XYZ and associates.

Vijaynagar-3
New Delhi
Phone number: 0422-2345678 FAX: 222333444
Email: XYZ [email protected]
Balapragatha M
XYZ and associates.
Vijaynagar-3
October 20, 2015
Ajay,
Director,
123, jayanagar,
New Delhi- 131008

Confidential Attorney/Client Communication

Re: Clarifications of your queries regarding section 138 NI act and the liabilities of the
relevant party.

Dear Mr.Ajay,

Hope you are doing well. In our first meeting we had a primary discussion regarding

the criminal proceeding launched by Alpha Fincrop (P) Ltd against you.Recently you wrote

to us to seek guidance regarding Section 138 of the Negotiable instruments act. I have

analyzed section 138 and 141 of the Negotiable instruments act (NI) and the other related

statutory provisions in relation to the facts of the case. This letter summarizes the facts, as I

understand them and my analysis of your queries.

Under the facts as I understand them, Xylo Pvt. Ltd. Co. and Yellow Pvt. Ltd. Co.

entered into a loan agreement with Alpha Fincrop (P) Ltd., a Non-Banking Financial

Company. You being the common director of both the private limited companies, signed the

agreement for a debt of Rs. 4 Crores with the representative of Alpha Fincrop (P) Ltd. For

this purpose,you, in the capacity of a director, had also issued four cheques which are undated

and under the seal of the Xylo Pvt. Ltd. Co. Due to the default in payment of the loan, Alpha

Fincrop (P) Ltd. Fincorp (P) Ltdpresented the cheques issued as security to the bank, which

weredishonoured due to “insufficient funds”. Alpha Fincrop (P) Ltd issued the statutory
demand notice through “Speed Post” to Xylo Pvt. Ltd. Co., Ajay and Beena, within 30 days

after the intimation was received by it from the bank. The notice to Xylo Pvt.Ltd.Co. was

undelivered due to “Door Locked”. Further, Ajay refused to take the delivery of the notice to

him. However the notice to Beena was successfully delivered. You mentioned to me that no

payment has been made yet. With respect to this, Alpha Fincrop (P) Ltd. has started criminal

proceeding only against Xylo Pvt. Ltd. Co.,You and Beena. Yellow Pvt. Ltd. Co. was not

made co-accused. Now, you and Beena have filled a revision petition since Alpha Fincrop (P)

Ltd.’s complaint was deprived of material particulars regarding the role of both directors with

respect to the transaction in question. For the ease of understanding, I have divided my

analysis into four broad categories; (I) the authority of statutory demand notice under section

138 and ingredients of valid delivery(II) liability of borrower and co-borrower, (III) legality

of Yellow Pvt.Ltd. Co.not being an accused to the case and (IV) the liability of Beena as a

non-executive director.

I) S.138 of the Negotiable Instruments Act and legality of statutory demand notice.

Section 138. of the NI act, as we discussed, deals with offence of a cheque being

dishonoured.According to this section, a cheque must be drawn for discharge of any liability.

In furtherance to the same,the court in Sampelly Satyanarayana Rao v Indian Renewable

Energy Development Agency Limited observed that a cheque issued as a security in

consideration of an existing liability would be covered underSection 138. Further, if the

cheque were to be returned unpaid due to insufficiency of funds, as in this case, or if the

amount exceeds the arrangement made with the bank, the person is said to have committed an

offence under Section 138. For this section tobe invoked, there are certain requirements that

have to be satisfied. Firstly, the cheque ought to have been presented to the bank within a

period of 6 months (3 months as per RBI guidelines) from the date on which it is

drawn.Secondly, the holder must make a demand for the payment of the said amount of
money to the drawer of the cheque by giving a notice in writing within 30 days of the receipt

of the information from the bank regarding the dishonoured cheque.Thirdly, the drawer of

such a cheque should have failed to make payment of the said amount of money to the payee

within 15 days of the receipt of the said notice. If an act satisfies these requirements, it would

constitute an offence under Section 138 of NI act and the accused would be punished with

imprisonment for a term which may extend to two years, or with fine which may amount to

twice the amount of the cheque, or with both. Based on the information provided by you,

Alpha Fincrop (P) Ltd. has fulfilled the needed requirements as set out in aforementioned

section.

In regards to your question concerning what constitutes a valid delivery, as per

Section 27 of the General Clauses Act, 1897, and in cases such asIndo Automobiles v. Jai

Durga Enterprises, (2008) 8 SCC 529, K. Bhaskaran v. SankaranVaidhyanBalan, (1999) 7

SCC 510, a presumptionof valid delivery is observed. It is presumed that once a notice is sent

by registered post by correctly addressing it to the drawer of the cheque, the service of notice

is deemed to have been effected. In the light of the present case,the notice sent to Xylo Pvt

Ltd. Co., was undelivered due to “Door locked”. The Supreme Court in a catena of casessuch

as N. ParameswaranUnni v. G. Kannan, (2017) 5 SCC 737.Harcharan Singh v. Shivrani,

(1981) 2 SCC 535; and in Jagdish Singh v. Natthu Singh, (1992) 1 SCC 647has upheld that

due service of notice will be presumed when a notice is sent by a registered post and is

returned with postal endorsement as “refused” or “not available in the house” or “house

locked” or “shop closed”.

With respect to the notice that was served to you and Beena, in the case of Krishna

Texport& Capital Markets Ltd. v. Ila A. Agrawal &Ors Criminal appeal No.1220 of 2009

becomes relevantthe court held that separate notices to all the individual directors are not

necessary. Hence, in my opinion, the court would consider the notice to Xylo Pvt. Ltd. Co. as
a valid and satisfactory delivery of notice. Under the facts, even if a court were to look into

the validity of the notice served to you, they are likely to apply that a ‘refusal’ of acceptance

is considered valid as provided in the above mentioned case. Hence, if you think there

ismaterial information with respect to the delivery that would contradict this presumption, we

could discuss more about it in the next meetings.

2) Rights and liabilities of Borrower and Co- Borrower:

Under Section 42 in The Indian Contract Act (ICA) a devolution of joint liability is

discussed. So, when two parties, here Xylo Pvt. Ltd. Co. and Yellow Pvt. Ltd. Co., have

made a joint promise to a third party then the parties are jointly and severally liable to fulfil

the promise. Additionally, Section 43 of Indian Contract Act provides that any one of joint

promisors can be compelled to perform by the promisee. The section further provides that

joint promisors have the right to compel the other joint promisors to contribute equally to

perform the promise. Hence applying these statutory provisions, Xylo Pvt. Ltd. Co and

Yellow Pvt. Ltd. Co.must receive and repay the loan jointly providing rights to Xylo Pvt. Ltd.

Co. to sue Yellow Pvt. Ltd. Co. for its part of the liability in the loan agreement.

3) Legality of Yellow Pvt. Ltd. co. not being an accused to the case:

In AneetaHada v. Godfather Travels and Tours Private Limited, the court discussed

the issue of whethera proceeding is lawful if only its Directors or Authorized signatory of a

company, are made an accused without joining the company.It was held that only if the

company is made an accused to the case,vicariousliability for the offence under section 141

of NI would apply. However, the offence under section 138 pertains only to the person who

has drawn the cheque on the account maintained by him with the banker. To sum up , based

on the facts as I have recited in this letter , I believe that a court would conclude that Xylo

Pvt. Ltd. Co. being a party to the case is only the prerequisite, as cheque was drawn by you in
the capacity of director of and under the seal of Xylo Pvt. Ltd. As the cause of action in the

present proceeding is the dishonoured cheque and Yellow Pvt Ltd is not a party to the case, it

may not be bad in law to not include it is a party to the case.

4)Liability of a Non- Executive Director:

The Directors of a company are held liable under Sec 141 for offences under Sec 138

as they stand in a fiduciary position with the company and are expected to manage the affairs

of the company in a manner beneficial to the interest of the company and its stakeholder. But,

Nonexecutive directors (NEDs) or independent directors (IDs) are not in charge with the

daily affairs and management of the company.

Before analysing the liabilities of Beena as a Non- executive Director(NED) as

ascertained by you, we have to understand whether Beena would qualify as one.

UnderSection 149(6) of the Companies Act, 2013 there are certain requirements that has to

be fulfilled for a person to qualify as an NED. One of the requirement, that is most relevant in

this case is, that he/ she should not be related to any promoters or directors of the company or

any key managerial personnel in the company. Furthermore, as per Regulation 67 of SEBI

(Listing Obligations & Disclosure Requirements) the husband and wife relation is under the

purview of ‘relation’. You have mentioned that you have applied for a divorce decree, but

this may not assist in proving Beena’s position as an NED, as at the time of taking the loan

her eligibility for being an NED is in question. There are many other requirements which are

included in the regulation, as the facts are silent about these I couldn’t provide the analysis

for the same. If you want to discuss them further, I would be very happy to set up a meeting.

Nonetheless, in many cases such as S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, the

supreme courts, have observed that the liability under section 138 and 141 of the NI Act
doesn’t arise only on the account of a person holding office as such but have had knowledge

regarding the transactions in question and must have had a role to play in the day to day

activities of the company relation. Lastly, under section 149(12) of the Companies Act, it is

possible to acquit even a director if he/she proves that the offence in question was committed

without his/her knowledge. Hence, if we are able to provide evidences that she didn’t have

knowledge regarding the transaction is question, then the court would not hold her liable.

I hope this answers your queries. Also, if there are any misstatements of fact in this letter it is

important you contact me when possible. Should you have any questions or seek

clarifications, please do not hesitate to contact me.

Best Regards,

Balapragatha M