Breaking ; #Dishonour of cheque issued by a company: Notice to individual directors of the company not contemplated under Section 138 of the NI Act : SC [Read the Judgment]

Answering the issue whether notice under Section 138 of the Negotiable Instruments Act is mandatorily required to be sent to the directors of a Company before a complaint could be filed against such directors along with the Company in case of dishonor of a cheque issued by the drawer-Company, the Supreme Court in an important decision rendered today, has clarified that Section 138 of the Act does not admit of any necessity or scope for reading into it the requirement that the directors of the Company in question must also be issued individual notices under Section 138 of the Act.

“Such directors who are in charge of affairs of the Company and responsible for the affairs of the Company would be aware of the receipt of notice by the Company under Section 138. Therefore neither on literal construction nor on the touch stone of purposive construction such requirement could or ought to be read into Section 138 of the Act,” said the Supreme Court while allowing an appeal by Special Leave preferred against a Bombay High Court judgment which had held otherwise.

A cheque dated 08.09.1996 drawn by M/S Indo French Bio Tech Enterprises Ltd (‘the Company’ for short) on Dena Bank, New Marine Lines, Mumbai in favour of the appellant was returned on 10.9.1996 with endorsement “funds insufficient”, pursuant to which a notice dated 14.09.1996 under Section 138 of the ‘Negotiable Instruments Act, 1881’(hereinafter referred to as “the Act”) was issued on behalf of the appellant calling upon addressee (the company) to make the payment of the cheque amount within 15 days of the receipt of such notice. No reply was sent to the aforesaid notice dated 14.9.1996.

This led to the institution of proceedings by the appellant before the Additional Chief Metropolitan Magistrate, 5^th Court at Dadar, Mumbai against the Company, Mr. K.J. Bodiwala, the Chairman and Managing Director of the Company and 11 other directors including respondents 1 and 2 in the appeal before the Apex Court.

In so far as the directors were concerned, it was averred that they were in-charge of the business of the Company and its day to day affairs and were liable. During the pendency of said complaint case, the process issued against Accused Nos. 3 to 5, 7, 9 to 13 was recalled and due to the death of Mr. Bodiwala the proceedings as against him also abated, which left the Company and the present respondents 1 and 2 namely Ms. Ila A. Agrawal and Mr. Prafulla Ranadive, Accused Nos. 6 and 8 respectively in the array of accused.

It was found on facts that no individual notices were given to the directors by the appellant company.

Relying on the judgment of the Division Bench of Madras High Court in B. Raman & Ors. Vs. M/s.Shasun Chemicals and Drugs Ltd. reported in 2006 Cril. L.J. Page 4552, wherein it was held that statutory notice under Section 138 of the Act was required to be issued to every Director and for non- compliance of such mandatory requirement respondents 1 and 2 could not be proceeded against, the Metropolitan Magistrate by his judgment and order dated 30.4.2007 convicted the Company but acquitted respondents 1 and 2 of the offence punishable under Section 138 of the Act.

Aggrieved by the judgment rendered by the Metropolitan Magistrate, the appellant approached the High Court of Judicature at Bombay seeking leave to prefer appeal against the judgment acquitting respondents 1 and 2. It was the contention of the appellant that it was not necessary to serve individual notice upon the directors and it was sufficient if the notice was served on the Company

The Bombay High Court, relying on the judgment of the Division Bench of Madras High Court in B. Raman & Ors. (supra) observed that it was mandatory to have issued separate notices to the directors, and concluded thus:

“If the legal fiction is created by Section 141 to make directors who are responsible for day to day affairs of the Company, punishable under Section 138, then it is necessary that they get an opportunity to rectify, the mistake or clarify matters after service of notice. So before making the complaint against the directors, notice necessarily must be served on them. In my opinion without service of notice to accused Nos. 6 & 8, vicarious liability of the offence under Section 138 cannot be fixed upon them.” 

Mr. Ajit Anekar, Counsel for the appellant-company urged before a Bench of the Apex Court comprising of Justices Pinaki Chandra Ghosh and Uday Umesh Lalit that Section 138 does not contemplate issuance of separate notices to the directors and that no such requirement ought to be read into said Section.

Mr. Shree Prakash Sinha and Mr. Ashok Bhatia, learned Advocates appearing for respondents relied upon the decision of the Division Bench of Madras High

Court in  B. Raman & others (Supra). It was submitted that though the issue whether such separate notices are mandatorily required to be given to the Directors had not squarely arisen, paras 10 & 11 of the decision of this Court in N.K. Wahi v Shekhar Singh [(2007)9 SCC 481] did speak of such notices.

The Apex Court perusing the decision of this Court in N.K. Wahi (supra) held that the said decision the issue of whether it is obligatory to issue separate notices to the Directors in addition to the Company, before initiating anyproceedings against them had not arisen for consideration in that case.

Holding thus, the Bench proceeded to answer the said issue after referring to the statutory provisions.

Adverting to Section 138 of the Act, the Bench said that the notice contemplated therein is required to be given to “the drawer” of the cheque so as to give the drawer an Opportunity to make the payment and escape the penal consequences. No other person is contemplated by Section 138 as being entitled to be issued such notice.  “The plain language of Section 138 is very clear and leaves no room for any doubt or ambiguity. There is nothing in Section 138 which may even remotely suggest issuance of notice to anyone other than the drawer,” said the Bench.

Thereafter, interpreting the purport and scope of Section 141 of the Act, the Bench said, Section 141 again does not lay down any requirement that in the eventuality of an offence under Section 138, the directors must individually be issued separate notices under Section 138. “The persons who are in charge of the affairs of the Company and running its affairs must naturally be aware of the notice of demand under Section 138 of the Act issued to such Company. It is precisely for this reason that no notice is additionally contemplated to be given to such directors,” said Justice U.U. Lalit writing the judgment for the Bench.

The Apex Court further said that if it was the contention of the directors arrayed as the accused in a prosecution under the Act, that the offence was committed without their knowledge or that they had exercised due diligence to prevent such commission, it would be a matter of defence to be considered at the appropriate stage in the trial and ‘certainly not at the stage of notice under Section 138’.

The Court also said that if the requirement that such individual notices to the directors must additionally be given is read into the concerned provisions, it will not only be against the plain meaning and construction of the provision but will make the remedy under Section 138 wholly cumbersome.

The Apex Court accordingly overruled the decision of the Division Bench of the Madras High Court in B. Raman & Ors. Vs. M/s. Shasun Chemicals and Drugs Ltd. (supra) holding that it was incorrect.

Read the Judgment here.