Form 32 of the Companies Act and its use in determining offences under the Negotiable Instruments Act

September 24, 2019

The Negotiable Instruments Act, 1881, puts a vicarious liability on the Officer of a Company as per sec. 141 (1) and (2) i.e. 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, shall be deemed to be guilty of the offence u/s 138 of the Act.

Thus if the offence u/s 138 of the Act is committed by a Company, then the Directors are automatically pulled into the ambit of the same.

The only saving grace is when the Director can prove that the offence was committed without his knowledge or he had exercised all due diligence to prevent the commission of such offence.

Thus any person, who, when an offence u/s 138 of the Act is committed, was responsible for the conduct of the business of the company under the law, and was incharge at the relevant point of time, shall be held to be liable.

In the National Small Industries Corporation Vs. Harmeet Singh Paintal, (2010) 3 SCC 330, the Apex Court has held that merely because the Directors are in-charge of the affairs of the company should not be a sufficient cause to make them as an accused but there should be specific averments in the complaint against them, as to how and in what manner they were responsible for the conduct of the business. Moreover, Vicarious Liability should not be pleaded but it must be proved.

Further, in SMS Pharmaceuticals vs. Neeta Bhalla [2005] 68 CLA 192 SC it was held that since Section 138 imposes a criminal liability, the provisions of the Act are to be strictly complied with. Moreover, the Liability arises not because of simply holding a post of the Director but because of being in charge of and responsible for the conduct of the business of the company.

Thus one of the defence by which a Director can benefit from is not being in charge of the business of the company on the relevant day:

  1. If he is not in-charge of the everyday business of the company, then by merely being a director, he cannot be held as an accused in the offence. As mentioned earlier, there should be specific averments against him. In the case of Shushatna J. Sarkar & Anr. Vs. State of Maharashtra 2014 (1) MhLJ 214, the complaint did not show what role the director had played. It was observed that the averments were not sufficient to make them vicariously liable for an offence u/s 138.
  2. Similarly, the Directors nominated by Central or State Government are kept outside the purview of this section by virtue of their holding any office or employment in such Government or Financial Corporation owned or controlled by the Government. In case of K. Shrikant Singh vs. North East Security Ltd.and others, J.T. 2007 (9) SC 449. The Hon\’ble Apex court observed that vicarious liability on the part of a person must be pleaded and inferred.
  3. Further, in N.K. Wahi Vs. Shekhar Singh, AIR 2007 SC 1454, it has been held that before a person is made vicariously liable, strict compliance with the statutory requirements would be insisted. Further, it is held that there can be no deemed liability of the director and the fact that he was a director in charge of business at the relevant point of time is to be averred. The same has been stated in A.K. Singhania Vs. Gujarat State Fertilizer Co. Ltd. & Anr. Where in if there are no specific averments that he was a director in charge of business at the relevant point of time, in the complaint then the Director cannot be held to be vicariously liable, and the prosecution against him is liable to be quashed.
  4. In Girdhari Lal Gupta Vs. D.H. Mehta & Anr. (1971) 3 SCC 189, it has been held that a person ‘in charge of a business’ means that the person should be in overall control of the day to day business of the Company.

Thus the most important factor is that the person should be in-charge on the relevant day. In the case of a Director who has already resigned from the company, if the offence occurs after he has resigned, then merely because he was once a director or his name appears in the public domain i.e. the web-site of the company, he is considered to be vicariously liable, is something which is not acceptable to the law.

In such cases, Form 32, under the Companies Act, 1956 comes to aid. Form 32 is filed with the Registrar of Companies and it indicates the status of the Directors. Thus when a Director resigns, and his resignation is accepted by the Company, the Company becomes obliged to file a Form 32 with the ROC indicating change in status of the Directors.

It was held in Mrs. Anita Malhotra vs. Apparel Export Promotion Council & Anr. (Cri. Appeal No. 2033 of 2011) (S.C.) that if the person has proved of his resignation on the relevant date when the offence has occurred, then the proceedings against such a person are liable to be quashed.

Similarly, it was held in DCM Financials Vs. J. N. Sareen & Anr. (2008) 8 SCC 1, that if the Person-in-charge has resigned with the knowledge of the complainant and is not in charge of the business of the company on the relevant date, then he could not be made responsible for the offence.

In such a case, FORM 32 can prove conclusively the position of a director on the relevant date. It is necessary for a person to file a certified copy of FORM 32 before the Court.

Moreover in the case of Sudeep Jain Vs. M/S ECE Industries, CRL. M.C. 1821/2013, the Hon’ble High Court of Delhi has issued guidelines, in which it has directed the Magistrates to seek copies of FORM 32 from the Complainant, in order to prima facie satisfy the Court as to who were the Directors of the accused company at the time of commission of the alleged offence.

Besides a certified copy of FORM 32, the annual return filed by the Company, the Minutes of the Meeting, etc. can also be brought on record in order to prove that the said Director was not in-charge of the conduct of the business of the company on the relevant date. The same is seen in the case of Pooja Ravinder Devidasani Vs. State of Maharashtra & Ors. Cri. Appeal No. 2604 – 2610 / 2010 (S.C.).

Similarly in Manish Kant Agarwal vs. M/S,. National Agricultural Co-operative Marketing Federation of India Ltd. & Anr. It has been held that when the Director has tendered his resignation, and the Board of Directors has accepted it, and acted on it, then such a Director cannot be held to be liable.

However in the case of Suhas Bhand Vs. State of Maharashtra & Anr. Cri. W.P. No. 1194 / 2008, & 2331 / 2006, it has been held that if the complainant produces any evidence showing the continuance of the accused as the Director of the Company after the date of resignation claimed by him as per the certified copy of FORM 32, then such accused cannot be discharged on the production of FORM 32, and he would have to lead evidence to prove the factum of his resignation.

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