makes specific mention that previous Annexure B agreement of the complainant was with ‘a company owned by the second accused and his family’, and the liabilities due there of are adjusted and settled by the complainant entering into an agreement with another company controlled and managed by the second accused. Annexure F agreement makes specific mention that previous Annexure B agreement of the complainant was with ‘a company owned by the second accused and his family’, and the liabilities due there of are adjusted and settled by the complainant entering into an agreement with another company controlled and managed by the second accused. The question then is even if second accused had given a cheque in the name of first accused company in view of Annexure F agreement entered by that accused as managing director of another company, Swargachithra, with the complainant, whether that would constitute any liability on the first accused company. The terms covered by Annexure F agreement clearly spell out that the cheque as the managing director of ‘Swargachitrha which is a party to that agreement and not in his capacity as managing director of first accused company. Even if he has dual capacity as managing director of two companies, where acknowledgment of liability and issue of cheque is shown to be by a different company, Swargachithra, the first party in Annexure F agreement , even if it was given in the name of first accused company by second accused, who continued as managing director of Swargachithra also, that cannot cast liability upon the first accused company. With this, it is also to be taken note of that Annexure F agreement Further states that on execution of such agreement as per the terms settled by the parties Annexure B agreement has been cancelled. Clause (7) of Annexure F agreement reads thus: “The original agreement executed on 18th December 2007 by and between Traders Tower Constructions and property Developers Pvt. Ltd as First party and HiLITE Builders Pvt., Ltd as Second party hereby stands cancelled’. Annexure B agreement, the bedrock on which the liability giving rise to prosecution under the dishonoured cheque rest, stands cancelled under the new agreement (Annexure F) entered between the second accused, but, in a different capacity as managing director of Swargachithre, and the complainant. Annexure B agreement, the bedrock on which the liability giving rise to prosecution under the dishonoured cheque rest, stands cancelled under the new agreement (Annexure F) entered between the second accused, but, in a different capacity as managing director of Swargachithre, and the complainant. Where Annexure F agreement specifically states of adjustment of liabilities arising out of Annexure B agreement and even acknowledges that a major portion of the liability outstanding is to be treated as capital investment of complainant in another company controlled by the second accused, prosecution of first accused company on the cheque issued by the second accused as if the liability under Annexure B agreement continued to rest with the first accused company is prima facie not acceptable. Annexure F agreement on the face of it would show whatever liabilities arising from Annexure B agreement had been acknowledged and accepted as liabilities of second accused, who and his family were in control of the first accused, company when that agreement was entered in to, and such liabilities were agreed to be treated as liabilities of another company, Swargachithra, that too under the control of second accused, by the complainant company. In acknowledging so the complainant has agreed to treat part of the liabilities outstanding, a sum of Rs.5.5 Crores, as its capital investment in the company, Swargachithra, that too controlled by the second accused. If that liability was that of first accused company, which is a separate legal entity, even if 2nd accused continued as its managing director after transfer of majority of shares to petitioners, he could not have made a settlement as indicated under Annexure F agreement with the complainant, that too executing such an agreement in the name of a different company, Swargachithra. The aforesaid circumstances also indicate that whatever be the liability arising under Annexure B agreement was treated as liability of second accused and not that of first accused company; by the complainant company and second accused. 11. With the aforesaid, now, it has to be considered whether prosecution of petitioners for the offence under Section 138 of the Act is permissible? That has to be looked into with reference to Section 139 of the Act. 11. With the aforesaid, now, it has to be considered whether prosecution of petitioners for the offence under Section 138 of the Act is permissible? That has to be looked into with reference to Section 139 of the Act. That Section reads thus: “It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque, of the nature referred to in Section 138, in whole or in part of any debt or other liability.” 12. Statutory presumption available in favour of the holder postulates that he received the cheque for the discharge in whole or in part of any debt or other liability unless the contrary is proved. What is the proof required to rebut that presumption available infavour of the holder has necessarily to be examined having regard to the offence and also the procedure for trial of such offence. The word ‘proved’ does not indicare that there should be proof of such a nature establishing that the cheque involved has not been issued in discharge of any debt or other liability. What is necessary is only placing of such circumstance before the court as may be sufficient to convince it that the presumption under Section 139 is not available to the complainant. 13. Annexure F agreement, prime facie, shows that the first accused company has no liability over the cheque issued by second accused though such cheque was issued from the account of the company. 2nd accused is the signatory of the instrument and shown as the managing director of that company, for that reason, should the petitioners, directors of that company, be called upon to face the prosecution for the offence? Annexure F agreement entered by the complainant and second accused is sufficient enough to rebut the presumption emerging under Section 139 of the NI Act, to show that the second accused though signed as managing director of first accused company has not issued that cheque towards the debt or liability of that company. In summary trial which need be followed for an offence under section 138 of the Act the magistrate cannot be called upon` to determine whether the cheque relates to the liability of first accused company or Swargachithra. Any such exercise over the question of liability in summary trial where ‘swargachitra’ is not a party and also cannot be made a party, has to be avoided. Any such exercise over the question of liability in summary trial where ‘swargachitra’ is not a party and also cannot be made a party, has to be avoided. Of course, the magistrate can ignore Annexure ‘F’ agreement if it does not prime facie show a dispute of the above nature. But, where presumption in favour of holder over the liability under the cheque stands displaced and a dispute requiring adjudication over such a liability under the instrument is prime facie shown by an incontrovertible document produced, then, that is different matter having a decisive bearing on the competency of magistrate to decide it in a summary trial. Learned counsel for complainant has relied on Malwa Cotton and Spinning Milla’s case and Anil Sacher’s case {2011 (13) SCC 148}, referred to above, to contend that quashing of criminal proceedings will not be justified where disputed questions of fact are involved. After going through the decisions, I find that no proposition as canvassed by the counsel has been made by the Apex Court. In Malwa Cotton and Spinning Mills Ltd.’s case, referred to above, prosecution against one of the directors of the company was quashed by the high court on the ground that he had resigned from the directorship before the cheques were issued. There was factual disputes as to when he resigned, with delayed presentation of his resignation to the Registrar of Companies, which was in fact presented long after the cheques were issued. In that context, following the decision rendered in S.V. Muzumdar v. Gujarat State Fertiliser Co. Ltd. ((2005) 4 SCC 173), wherein, it has been held when the challenge is against the allegations raised as to whether it would constitute a foundation for action in terms of Section 141 of the Act against the directors of a company, any question thereof has to be decided at trial. Ltd. ((2005) 4 SCC 173), wherein, it has been held when the challenge is against the allegations raised as to whether it would constitute a foundation for action in terms of Section 141 of the Act against the directors of a company, any question thereof has to be decided at trial. Where an incontrovertible document, admittedly, executed by the complainant and another, that too signatory of the cheque, would disclose that liability covered by such cheque had been taken over by another company, and, that the company proceeded against has no liability over the cheque issued in its name, it is not even a matter touching upon disputed facts but one unmistakably showing that the holder of the cheque is not entitled to the presumption under Section 139 of the N.I. Act, in a summary trial for the offence and Section 138 of the N.I. Act, as already pointed out, whether the directors of the company which is proceeded against on the allegations constituting a foundation for action interms of Section 141 of the Act should face a prosecution, is a matter to be looked into in the backdrop that the courts exist to do substantial justice. Where this Court is prima facie satisfied of the displacement of presumption under Section 139 of the N.I. Act by an incontrovertible document, with the facts presented revealing that a dispute as to which of the two companies, the 1st accused or Swargachitra, both of which have the 2nd accused as its managing director has the liability under the cheque, can be decided only in a properly framed suit before a competent civil court, the ends of justice demand quashing of the proceedings against the petitioners, who are proceeded as directors of a company. In Anil Sachar’s case, referred to above, challenge was over an order of acquittal, after trial, rendered in favour of the accused in a cheque case, and, affirmed by the High Court as well. Conclusions drawn by the trial court and High Court on the materials placed in that case were found to be incorrect by the Apex Court, and the order of acquittal was reversed in that case it was notice that no effort was made by the accused who included the directors of a company to rebut the presumption under Section 139 of the N.I. Act. That is not the situation in the present case. That is not the situation in the present case. Even before the trial proceeded in the case on the document produced before this Court, admittedly, executed by the complainant and another company, that too, represented by the 2nd accused as its managing director, prima facie, it is shown that liability under the cheque is not that of the 1st accused but that of another company, Swargachitra. So much so, the aforesaid decision has no application to the present case. 14. When such be the fact situation presented in the case with Annexure F agreement displacing the statutory presumption indicating prima facie that the first accused company cannot be held liable for the cheque issued by the second accused, I find the prosecution of Petitioners, for the reason they are directors of first accused company, nor that of the company (first accused) can be allowed. Where accused Nos.2 to 6 in the complaint have been proceeded against as managing director and directors of the first accused company and it is shown, prima facie, the liability over the cheque cannot be cast upon first accused company, I find, proceedings arising from the complaint are to be quashed. 15. In the light of the discussion made above. I find, the other challenge canvassed by the petitioners to assail their prosecution that they as directors are not in charge of the company when the offence over the cheque involved was committed, does not require to be considered. Criminal proceedings against the petitioners/accused No.3 to 6 and also other accused as well in S.T No.305 of 2011 on the file of Chief Judicial Magistrate Court, Kozhikode are quashed under Section 482 of the Code. Crl. M.C is disposed of as above.