Court slaps over Rs 1 crore fine on Elder Pharma

The case stemmed after a complaint was filed by the director of Ankola Paper Mills Private Limited against Elder Pharmaceuticals (Accused Company), its Managing Director (Accused No. 2), a Director and Authorized Signatory (Accused No. 3), and its Chief Operating Officer (Accused No. 4).

Accused Nos. 2 to 4 had approached Ankola Paper Mills seeking an inter-corporate deposit as a short-term financial arrangement for Elder Pharmaceuticals. A formal agreement was reached, under which Ankola provided Rs 85 lakh to Elder Pharmaceuticals as a short-term inter-corporate deposit at an interest rate of 11.5% per annum. Later, Elder Pharmaceuticals, through Accused Nos. 2, 3, and 4, issued a post-dated cheque of Rs 91,68,575 along with a covering letter.

However, when the complainant deposited the cheque with their bank, it was returned unpaid with the remark "Account Closed." The complainant was then notified of the cheque's dishonor.

After the cheque bounced, the complainant issued a demand notice to the accused. However, even after receiving the legal notice, the accused failed to make the payment.

As a result, a complaint was filed, and proceedings were initiated against Accused Nos. 1 to 3. The complaint against Accused No. 4 was dismissed, and Accused No. 2 passed away.

The court referred to Section 139 of the NI Act, which presumes that a cheque is issued for a legally enforceable debt unless proven otherwise. Here, the court noted that the accused failed to rebut this presumption.

Additionally, the court cited Section 141 of the NI Act, which requires the complainant to prove that a director or partner was actively involved in the company’s daily business operations at the time of issuing the cheque.

Referring to the Supreme Court ruling in S.P. Mani & Mohan Dairy vs. Dr. Snehalatha Elangovan (2022 LiveLaw (SC) 772), the court emphasized that specific allegations must be made in the complaint to hold a director liable.

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In this case, the court found that the complainant did not provide evidence proving that Accused No. 3 (Director) was involved in the company’s daily operations when the cheque was issued.

The court observed;

"Although Accused No. 1 is under liquidation, its legal existence as an entity has not ceased. There is no evidence to suggest that the company has completely shut down. Hence, Accused No. 1 remains liable under Section 138 of the NI Act."

It was also established that Accused No. 3 was neither a director nor actively involved in the company's operations at the time of issuing the cheque, making him eligible for acquittal.

As a result, the court convicted Elder Pharmaceuticals (Accused No. 1) under Section 138 of the NI Act and imposed a fine of Rs 1,83,37,150 crore (double the cheque amount of Rs 91,68,575). Subsequently, Justice Prashant S. Ghodke noted;

"I hold that Accused No. 1 issued the cheque to the complainant to discharge a legal liability. The cheque was presented to the bank but remained unpaid even after the statutory demand notice."

According to a recent media report in Live Law, additionally, the company was ordered to provide a personal bond of Rs 30,000 and a cash bail of Rs 30,000.

However, Accused No. 3 (Director) was acquitted.