Dushyant D. Anjaria Case

Facts of the Case

The respondent in case M/S Wall Street Finance Ltd filed a complaint against M/S Integra Funds Management Ltd, Mr Sumir Nagar, Mr D.D Anjaria and M.s Shakuntala Nagar in the court of 4th Chief Metropolitan Magistrate, Girgaum, Mumbai[1]. The first accused company[2], M/S Integra Funds Management Ltd, approached the complainant[3],for finance to purchase some machineries and a lease agreement was executed between both parties on the 31st of January, 1997. The lease agreement was for Rs. 31, 89, 368 wherewith the amount was payable in 35 months with installments of Rs. 71, 507 per repayment schedule of the lease agreement and the first installment was Rs. 6,86,623. The Complainant posited that the accused issued 2 cheques dated 19/11/1997 for Rs. 76,091 and the second cheque dated 19/01/1998 for Rs. 79,220. Both cheques drawn on Centurion Bank Limited were however dishonored because of lack of sufficient funds. The Complainant then sent a notice dated 14/05/1998 bringing to fore the dishonored cheque and demanding that payment be made to them. The said notice of the complainant was sent by a registered post, where it was said to have been served on 18/05/1998. When no payment was made or received by the complainant within fifteen days, the complainant filed a complaint and they prayed that process be issued against the accused persons[4]. The additional Chief Judicial Magistrate issued the process against all the accused persons. The present petitioner[5], in response in case made an application before the concerned Metropolitan Magistrate for recall of the process. The application was however rejected dated 25/01/2000 which gave rise to the present criminal writ petition.

The learned counsel for the petitioner in case posited that the Petitioner was co-opted as an additional director of the first accused company on 13/04/1992.  The present Petitioner resigned as an additional director of the company on 2/12/1992 and claimed that for the alleged offence committed by the first accused company in respect of dishonoring the two cheques which happened in 1998, he cannot be prosecuted and no process could have been issued against him. The legal counsel for the petitioner further stated that since the petitioner was appointed as an additional director of the first accused company on 13/04/1992, even if it had shown he had not resigned on 2/12/1992, he ceased to be director on the last date on which the first annual general meeting of the accused company should have been held[6] under Section 166 of the Companies Act.[7]

Also, the private limited company changed to the public limited company on 2/6/1992 and which meant that the first annual general meeting was required to be held latest by 16th of March 1993 within eighteen (18) months from the date of incorporation of the private limited company.

However, the counsel for respondent in case one[8], claimed that the resignation document given by the present petitioner came into existence after the complaint was filed by them and the position raised by the petitioner on being an additional director should not be accepted. They also posited that on the claim raised by the petitioner that he had vacated his office on the last day when the annual general meeting should have held, such claim should be disregarded as the petitioner never raised such ground in his application for recalling the process and should not be raised by the court.

The trial court in case rejected the contention of the petitioner that he resigned on 2/12/1992 because the first accused company failed to file the resignation of the Petitioner in the office of the registrar of companies until 17/11/1998 after the complaints was already filed including the petitioner. The trial court posited that the delay in filing was never explained by the petitioner.

However, this position was contended as the Division Bench of the Madras High Court posited that since the petitioner was not appointed an additional director at the time the general meeting was to be held, he ceased to be an additional director with effect from the date, as it was open for the board to reappoint him and it was impossible for him to explain why his resignation was never filed till later. The criminal writ petition was allowed as well as the Petitioner’s application for recall of process. The order passed by the additional chief metropolitan magistrate was thus quashed. The complaint against the present petitioner was dismissed.

Issues for Court’s Determination and Analysis for Case

Issues in case are as follows:

• Whether the same charges could be brought against accused one (the company) and accused two-four (the directors).
• Whether there existed any record that showed that the petitioner already vacated his office.
• Whether petitioner could have been blamed for the first accused company’s failure in filing his resignation in the office of the registrar of companies.
• Whether documentary evidence was needed in addition to the form presented to verify the Petitioner’s resignation and receipt by the first accused company.[9]

A Company as A Legal Entity

In a company setting where liabilities and obligations can be imposed, it is always important to draw a fine line between a company and individuals who run the company.

A company as a legal entity simply means such company has legal rights and responsibilities which is clearly distinguishable. Hence, such company can sue and be sued, assume obligations, incur debts as well as enter into agreements.

Lord Macnaughten[10] posited,

“The company is at law a different person altogether from the subscribers to the memorandum and although it may be that after incorporation, the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or the trustees for them. Nor are subscribers as members liable, in any shares of form, except to the extent and in the manner provided by the Act”

Note that the principle of separate legal entity will only exist when a company has proper incorporation (registered under the due process and in accordance with the existing legislation that governs companies’ affairs).

It needs to be emphasized that shareholders cannot and should not be held responsible and liable for acts of the company which is supposed to be a separate legal entity. This also applies in cases when such shareholder(s) holds literally all the shares capital in the company which is a general rule.[11]

Provisions of Concerned Legislations

For the purpose of better clarification and how such legislations brought up in the charge applies, recourse would be made to the Negotiable Instrument Act 1881 and the Indian Penal Code, under which the complaint was filed.

According to Section 138[12], it provides thus;

“Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honor the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with a fine which may extend to twice the amount of the cheque, or both…………………”

Note that under this section, there is no provision for companies which have been incorporated, or to individuals being joined in a suit as a result of loans made by the company for the company.[13]

Section 141 of the same Act which is also key to understanding the application of the Act to the charge, deals with dishonoring of cheques drawn by companies and it extends its liability to individuals who were involved in the company’s business when the offence was committed. Here, the office of the Director comes within this scope of category.

However, for the provision of section 141 to apply, the offence of section 138 should have been committed as a principal offence.[14]

In Aneeta Hada V Godfather Travels and Tours Private LTD[15], it was held that the company has to be prosecuted first and only then can the person responsible can be vicariously liable.

Having established that, can we say the first respondent was wrong in bringing its complaint not just against the company, which in this case is the first accused company but also against accused 2 to 4, which also includes an additional Director at the same time?

The concept of additional director would be explained as we proceed in the analysis.

Section 420 of the Indian Penal Code provides;

“whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to 7 years, and shall also be liable to fine”.

Note that a cheque cannot qualify as a property. It is a bill of exchange and can also be called a security which the latter part of the provision covers. However, while the latter part of the provision stipulates altering, making or destroying a valuable security which is capable of being converted into a valuable security, this provision should not fall under the purview of charges raised as a result of dishonored cheques.

One question that comes to mind is can directors be liable and if so, how liable can they be toward the actions and inactions of a company?

It has been established already that a company is a separate legal entity and individuals running such companies are not to be held liable for affairs of the company. However, it is noteworthy to posit that Director’s liabilities or the supposition of it, arises because of their position as agents/ trustees of the company as they stand in a fiduciary relationship with the company.[16]

Additional Directors and Directors

Section 260 of the Act provides;

“Nothing in section 255, 258 or 259 shall affect any power conferred on the board of Directors by the articles to appoint additional directors:

Provided that such additional directors shall hold office only up to the date of the next annual general meeting of the company……”[17]

An additional director has all the powers, obligations, duties as well as limits as a regular director. The only significant difference is on the ‘who’ and ‘how’ in appointment.

An additional director is appointed by the board of Directors while a director is appointed by shareholders in a general meeting.

An additional director would remain an additional director if 2 requirements are fulfilled;

•  A resolution proposing him as additional director is passed; and
• The resolution is passed at an annual general meeting.

Can actions be brought against him?

There are some circumstances in which an additional director (who also share same powers with a director), can be liable on behalf of the company. Such matters include tax issues[18], debt of a company (particularly where there is fraud) and offences under Labour Law[19].

Having examined who an additional director is and in relation to the case, was there any record that showed that the petitioner already vacated his office at the time he said he did?

The Memorandum of Articles and association showed that at the time accused two and four were directors of the first accused company, the petitioner resigned on 2/12/1992 which was accepted that same day and he ceased to be an additional director.

Conclusion of Case

Ordinarily, one way a director could be removed from his office is if he fails to attend 3 general meetings. When this happens, the director is automatically removed and ceases to be a director. In the present case, considering the longevity of the receipt of the resignation letter and filing of the complaint (1992-1998), there is no doubt that the director already failed to attend three general meetings, which is one of the stipulations for removal.

Hence, with or without positions raised on whether documentary evidence was presented or the resignation was submitted in the office of the registrar of companies, subscribing to a Latin maxim,”res ipsa loquitur”, the fact speaks for itself and evidences the petitioner’s withdrawal from the first accused company. The input of the annual general clause contained in the companies Act[20] emphasizing on the reappointment of additional directors by the board is deducible that the petitioner ceased to be an additional director from 16/03/1993, when the annual general meeting was to be held. [21]

Also, it is important that the first accused company be reprimanded for their nonfeasance in respect to submitting the petitioner’s resignation letter in the office of the registrar of companies.

References:

[1] Section 138 to 142 of the Negotiable Instrument Act 1881 as amended by Act 66/88 and Section 420 of the Indian Penal Code 1860.

[2]The accused no 1 is the company and accused no 2, 3 and 4 are Directors of the Company.

[3]Thecomplainant is M/S Wall Street Finance Ltd

[4]Under section 138 of the Negotiable Instruments Act as well as under section 420 of the Indian Penal Code

[5]The present petitioner and accused three is Dushyat D. Anjaria

[6]Section 260 of the Companies Act 1956 [Act No. 1 of 1956]

[7]Section 166 stipulates that a company shall in each year hold in addition to any other meetings a general meeting as its annual general meeting, specifying the meeting in the notices.

[8]M/S Wall Street Finance Ltd (formerly the complainant)

[9] Just as the name implies, documentary evidence are evidence presented in a document beit in letters, deeds, certificates, as long as it is presented at trial in writing and is evidenced in a tangible manner which gives it more authenticity..

[10]Salomon V Salomon & Co(1897) AC 22

[11] Note that to every general rule, there is always an exception.

[12]The Negotiable Instrument Act 1881

[13]The latter part of section 138 provides for 3 exceptions to the section and the punishments attached.

[14]A principal offence is the most serious offence

[15](2012) 5 SCC 661

[16] Fiduciary relationships only arises where there is a duty of care and Party A owes such duty to party B.

[17]Companies Act 1956

[18]Section 179 of the Income tax 1961

[19] Note that additional directors are appointed as Occupiers under the Factories Act 1948, particularly in Section 2(n)(ii).

[20] Section 260 of the Companies Act 1956

[21]Section 260 of the Companies Act 1956.