As per case facts, M/s Rainbow Papers Limited, whose director is the Appellant, sought loans from the Respondent. A post-dated cheque issued for an installment was dishonoured, leading to a ...
REPORTABLE
IN THE SUPREME COURT OF INDIA
CRIMINAL APPELLATE JURISDICTION
CRIMINAL APPEAL NO.172 OF 2023
AJAY KUMAR RADHEYSHYAM GOENKA …APPELLANT
Versus
TOURISM FINANCE CORPORATION
OF INDIA LTD. …RESPONDENT
With
Crl. A. No.170/2023
Crl.A. No.171/2023
J U D G M E N T
SANJAY KISHAN KAUL, J.
Factual Background:
1.M/s Rainbow Papers Limited (company incorporated and registered
under the Companies Act, 1956), of which Ajay Kumar Radheyshyam
Goenka, the Appellant before us, was the Promoter and Managing Director,
sought loans from a public financial institution, Tourism Finance
Corporation of India Limited, the Respondent before us, to fulfil its various
1 2023 INSC 232
corporate requirements. The proposal of the company was considered by the
Respondent and approval was granted for a Term Loan of Rs. 30.00 crores.
In pursuance to the approval, a Loan Agreement was executed on
27.03.2012 in New Delhi.
2.In order to satisfy its obligations under the Agreement, the Accused
company issued post-dated cheque of Rs. 25,47,945/- bearing cheque
number 090656 dated 15.02.2016, drawn on Indian Overseas Bank, Kalupur
Circle Branch, Railway Pura, Ahmedabad, towards the payment of one of
the instalments. On the cheque being presented to the bankers of the
Respondent i.e., HDFC Bank Limited, Nehru Place Branch, New Delhi, the
cheque was returned vide Memo dated 07.04.2016 for the reason “Account
Closed”.
3.On 19.04.2016, a demand-cum-legal notice under Section 138 of
Negotiable Instruments Act, 1881, (hereinafter referred to as ‘the NI Act’)
was issued on behalf of the Respondent calling upon the company as
Accused no.1 and the Appellant herein as Accused no. 2 to settle the debt
advanced by way of corporate loan dated 27.03.2012. The Accused
acknowledged their liability to pay the loan amount vide reply dated
28.04.2016. The amount was not paid and, thus, on 16.05.2016, Criminal
Complaint No. 632982/2016 was filed in the Court of Chief Metropolitan
2
Magistrate, Saket Courts, New Delhi, under Section 190 of the Code of
Criminal Procedure, 1973, read with Section 138
1
, Section 141
2
and Section
142
3
of the NI Act. The complaint was signed and verified by Mr. N.
Ramachandran, Deputy General Manager (Law) of the Respondent
company. An endeavor for mediation was made but was not successful and,
thus, the next date was scheduled before the Magistrate for 15.01.2018. In
the meantime, a development, which took place, was that in 2017 M/s
Neeraj Paper Agencies Limited, styling itself as ‘Operational Creditor’, filed
an application under Section 9 of the Insolvency and Bankruptcy Code,
2016 (hereinafter referred to as ‘IBC’) read with Rule 6 of Insolvency and
Bankruptcy (Application to Adjudicating Authority) Rules, 2016,
(hereinafter referred to as ‘IB Rules, 2016’) with the request to initiate
Corporate Insolvency Resolution Process against the Accused company,
treating it as the 'Corporate Debtor'. The National Company Law Tribunal
vide order dated 12.09.2017 admitted the aforesaid insolvency application.
4.The Respondent herein filed its claim qua the debt, which was the
subject matter of the N.I. Act proceedings, on 13.10.2017. In terms of the
Resolution Plan dated 26.05.2018, the Resolution Applicant (Kushal
Limited) filed the Resolution Plan and during the course of meeting the
1
Dishonour of cheque for insufficiency, etc., of funds in the account.
2
Offences by companies.
3
Cognizance of offences.
3
Committee of Creditors on 05.06.2018, it was informed that the respondent
herein could not be considered as a Secured Financial Creditor as per
definitions contained in Section 3(30) and Section 3(31) of the IBC. In
effect, on legal advice, the Respondent was opined as an Unsecured
Financial Creditor. This resulted in the Respondent filing applications, in
the form of objections, before the NCLAT where the status was sought to be
changed from the Unsecured to Secured Financial Creditor.
5.Now turning back to the NIA proceedings, the Metropolitan
Magistrate passed an interim order dated 12.11.2018 dismissing the
application of the Appellant for exemption from personal appearance. This,
in turn, was predicated on the observations of NCLAT in Shah Brothers
Ispat Pvt. Ltd. Vs P. Mohan Raj &Ors, Company Appeal (AT) Insolvency
No.306 of 2018, opining that Section 138 of NI Act is a penal provision,
which empowers the court of competent jurisdiction to pass order of
imprisonment or fine, which cannot be held to be proceedings or any
judgment or decree of money claim. Thus, it would not come within the
purview of Section 14 of the IBC and, thus, the proceedings under Section
138 of the NI Act, 1881 could continue simultaneously.
6.The Appellant, thus, filed an application for discharge of the
Complaint Case in question herein in the present case, which was dismissed
4
by the Metropolitan Magistrate vide order dated 01.11.2019. The Criminal
Revision Petition preferred by the Appellant bearing Criminal Revision
Petition No. 784 of 2019 also met with a similar fate before the High Court
and was dismissed with cost of Rs. 20,000/- to be paid by the Appellant to
the Respondent. It is this order, which is now, sought to be assailed before
us.
Appellant’s submissions:
7.Mr. Nikhil Goel, learned counsel, sought to urge on behalf of the
appellant that the trigger of Section 138 of the NI Act, is the non-payment of
legally enforceable debt. Once the debt is itself extinguished, either under
Section 31 or in process from Sections 38 to 41 and 54 of IBC, the basis of
Section 138 of the NI Act disappears. We may note that these provisions fall
under Chapter III
4
of the IBC.
8.The term ‘Debt’ would mean ‘legally enforceable debt’ under the
Explanation to Section 138 of the NI Act and this may be read with Sections
2(6) and 2(8) of the IBC.
9.It was submitted that the nature of the proceedings under Section 138
of the NI Act is primarily compensatory in nature and the punitive element
is incorporated at enforcing the compensatory provisions. Therefore, once
4
Liquidation Process
5
recovery is made partly by the receipt of money and partly by waiver,
Section 138 of the NI Act should not be permitted to be continued.
10.It was lastly urged that if the debt of the company is resolved then the
payment would be governed under the Resolution Plan. If the debts are not
resolved, then the assets of the company are to be distributed in terms of
Section 53 of the IBC.
Plea of the Respondent:
11.On behalf of the Respondent, it was urged that the cheque was
given for repayment of the aforementioned loan amount of Rs.30 crore
for which the accused company agreed to repay the principal amount in
two installments with first installment of Rs.10 crore payable on
31.03.2015 and the second installment of Rs.20 crore payable on
31.03.2016. The accused company had to pay interest @ 15 per cent per
annum on the said principal amount of loan and such interest was payable
monthly on the 15
th
day of every month, which was in consonance with
the dates and the cheque amount.
12.It was urged that the accused company along with the Appellant
deliberately and with the mala fide intention gave the cheque to defraud
the Respondent to take loan from it and subsequently to usurp the loan
6
amount and hence had closed the bank account. The Appellant being the
signatory was directly liable along with the accused company. The
Appellant was actively involved in the day to day affairs of the company
as can be inferred from the aforementioned loan agreement signed by
him as well.
Our View:
13.We may note that on 20.09.2022 with some of the SLPs being
withdrawn, in respect of the SLPs in question, the interim order was
made absolute with the direction for urgent listing as criminal
proceedings had been stayed. Learned counsel for the parties stated that
they will file short synopsis not running into more than three pages each
and will not take more than 15-20 minutes each for their respective
submissions. On the conspectus of the aforesaid we heard the arguments
on 17.01.2023 when we granted leave and reserved the judgment.
14.The Appellant had submitted the synopsis in advance. The
Respondent however, despite assuring that they would submit the
synopsis has not cared to do so and we have gone on the basis of the
record. This position is prevalent right till 12.03.2023 and we do not
consider it appropriate to wait any more. We assume that the Respondent
7
is not interested in rendering any further assistance to the Court by filing
synopsis. Fortunately for them, for the reasons to be recorded hereinafter,
they have not really suffered the consequences thereof.
15.The issue whether the respondent is a Secured Financial Creditor
or an Unsecured Financial Creditor within the meaning of the said Code
is not something we can deal with as that is the matter of the proceedings
under the said Code or any appeal preferred therefrom. The only issue
with which we are concerned with is whether during the pendency of the
proceedings under the said Code which have been admitted, the present
proceedings under the N.I. Act can continue simultaneously or not.
16.We have no hesitation in coming to the conclusion that the scope
of nature of proceedings under the two Acts and quite different and
would not intercede each other. In fact, a bare reading of Section 14 of
the IBC would make it clear that the nature of proceedings which have to
be kept in abeyance do not include criminal proceedings, which is the
nature of proceedings under Section 138 of the N.I. Act. We are unable
to appreciate the plea of the learned counsel for the Appellant that
because Section 138 of the N.I. Act proceedings arise from a default in
financial debt, the proceedings under Section 138 should be taken as akin
8
to civil proceedings rather than criminal proceedings. We cannot lose
sight of the fact that Section 138 of the N.I. Act are not recovery
proceedings. They are penal in character. A person may face
imprisonment or fine or both under Section 138 of the N.I. Act. It is not
a recovery of the amount with interest as a debt recovery proceedings
would be. They are not akin to suit proceedings.
17.It cannot be said that the process under the IBC whether under
Section 31 or Sections 38 to 41 which can extinguish the debt would ipso
facto apply to the extinguishment of the criminal proceedings. No doubt
in terms of the Scheme under the IBC there are sacrifices to be made by
parties to settle the debts, the company being liquidated or revitalized.
The Appellant before us has been roped in as a signatory of the cheque as
well as the Promoter and Managing Director of the Accused company,
which availed of the loan. The loan agreement was also signed by him on
behalf of the company. What the Appellant seeks is escape out of
criminal liability having defaulted in payment of the amount at a very
early stage of the loan. In fact, the loan account itself was closed. So
much for the bona fides of the Appellant.
9
18.We are unable to accept the plea that if proceedings against the
company come to an end then the Appellant as the Managing Director
cannot be proceeded against. We are unable to accept the plea that
Section 138 of the N.I. Act proceedings are primarily compensatory in
nature and that the punitive element is incorporated only at enforcing the
compensatory proceedings. The criminal liability and the fines are built
on the principle of not honouring a negotiable instrument, which affects
trade. This is apart from the principle of financial liability per se. To say
that under a scheme which may be approved, a part amount will be
recovered or if there is no scheme a person may stand in a queue to
recover debt would absolve the consequences under Section 138 of the
N.I. Act, is unacceptable.
19.We are, thus, conclusively of the view that the impugned order
takes the correct view in law and cannot be assailed before us.
10
Conclusion:
20.The appeals are accordingly dismissed but without costs before us
on account of what we have recorded in para 14.
...................……………………J.
[Sanjay Kishan Kaul]
...................……………………J.
[Abhay S. Oka]
New Delhi.
March 15, 2023.
11
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CRIMINAL APPELLATE JURISDICTION
CRIMINAL APPEAL NO. 170 OF 2023
(@SLP(CRL) NO. 417 OF 2020)
AJAY KUMAR RADHESHYAM GOENKA ……APPELLANT(S)
VERSUS
TOURISM FINANCE CORPORATION OF ......RESPONDENT(S)
INDIA LTD.
WITH
CRIMINAL APPEAL NO. 172 OF 2023
(@SLP(CRL) NO. 482 OF 2020)
&
CRIMINAL APPEAL NO. 171 OF 2023
(@SLP (CRL) 446 OF 2020)
J U D G M E N T
J.B. PARDIWALA, J. :
1.I have carefully, gone through the perspicuous opinion of my esteemed brother
Sanjay Kishan Kaul, J. I am entirely in agreement with the discussion contained in the
said judgment on all the cardinal issues that have arisen for consideration in these
proceedings. At the same time, having regard to the fact that the issues involved are of
seminal importance, I am also inclined to pen down my thoughts.
2.For the sake of convenience, the Criminal Appeal No. 170 of 2023 (@ SLP
(Crl) No. 417 of 2020) is treated as the lead matter.
3.This appeal by special leave is at the instance of the original accused No. 2 in a
complaint lodged by the respondent herein (original complainant) for the offence
punishable under Section 138 of the Negotiable Instruments Act, 1881 (for short, ‘the
NI Act’) and is directed against the order passed by the Additional Sessions Judge-02
2
South East District, Saket Court, New Delhi dated 23.11.2019 in the Criminal
Revision Application No. 593 of 2019 by which the Additional Sessions Judge
affirmed the order passed by the Metropolitan Magistrate – 09, SED dated 01.11.2019
rejecting the application filed by the appellant herein seeking discharge from the
criminal proceedings i.e. Complaint Case No. 632984 of 2016 instituted by the
respondent-complainant under Section 138 of the NI Act.
4.It is necessary to clarify why the appellant challenged the impugned order
passed by the Additional Sessions Judge directly before this Court invoking Article
136 of the Constitution of India. In this regard, the following averments made in the
synopsis are reproduced hereinbelow:
“The petitioner is directly approaching this Hon’ble Court, because the
first two facets are already being considered by this Hon’ble Court, in
which view, the Hon’ble High Court is not likely to entertain a quashing
petition. This apart, a petition before any other court is likely to result in
conflicting orders and would be an exercise in futility. The earlier matters
pending before this Hon’ble Court also arose directly out of the summons
issued by the concerned Learned Magistrate.”
FACTUAL MATRIX
5.The respondent herein, namely, the “Tourism Finance Corporation of India
Limited” (hereinafter shall be referred to as, ‘the complainant’), had advanced a sum
of Rs. 30,00,00,000/- (thirty crore) as a corporate loan to the Rainbow Papers Limited
(Original Accused No. 1/corporate debtor). The appellant herein at the relevant point
of time was the Managing Director of the company i.e. the corporate debtor. The
transaction between the parties took place on 31.03.2012. It appears that an amount of
Rs. 10.88 crore came to be repaid before the disputes arose between the parties.
Sometime in 2016, the complainant issued a notice to the corporate debtor to settle the
balance amount. On 16.05.2016, a complaint was lodged under Section 138 of the NI
Act by the complainant against the corporate debtor and the appellant herein
(Managing Director of the Corporate Debtor) for dishonour of the three cheques issued
by the appellant herein for discharge of the debt in part to the tune of Rs. 57,00,000/-
3
(fifty-seven lakhs).
6.The aforesaid complaint under Section 138 of the NI Act was registered in the
Court of the Chief Metropolitan Magistrate, Saket Court, New Delhi.
7.In 2017, one of the operational creditors filed an application under Section 9 of
the Insolvency and Bankruptcy Code, 2016 (for short, ‘the IBC’ or ‘the IBC, 2016’)
before the NCLT, Ahmedabad, seeking to initiate Corporate Insolvency Resolution
Process (for short, ‘the CIRP’) with respect to the corporate debtor.
8. The Insolvency application came to be admitted by the NCLT on 12.09.2017.
9.On 3.10.2017, the complainant filed its claim of Rs. 22,50,00,000/- crore
(approximately) before the Interim Resolution Professional (for short, ‘the IRP’).
10.On 26.05.2018, the resolution applicant filed its resolution plan under the terms
of which, the payment to the complainant was in full and final settlement of all its
claims against the corporate debtor.
11.On 05.06.2018, the Committee of Creditors (for short, ‘the CoC’) approved the
resolution plan proposed by the resolution applicant. The complainant was one of the
members of the CoC.
12.On 23.07.2018, the complainant lodged his objections before the NCLT to the
resolution plan in so far as it changed its status from secured to unsecured creditor.
13.It appears that in the meantime, the appellant preferred an application before the
trial court seeking exemption from his personal appearance invoking a moratorium
under Section 14 of the IBC. The Magistrate vide order dated 12.11.2018 rejected the
said application on the ground that the criminal proceedings under the NI Act had
nothing to do with the proceedings under the IBC.
14.On 27.02.2019, the NCLT approved the resolution plan so far as the corporate
debtor is concerned.
15.As the resolution plan came to be approved by the NCLT, the appellant herein
filed an application dated 20.07.2019 before the trial court, praying that he be
discharged from the criminal proceedings. The case of the appellant herein before the
Magistrate was that as the debt stood settled in the proceedings under the IBC, the
criminal proceedings would not survive.
16.The trial court vide order dated 01.11.2019 rejected the aforesaid application
4
essentially on the ground that it had no jurisdiction to discharge an accused in a
summons triable case.
17.In view of the aforesaid, the appellant herein filed the Criminal Revision
Application No. 593 of 2019 before the Additional Sessions Court, challenging the
order passed by the Magistrate dated 01.11.2019 referred to above. The appellant
contended before the revisional court that as the debt in connection with which the
criminal proceedings had been initiated, formed part of the approved resolution plan
the outstanding debt under the NI Act could be said to have stood settled.
18.The Additional Judge vide the impugned order dated 23.11.2019 rejected the
Revision Application.
19.In such circumstances, referred to above, the appellant is here before this Court
with the present appeal.
THE SUBMISSIONS ON BEHALF OF THE APPELLANT
20.Mr. Nikhil Goel, the learned counsel appearing for the appellant made the
following submissions:
A. The trigger of Section 138 of the NI Act, is the non-payment of legally
enforceable debt. Once the debt itself gets extinguished either under Section 31
of the IBC or in the process from Sections 38 to 41 and 54 resply of the IBC, the
basis of Section 138 of the NI Act no longer remains. The term debt would mean
the ‘legally enforceable debt’ under the explanation to Section 138 of the NI Act.
This may be read with Section 2(6) & 2(8) resply of the IBC.
B. The liability is primarily of the company and prosecution of natural
persons under Section 141 of the NI Act is vicarious to the prosecution of the
company. It is for this reason that a director cannot be prosecuted without making
the company as an accused. [See Ajit Balse v. Ranga Karkere: (2015) 15 SCC
748.]
C. The nature of proceedings under Section 138 of the NI Act is primarily
compensatory and the punitive element is incorporated at enforcing the
compensatory provisions. (paras 53 & 63 resply in P. Mohanraj and Others v.
5
Shah Brothers Ispat Private Limited reported in (2021) 6 SCC 258). Therefore,
once recovery is made, partly by receipt of money and partly by waiver, Section
138 of the NI Act should not be permitted to be continued.
D. If the debt of the company is resolved then payments would be governed
under the resolution plan. If the debts are not resolved then the assets of the
company are to be distributed in terms of Section 53 of the IBC. Permitting two
proceedings to continue would therefore defeat either Section 31 or Section 53 of
the IBC, as the case may be.
E. Mr. Goel submitted that this Court in P. Mohanraj (supra) considered the
position of law as regards the continuation of the criminal proceedings under
Section 138 of the NI Act vis-a-vis the proceedings under the IBC and answered
the same in para 102 of the judgment. It was pointed out by Mr. Goel that this
Court drew a fine distinction between the corporate debtor and natural persons &
ultimately held that while a corporate debtor would be protected from Section
138 proceedings during the period of moratorium, the natural persons would not
enjoy such protection and Section 138 proceedings would continue against the
natural persons. However, according to Mr. Goel, this Court may not go in the
correctness of such bifurcation as in the case on hand, the proceedings are
beyond the period of moratorium. Mr. Goel pointed out that the question framed
in para 6 of the decision in P. Mohanraj (supra) is restricted only to the
applicability of Section 14 of the IBC to the proceedings under Section 138 of the
NI Act.
F. The principal argument of Mr. Goel is that if the IBC proceedings have
travelled beyond Section 14, the process would either lead to acceptance of a
resolution plan under Section 31 of the IBC or liquidation of the company after
determination of the claims under Chapter III of the IBC. According to Mr. Goel,
Section 31 of the IBC is applicable to the present litigation.
21.In such circumstances referred to above, Mr. Goel prays that there being merit
in his appeal, the same may be allowed and the appellant may be discharged from the
criminal liability under Section 138 of the NI Act.
6
THE SUBMISSIONS ON BEHALF OF THE RESPONDENT (COMPLAINANT)
22.On the other hand, this appeal has been vehemently opposed by Mr. Rajiv
Ranjan Dwivedi, the learned counsel appearing for the complainant by submitting that
in the case on hand, the criminal proceedings under the NI Act were initiated much
before the proceedings under the IBC came to be initiated. In other words, cognizance
was taken by the learned Magistrate upon the complaint filed under Section 138 of the
NI Act much before the scheme came to be approved under the IBC. He would submit
that the offence alleged to have been committed by the appellant herein prior to the
scheme would not get automatically compounded only as a result of the said scheme.
He would further submit that none of the provisions of the IBC bars the continuation
of the criminal prosecution initiated against the corporate debtor or its directors or
officials. According to the learned counsel, if the company is dissolved as a result of
the resolution process, the criminal proceedings against it would stand terminated,
however, the signatory to the cheque or its erstwhile directors are not entitled in law to
take advantage of such a situation created by operation of law.
23.The learned counsel appearing for the complainant, laid much stress on Section
32A of the IBC, which states that every person who was a ‘designated partner’ or an
‘officer who is in default’ or was in any manner in charge of/responsible to the
corporate debtor for the conduct of its business or associated with the corporate debtor
in any manner and who was directly or indirectly involved in the commission of such
offence in accordance with the report submitted or complaint filed by the investigating
authority shall continue to be liable to be prosecuted and punished for such an offence
committed by the corporate debtor notwithstanding that the corporate debtor’s liability
has ceased under the provision of Section 32A of the IBC.
24.In such circumstances, referred to above, the learned counsel prays that there
being no merit in the present appeal, the same may be dismissed.
ANALYSIS
25.Having heard the learned counsel appearing for the parties and having gone
7
through the materials on record, the seminal question of law that falls for the
consideration of this Court may be formulated as under:
Whether in light of:
(i)the complainant having participated in the proceedings under the IBC,
2016 by putting forward its claim and consenting to accept some share as
a creditor; coupled with
(ii)the approval of the resolution plan under Section 31 of the IBC, 2016;
the signatory/director in charge of the day-to-day affairs would stand
discharged/relieved from the penal liability under Section 138 of the NI
Act?
26.Before adverting to the rival submissions canvassed on either side, it is
necessary to look into few relevant provisions of the NI Act as well as IBC, 2016.
27.Section 138 of the NI Act reads thus:
“138. Dishonour of cheque for insufficiency, etc., of funds in the
account.—
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 honour 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 be extended to two years, or with
fine which may extend to twice the amount of the cheque, or with both:
Provided that nothing contained in this section shall apply unless—
(a) the cheque has been presented to the bank within a period of six
months from the date on which it is drawn or within the period of its
validity, whichever is earlier;
(b) the payee or the holder in due course of the cheque, as the case
may be, makes a demand for the payment of the said amount of money
by giving a notice in writing, to the drawer of the cheque, within thirty
days of the receipt of information by him from the bank regarding the
return of the cheque as unpaid; and
8
(c) the drawer of such cheque fails to make the payment of the said
amount of money to the payee or, as the case may be, to the holder in
due course of the cheque, within fifteen days of the receipt of the said
notice.
Explanation.— For the purposes of this section, “debt of other
liability” means a legally enforceable debt or other liability.”
28.Section 139 of the NI Act raises presumption. The same reads thus:
“139. Presumption in favour of holder.— It shall be presumed, unless the
contrary is proved, that the holder of a cheque received the cheque of the
nature referred to in section 138 for the discharge, in whole or in part, of
any debt or other liability.”
29.Section 141 of the NI Act fastens vicarious liability upon every person, who at
the time of the offence, was in charge of and was responsible to the company for the
conduct of the business of the company. Section 141 reads thus:
“141. Offences by companies.— (1) If the person committing an offence
under section 138 is a company, 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, as well as the company, shall be
deemed to be guilty of the offence and shall be liable to be proceeded
against and punished accordingly:
Provided that nothing contained in this sub-section shall render any person
liable to punishment if he proves that the offence was committed without his
knowledge, or that he had exercised all due diligence to prevent the
commission of such offence:
Provided further that where a person is nominated as a Director of a
company by virtue of his holding any office or employment in the Central
Government or State Government or a financial corporation owned or
controlled by the Central Government or the State Government, as the case
may be, he shall not be liable for prosecution under this Chapter.
(2) Notwithstanding anything contained in sub-section (1), where any
offence under this Act has been committed by a company and it is proved
that the offence has been committed with the consent or connivance of, or is
attributable to, any neglect on the part of, any director, manager, secretary
or other officer of the company, such director, manager, secretary or other
officer shall also be deemed to be guilty of that offence and shall be liable
to be proceeded against and punished accordingly.
Explanation.— For the purposes of this section, —
(a) "company" means any body corporate and includes a firm or other
association of individuals; and
(b) "director", in relation to a firm, means a partner in the firm.”
9
30.Section 142 of the NI Act is in regard to the cognizance of offence. The same
reads thus:
“142. Cognizance of offences.— (1) Notwithstanding anything contained
in the Code of Criminal Procedure, 1973 (2 of 1974),
(a) no court shall take cognizance of any offence punishable under section
138 except upon a complaint, in writing, made by the payee or, as the case
may be, the holder in due course of the cheque;
(b) such complaint is made within one month of the date on which the cause
of action arises under clause (c) of the proviso to section 138:
Provided that the cognizance of a complaint may be taken by the Court
after the prescribed period, if the complainant satisfies the Court that he
had sufficient cause for not making a complaint within such period.
(c) no court inferior to that of a Metropolitan Magistrate or a Judicial
Magistrate of the first class shall try any offence punishable under section
138.
(2) The offence under section 138 shall be inquired into and tried only by a
court within whose local jurisdiction,—
(a) if the cheque is delivered for collection through an account, the branch
of the bank where the payee or holder in due course, as the case may be,
maintains the account, is situated; or
(b) if the cheque is presented for payment by the payee or holder in due
course, otherwise through an account, the branch of the drawee bank
where the drawer maintains the account, is situated.
Explanation.— For the purposes of clause (a), where a cheque is delivered
for collection at any branch of the bank of the payee or holder in due
course, then, the cheque shall be deemed to have been delivered to the
branch of the bank in which the payee or holder in due course, as the case
may be, maintains the account.”
31.Section 147 of the NI Act provides that the offence under the NI Act shall be
compoundable. Section 147 reads thus:
“147. Offences to be compoundable.— Notwithstanding anything
contained in the Code of Criminal Procedure, 1973 (2 of 1974), every
offence punishable under this Act shall be compoundable.”
32.The offence under Section 138 of the NI Act, is committed, after the conditions
set out therein are fulfilled. Thereafter, the payee of the cheque has the option of
prosecuting the drawer of the cheque by instituting a complaint under Section 200 of
10
the Code of Criminal Procedure, 1973 (for short, ‘the CrPC’) before the jurisdictional
criminal court. After cognizance of the offence is taken, the criminal court is seized of
the matter. The case will have to be disposed of in terms of the provisions set out in the
CrPC. If the complainant fails to turn up on any hearing date, the Magistrate can
invoke Section 256 of the CrPC and acquit the accused. Under Section 257 of the
CrPC, the complaint can be withdrawn at any point of time before the final order is
passed. Under Section 147 of the NI Act the offence can be compounded. The case
may end in acquittal or conviction at the conclusion of the trial.
33.Section 141 of the NI Act states that if the person committing an offence under
Section 138 is a company, 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, as well as the company, shall be deemed to be guilty of the offence
and shall be liable to be proceeded against and punished accordingly. The expression
“as well” is occurring in Section 141 of the NI Act. This expression means “on par”.
Therefore, the liability of such persons in charge of and responsible to the company for
the conduct of its business is thus co-extensive.
SCHEME OF THE IBC, 2016
34.I shall now try to understand the scheme of the IBC.
35.It is a comprehensive Code enacted, as the Preamble states, to “consolidate and
amend the laws relating to reorganisation and insolvency resolution of corporate
persons, partnership firms and individuals in a time bound manner for maximisation of
value of assets of such persons, to promote entrepreneurship, availability of credit and
balance the interests of all the stakeholders including alteration in the order of priority of
payment of Government dues and to establish an Insolvency and Bankruptcy Board of
India, and for matters connected therewith or incidental thereto”.
36.The Statement of Objects and Reasons of the IBC indicates that the Legislature
was of the opinion that the existing framework for insolvency and bankruptcy was
inadequate and ineffective and resulted in undue delays in resolution. The IBC was
proposed with the objective of consolidating and amending the laws relating to
11
reorganisation and insolvency resolution of corporate persons, partnership firms and
individuals in a time bound manner for maximisation of the value of assets of such
persons, to promote entrepreneurship, availability of credit and balance the interests of all
the stakeholders, including alteration in the priority of payment of Government dues and
to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or
incidental thereto. The IBC provides for designating the NCLT and the Debts Recovery
Tribunal (DRT) as the adjudicating authorities for corporate persons, firms and
individuals for resolution of insolvency, liquidation and bankruptcy. The IBC was
published in the Gazette of India dated 28.05.2016. Provisions of the IBC were, however,
brought into effect from different dates in terms of the proviso to Section 1(3) of the IBC.
37.Section 7 of IBC lays down the procedure for the initiation of the corporate
insolvency resolution process by the financial creditor or any other person or more
financial creditors jointly. The financial creditor may file an application before the
adjudicating authority along with the proof of default and the name of a resolution
professional proposed to act as the interim resolution professional in respect of the
corporate debtor. Once the adjudicating authority is satisfied, as to the extent of the
default and is ensured that the application is complete and no disciplinary proceedings are
pending against the proposed resolution professional, it shall admit the application.
38.Section 8 of the IBC provides that an operational creditor may, on the occurrence
of a default, deliver a demand notice of unpaid operational debt or copy of an invoice
demanding payment of the amount involved in the default to the corporate debtor in such
form and manner as may be prescribed.
39.Section 9 of the IBC stipulates that after the expiry of the period of 10 days from
the date of delivery of the notice or invoice demanding payment under sub-section (1) of
Section 8 if the operational creditor does not receive payment from the corporate debtor
or notice of the dispute under sub-section (2) of Section 8, it would be open for the
operational creditor to file an application before the adjudicating authority for initiating a
corporate insolvency resolution process.
40.After the initiation of the CIRP the following takes place:
12
(a)All the creditors are mandatorily required to put forward their claims before the
CIRP in light of the public announcement.
(b)In the aforesaid context, I must look into Sections 13 and 15 resply of the IBC.
Sections 13 and 15 resply are reproduced hereinbelow:
“13. Declaration of moratorium and public announcement.— (1) The
Adjudicating Authority, after admission of the application under section 7
or section 9 or section 10, shall, by an order—
(a) declare a moratorium for the purposes referred to in section 14;
(b) cause a public announcement of the initiation of corporate insolvency
resolution process and call for the submission of claims under section 15;
and
(c) appoint an interim resolution professional in the manner as laid down
in section 16.
(2) The public announcement referred to in clause (b) of sub-
section (1) shall be made immediately after the appointment of the interim
resolution professional.
Xxx xxx xxx
15. Public announcement of corporate insolvency resolution process.—
(1) The public announcement of the corporate insolvency resolution
process under the order referred to in section 13 shall contain the
following information, namely:—
(a) name and address of the corporate debtor under the corporate
insolvency resolution process;
(b) name of the authority with which the corporate debtor is
incorporated or registered;
(c) the last date for submission of [claims, as may be specified];
(d) details of the interim resolution professional who shall be vested
with the management of the corporate debtor and be responsible for
receiving claims;
(e) penalties for false or misleading claims; and
(f) the date on which the corporate insolvency resolution process shall
close, which shall be the one hundred and eightieth day from the date of
the admission of the application under sections 7, 9 or section 10, as
the case may be.
(2) The public announcement under this section shall be made in such
manner as may be specified.”
(c)It is important to note that the resolution professional has no adjudicatory powers
in regard to the claims unlike the liquidator. The resolution professional only collates the
claims. In this regard, the decision of this Court in the case of Swiss Ribbons Private
13
Limited and Another v. Union of India and Others reported in (2019) 4 SCC 17
assumes importance. I quote paras 88-91 of Swiss Ribbons (supra) as under:
Resolution professional has no adjudicating powers
“88. It is clear from a reading of the Code as well as the Regulations that the
resolution professional has no adjudicatory powers. Section 18 of the Code
lays down the duties of an interim resolution professional as follows:
“18. Duties of interim resolution professional.—(1) The interim
resolution professional shall perform the following duties, namely—
(a) collect all information relating to the assets, finances and
operations of the corporate debtor for determining the financial
position of the corporate debtor, including information relating to—
(i) business operations for the previous two years;
(ii) financial and operational payments for the previous two
years;
(iii) list of assets and liabilities as on the initiation date; and
(iv) such other matters as may be specified;
(b) receive and collate all the claims submitted by creditors to him,
pursuant to the public announcement made under Sections 13 and 15;
(c) constitute a Committee of Creditors;
(d) monitor the assets of the corporate debtor and manage its
operations until a resolution professional is appointed by the
Committee of Creditors;
(e) file information collected with the information utility, if necessary;
and
(f) take control and custody of any asset over which the corporate
debtor has ownership rights as recorded in the balance sheet of the
corporate debtor, or with information utility or the depository of
securities or any other registry that records the ownership of assets
including—
(i) assets over which the corporate debtor has ownership rights
which may be located in a foreign country;
(ii) assets that may or may not be in possession of the corporate
debtor;
(iii) tangible assets, whether movable or immovable;
(iv) intangible assets including intellectual property;
(v) securities including shares held in any subsidiary of the
corporate debtor, financial instruments, insurance policies;
(vi) assets subject to the determination of ownership by a court or
authority;
(g) to perform such other duties as may be specified by the Board.
Explanation.—For the purposes of this section, the term “assets” shall
not include the following, namely—
14
(a) assets owned by a third party in possession of the corporate
debtor held under trust or under contractual arrangements including
bailment;
(b) assets of any Indian or foreign subsidiary of the corporate
debtor; and
(c) such other assets as may be notified by the Central
Government in consultation with any financial sector regulator.”
89. Under the CIRP Regulations, the resolution professional has to vet and
verify claims made, and ultimately, determine the amount of each claim as
follows:
“10. Substantiation of claims.—The interim resolution professional or
the resolution professional, as the case may be, may call for such other
evidence or clarification as he deems fit from a creditor for substantiating
the whole or part of its claim.
* * *
12. Submission of proof of claims.—(1) Subject to sub-regulation (2), a
creditor shall submit claim with proof on or before the last date mentioned in
the public announcement.
(2) A creditor, who fails to submit claim with proof within the time
stipulated in the public announcement, may submit the claim with proof to
the interim resolution professional or the resolution professional, as the
case may be, on or before the ninetieth day of the insolvency
commencement date.
(3) Where the creditor in sub-regulation (2) is a financial creditor under
Regulation 8, it shall be included in the committee from the date of
admission of such claim:
Provided that such inclusion shall not affect the validity of any decision
taken by the committee prior to such inclusion.
13. Verification of claims.—(1) The interim resolution professional or the
resolution professional, as the case may be, shall verify every claim, as on
the insolvency commencement date, within seven days from the last date of
the receipt of the claims, and thereupon maintain a list of creditors
containing names of creditors along with the amount claimed by them, the
amount of their claims admitted and the security interest, if any, in respect of
such claims, and update it.
(2) The list of creditors shall be—
(a) available for inspection by the persons who submitted proofs of
claim;
(b) available for inspection by members, partners, Directors and
guarantors of the corporate debtor;
(c) displayed on the website, if any, of the corporate debtor;
(d) filed with the adjudicating authority; and
15
(e) presented at the first meeting of the committee.
14. Determination of amount of claim.—(1) Where the amount claimed
by a creditor is not precise due to any contingency or other reason, the
interim resolution professional or the resolution professional, as the case
may be, shall make the best estimate of the amount of the claim based on
the information available with him.
(2) The interim resolution professional or the resolution professional, as
the case may be, shall revise the amounts of claims admitted, including the
estimates of claims made under sub-regulation (1), as soon as may be
practicable, when he comes across additional information warranting
such revision.”
It is clear from a reading of these Regulations that the resolution
professional is given administrative as opposed to quasi-judicial powers. In
fact, even when the resolution professional is to make a “determination”
under Regulation 35-A, he is only to apply to the adjudicating authority for
appropriate relief based on the determination made as follows:
“35-A. Preferential and other transactions.—(1) On or before the
seventy-fifth day of the insolvency commencement date, the resolution
professional shall form an opinion whether the corporate debtor has been
subjected to any transaction covered under Sections 43, 45, 50 or 66.
(2) Where the resolution professional is of the opinion that the corporate
debtor has been subjected to any transactions covered under Sections 43,
45, 50 or 66, he shall make a determination on or before the one hundred
and fifteenth day of the insolvency commencement date, under intimation
to the Board.
(3) Where the resolution professional makes a determination under sub-
regulation (2), he shall apply to the adjudicating authority for appropriate
relief on or before the one hundred and thirty-fifth day of the insolvency
commencement date.”
90. As opposed to this, the liquidator, in liquidation proceedings under the
Code, has to consolidate and verify the claims, and either admit or reject
such claims under Sections 38 to 40 of the Code. Sections 41 and 42, by
way of contrast between the powers of the liquidator and that of the
resolution professional, are set out hereinbelow:
“41. Determination of valuation of claims.—The liquidator shall
determine the value of claims admitted under Section 40 in such
manner as may be specified by the Board.
42. Appeal against the decision of liquidator.—A creditor may appeal
to the adjudicating authority against the decision of the liquidator
accepting or rejecting the claims within fourteen days of the receipt of
such decision.”
16
It is clear from these sections that when the liquidator “determines” the
value of claims admitted under Section 40, such determination is a
“decision”, which is quasi-judicial in nature, and which can be appealed
against to the adjudicating authority under Section 42 of the Code.
91. Unlike the liquidator, the resolution professional cannot act in a
number of matters without the approval of the Committee of Creditors
under Section 28 of the Code, which can, by a two-thirds majority, replace
one resolution professional with another, in case they are unhappy with
his performance. Thus, the resolution professional is really a facilitator of
the resolution process, whose administrative functions are overseen by the
Committee of Creditors and by the adjudicating authority.”
(d)Section 29 of the IBC deals with the information memorandum on the basis of
which the resolution plan would be submitted. In this regard, Regulation 36 of the
Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate
Persons) Regulations, 2016, assumes importance wherein Regulation 36(2)(d) covers the
claims of different kinds of creditors. Regulation 36(2)(d) reads thus:
“36.Information memorandum.-(1) Subject to sub-regulation (4), the
resolution professional shall submit the information memorandum in
electronic form to each member of the committee within two weeks of his
appointment, but not later than fifty-fourth day from the insolvency
commencement date, whichever is earlier.
(2) The information memorandum shall contain the following details of the
corporate debtor-
(a) xxxx
Xx xx xx
(d) a list of creditors containing the names of creditors, the amounts claimed
by them, the amount of their claims admitted and the security interest, if any,
in respect of such claims;…..”
(e)In the aforesaid context, I may look into the decision of this Court in the case of
Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and
Others reported in (2020) 8 SCC 531, more particularly, paras 42-45 which read thus:
“42. Under Section 29(1) of the Code, the resolution professional shall
prepare an information memorandum containing all relevant information, as
may be specified, so that a resolution plan may then be formulated by a
prospective resolution applicant. Under Section 30 of the Code, the resolution
applicant must then submit a resolution plan to the resolution professional,
prepared on the basis of the information memorandum. After this, the
resolution professional must present to the Committee of Creditors, for its
17
approval, such resolution plans which conform to the conditions referred to in
Section 30(2) of the Code — see Section 30(3) of the Code. If the resolution
plan is approved by the requisite majority of the Committee of Creditors, it is
then the duty of the resolution professional to submit the resolution plan as
approved by the Committee of Creditors to the Adjudicating Authority
— see Section 30(6) of the Code.
43. The aforesaid provisions of the Code are then fleshed out in the 2016
Regulations. Under Chapter IV of the aforesaid Regulations, claims by
operational creditors, financial creditors, other creditors, workmen and
employees are to be submitted to the resolution professional along with proofs
thereof — see Regulations 7 to 12. Thereafter, under Regulation 13, the
resolution professional shall verify each claim as on the insolvency
commencement date, and thereupon maintain a list of creditors containing the
names of creditors along with the amounts claimed by them, the amounts
admitted by him, and the security interest, if any, in respect of such claims,
and constantly update the aforesaid list — see Regulation 13(1).
44. Chapter X of the Regulations then deals with resolution plans that are
submitted. Under Regulation 35, “fair value” as defined by Regulation 2(1)
(hb) [Under Regulation 2(1)(hb), Insolvency and Bankruptcy Board of India
(Insolvency Resolution Process for Corporate Persons) Regulations, 2016:“2.
(1)(hb) “fair value” means the estimated realisable value of the assets of the
corporate debtor, if they were to be exchanged on the insolvency
commencement date between a willing buyer and a willing seller in an arm's
length transaction, after proper marketing and where the parties had acted
knowledgeably, prudently and without compulsion;”] and “liquidation value”
as defined by Regulation 2(1)(k) [Id. Under Regulation 2(1)(k):“2. (1)(k)
“liquidation value” means the estimated realisable value of the assets of the
corporate debtor, if the corporate debtor were to be liquidated on the
insolvency commencement date;”] shall be determined by two registered
valuers appointed under Regulation 27, which shall be handed over to the
resolution professional.
45. After receipt of the resolution plans in accordance with the Code and the
Regulations, the resolution professional shall then provide the fair value and
liquidation value to every member of the Committee of Creditors
— see Regulation 35(2). Regulation 36 is important as it forms the basis for the
submission of a resolution plan. The information memorandum, spoken of by this
regulation, must contain the following:
“36.(2)(a) assets and liabilities with such description, as on the
insolvency commencement date, as are generally necessary for ascertaining
their values.
Explanation.—“Description” includes the details such as date of
acquisition, cost of acquisition, remaining useful life, identification number,
depreciation charged, book value, and any other relevant details.
18
(b) the latest annual financial statements;
(c) audited financial statements of the corporate debtor for the last two
financial years and provisional financial statements for the current financial
year made up to a date not earlier than fourteen days from the date of the
application;
(d) a list of creditors containing the names of creditors, the amounts
claimed by them, the amount of their claims admitted and the security
interest, if any, in respect of such claims;
(e) particulars of a debt due from or to the corporate debtor with respect
to related parties;
(f) details of guarantees that have been given in relation to the debts of
the corporate debtor by other persons, specifying which of the guarantors is
a related party;
(g) the names and addresses of the members or partners holding at least
one per cent stake in the corporate debtor along with the size of stake;
(h) details of all material litigation and an ongoing investigation or
proceeding initiated by Government and statutory authorities;
(i) the number of workers and employees and liabilities of the corporate
debtor towards them;
(j)-(k)***
(l) other information, which the resolution professional deems relevant to
the committee.””
(f)On the basis of the information memorandum, the resolution plan is submitted
under Section 30(1) of the IBC.
(g)It is important to note that the operational creditors are mandatorily entitled to the
liquidation value or the amount that the plan entitles them if distributed in accordance
with the waterfall mechanism under Section 53 whichever is higher. (See Section 30 (2)
(b))
(h)For dissenting financial creditors, they are mandatorily entitled to the amount
under Section 53 in the event of liquidation.
(i)The constitutional validity of the said provision was upheld by this Court in the
decision of Essar Steel India Limited (supra). (See paras 128-131)
(j) If the plan fails to comply with the above, the resolution plan is liable to be
mandatorily rejected.
(k)Section 31 of the IBC deals with the approval of the resolution plan which shall
bind everyone i.e. the corporate debtor, guarantors, creditors, other stakeholders etc.
19
Thus, whatever amount is allotted to the creditor under the plan, the same will have to be
accepted without any option.
(l)The new avatar of the corporate debtor does not have to deal with the various
“hydra heads”, i.e. multiple new claims popping up after the approval of the plan (para
107 of the Essar Steel (supra)
(m)The aforesaid has been accepted as a “Clean Slate Theory”. (See paras 93-94 of
Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.,
(2021) 9 SCC 657).
(n)This Court in Ebix Singapore Private Limited v. Committee of Creditors of
Educomp Solutions Limited and Another reported in (2022) 2 SCC 401, has held that
the resolution plan binds even the persons who have not consented. Paras 115 & 117
resply read thus:-
“115. While the above observations were made in the context of a scheme
that has been sanctioned by the court, the resolution plan even prior to the
approval of the adjudicating authority is binding inter se the CoC and the
successful resolution applicant. The resolution plan cannot be construed
purely as a “contract” governed by the Contract Act, in the period interven-
ing its acceptance by the CoC and the approval of the adjudicating authority.
Even at that stage, its binding effects are produced by IBC framework. The
BLRC Report mentions that “[w]hen 75% of the creditors agree on a revival
plan, this plan would be binding on all the remaining creditors” [ 3.3.1, The
Report of the Bankruptcy Law Reforms Committee, Vol. I : Rationale and
Design (November 2015), p. 13, available at <https://ibbi.gov.in/BLRCRe-
portVol1_04112015.pdf> last accessed 20-8-2021.]. The BLRC Report also
mentions that, “the RP submits a binding agreement to the adjudicator be-
fore the default maximum date” [Id, p. 92.]. We have further discussed the
statutory scheme of IBC in Sections I and J of this judgment to establish that
a resolution plan is binding inter se the CoC and the successful resolution
applicant. Thus, the ability of the resolution plan to bind those who have
not consented to it, by way of a statutory procedure, indicates that it is not
a typical contract.
Xxx xxx xxx
117. ….. The terms of the resolution plan contain a commercial bargain
between the CoC and resolution applicant. There is also an intention to
create legal relations with binding effect. However, it is the structure of IBC
which confers legal force on the CoC-approved resolution plan. The
validity of the resolution plan is not premised upon the agreement or
consent of those bound (although as a procedural step IBC requires sixty-
six per cent votes of creditors), but upon its compliance with the procedure
20
stipulated under IBC.” (Emphasis
supplied)
41.Thus, from the aforesaid, it is evident that the creditor has no option but to join the
process under the IBC. Once the plan is approved, it would bind everyone under the sun.
The making of a claim and accepting whatever share is allotted could be termed as an
“Involuntary Act” on behalf of the creditor. The making of a claim under the IBC and ac-
cepting the same and not making any claim, will not make any difference in light of Sec-
tion 31 of the IBC. Both the situations will lead to Section 31 and the finality and bind-
ing value of the resolution plan.
42.Keeping the aforesaid discussion in mind, at best, it could be said that from the
cheque amount under Section 138 of the NI Act, the amount received under the resolution
plan may be deducted. (akin to what happens to the guarantors)
SECTION 32A OF THE IBC
43.P. Mohanraj (supra) has harmoniously construed Section 32A with Section 14 of
the IBC so as to apply to Section 138 NI Act, proceedings. Section 32A(1) is very crucial
and hence, is quoted below:-
“32A. Liability for prior offences, etc.—(1) Notwithstanding anything to the
contrary contained in this Code or any other law for the time being in force,
the liability of a corporate debtor for an offence committed prior to the
commencement of the corporate insolvency resolution process shall cease,
and the corporate debtor shall not be prosecuted for such an offence from
the date the resolution plan has been approved by the Adjudicating Authority
under section 31, if the resolution plan results in the change in the
management or control of the corporate debtor to a person who was not—
(a) a promoter or in the management or control of the corporate debtor or
a related party of such a person; or
(b) a person with regard to whom the relevant investigating authority has,
on the basis of material in its possession, reason to believe that he had
abetted or conspired for the commission of the offence, and has submitted
or filed a report or a complaint to the relevant statutory authority or
court:
Provided that if a prosecution had been instituted during the corporate
insolvency resolution process against such corporate debtor, it shall stand
21
discharged from the date of approval of the resolution plan subject to
requirements of this sub-section having been fulfilled:
Provided further that every person who was a “designated partner” as
defined in clause (j) of section 2 of the Limited Liability Partnership Act,
2008 (6 of 2009), or an “officer who is in default”, as defined in clause
(60) of section 2 of the Companies Act, 2013 (18 of 2013), or was in any
manner incharge of, or responsible to the corporate debtor for the
conduct of its business or associated with the corporate debtor in any
manner and who was directly or indirectly involved in the commission
of such offence as per the report submitted or complaint filed by the
investigating authority, shall continue to be liable to be prosecuted and
punished for such an offence committed by the corporate debtor
notwithstanding that the corporate debtor's liability has ceased under
this sub-section.”
44.Section 32A of the IBC has been upheld by this Court in Manish Kumar v. Union
of India and Another reported in (2021) 5 SCC 1. This Court has held that the said
section does not permit the wrong-doer to get away. Thus, if the argument of allowing the
signatory/director to go scot-free after the approval of the resolution plan is accepted the
same would run contrary to the legislative intent of Section 32A which has been upheld
by this Court as under:
“326. We are of the clear view that no case whatsoever is made out to seek
invalidation of Section 32-A. The boundaries of this Court's jurisdiction are
clear. The wisdom of the legislation is not open to judicial review. Having
regard to the object of the Code, the experience of the working of the Code,
the interests of all stakeholders including most importantly the imperative
need to attract resolution applicants who would not shy away from offering
reasonable and fair value as part of the resolution plan if the legislature
thought that immunity be granted to the corporate debtor as also its
property, it hardly furnishes a ground for this Court to interfere. The
provision is carefully thought out. It is not as if the wrongdoers are allowed
to get away. They remain liable. The extinguishment of the criminal liability
of the corporate debtor is apparently important to the new management to
make a clean break with the past and start on a clean slate. We must also not
overlook the principle that the impugned provision is part of an economic
measure. The reverence courts justifiably hold such laws in cannot but be
applicable in the instant case as well. The provision deals with reference to
offences committed prior to the commencement of the CIRP. With the
admission of the application the management of the corporate debtor passes
into the hands of the interim resolution professional and thereafter into the
22
hands of the resolution professional subject undoubtedly to the control by the
Committee of Creditors. As far as protection afforded to the property is
concerned there is clearly a rationale behind it. Having regard to the object
of the statute we hardly see any manifest arbitrariness in the provision.”
(Emphasis supplied)
45.In P. Mohanraj (supra), this Court in clear terms held that Section 32A only
protects the corporate debtor and not the signatories/directors etc. The prosecution against
the signatories/directors would continue. In P. Mohanraj (supra): -
a.The issue involved was whether the institution/continuation of a
proceeding under Section 138/141 of the NI Act, 1881 is said to be
covered by Section 14 of the IBC, 2016.
b.That Section 138 proceedings can be said to be a "civil sheep" in a
"criminal wolf's" clothing.
i. The Court relied upon Kaushalya Devi Massand v. Roopkishore
Khore, (Para 59) [(2011)4 SCC 593] and Meters & Instruments (P)
Ltd. v. Kanchan Mehta, (Para 63) [(2018)1 SCC 560]
c.Section 138 proceedings are covered by Section 14 of the IBC, 2016.
(Para 67)
d. Moratorium under Section 14, IBC only applies to the Corporate
Debtor and does not apply to natural persons mentioned under Section
141 of NI Act, 1881. The said conclusion is reached after considering
Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC
661. (Para 102)
e. I quote para 102 of P. Mohanraj (supra) as under:
“102. Since the corporate debtor would be covered by the moratorium
provision contained in Section 14 IBC, by which continuation of Sec-
tions 138/141 proceedings against the corporate debtor and initiation
of Sections 138/141 proceedings against the said debtor during the cor-
porate insolvency resolution process are interdicted, what is stated in
paras 51 and 59 in Aneeta Hada ((2012) 5 SCC 661) would then be-
come applicable. The legal impediment contained in Section 14 IBC
would make it impossible for such proceeding to continue or be insti-
tuted against the corporate debtor. Thus, for the period of morato-
rium, since no Sections 138/141 proceeding can continue or be initi-
ated against the corporate debtor because of a statutory bar, such pro-
ceedings can be initiated or continued against the persons mentioned
in Sections 141(1) and (2) of the Negotiable Instruments Act. This be-
ing the case, it is clear that the moratorium provision contained in
Section 14 IBC would apply only to the corporate debtor, the natural
persons mentioned in Section 141 continuing to be statutorily liable
23
under Chapter XVII of the Negotiable Instruments Act.”
(Emphasis supplied)
46.While dealing with the issue of Section 14, IBC, this Court had the occasion to
deal in detail with Section 32A also. The 2
nd
proviso to Section 32A(1) is a complete
answer to the issue in question. The said provision is discussed in detail from Paras 39-43
in P. Mohanraj’s case. Paras 39 to 43 read thus:
“39. The raison d'être for the enactment of Section 32-A has been stated by
the Report of the Insolvency Law Committee of February 2020, which is as
follows:
“17. LIABILITY OF CORPORATE DEBTOR FOR OFFENCES COMMITTED
PRIOR TO INITIATION OF CIRP [Recommendations contained herein have
been implemented pursuant to Section 10 of the Insolvency and
Bankruptcy Code (Amendment) Ordinance, 2019.]
17.1. Section 17 of the Code provides that on commencement of the
CIRP, the powers of management of the corporate debtor vest with the
interim resolution professional. Further, the powers of the Board of
Directors or partners of the corporate debtor stand suspended, and are
to be exercised by the interim resolution professional. Thereafter, Section
29-A, read with Section 35(1)(f), places restrictions on related parties of
the corporate debtor from proposing a resolution plan and purchasing
the property of the corporate debtor in the CIRP and liquidation process,
respectively. Thus, in most cases, the provisions of the Code effectuate a
change in control of the corporate debtor that results in a clean break of
the corporate debtor from its erstwhile management. However, the legal
form of the corporate debtor continues in the CIRP, and may be
preserved in the resolution plan. Additionally, while the property of the
corporate debtor may also change hands upon resolution or liquidation,
such property also continues to exist, either as property of the corporate
debtor, or in the hands of the purchaser.
17.2. However, even after commencement of CIRP or after its successful
resolution or liquidation, the corporate debtor, along with its property,
would be susceptible to investigations or proceedings related to criminal
offences committed by it prior to the commencement of a CIRP, leading
to the imposition of certain liabilities and restrictions on the corporate
debtor and its properties even after they were lawfully acquired by a
resolution applicant or a successful bidder, respectively.
Liability where a Resolution Plan has been approved
24
17.3. It was brought to the Committee that this had created apprehension
amongst potential resolution applicants, who did not want to take on the
liability for any offences committed prior to commencement of CIRP. In
one case, JSW Steel had specifically sought certain reliefs and
concessions, within an annexure to the resolution plan it had submitted
for approval of the adjudicating authority. [SBI v. Bhushan Steel Ltd.,
2018 SCC OnLine NCLT 32305, para 83(i)] Without relief from
imposition of the such liability, the Committee noted that in the long run,
potential resolution applicants could be disincentivised from proposing a
resolution plan. The Committee was also concerned that resolution plans
could be priced lower on an average, even where the corporate debtor
did not commit any offence and was not subject to investigation, due
to adverse selection by resolution applicants who might be apprehensive
that they might be held liable for offences that they have not been able to
detect due to information asymmetry. Thus, the threat of liability falling
on bona fide persons who acquire the legal entity, could substantially
lower the chances of its successful takeover by potential resolution
applicants.
17.4. This could have substantially hampered the Code's goal of value
maximisation, and lowered recoveries to creditors, including financial
institutions who take recourse to the Code for resolution of the NPAs on
their balance sheet. At the same time, the Committee was also conscious
that authorities are duty-bound to penalise the commission of any
offence, especially in cases involving substantial public interest. Thus,
two competing concerns need to be balanced.
Xxx xxx xxx
17.6. Given this, the Committee felt that a distinction must be drawn
between the corporate debtor which may have committed offences under
the control of its previous management, prior to the CIRP, and the
corporate debtor that is resolved, and taken over by an unconnected
resolution applicant. While the corporate debtor's actions prior to the
commencement of the CIRP must be investigated and penalised, the
liability must be affixed only upon those who were responsible for the
corporate debtor's actions in this period. However, the new management
of the corporate debtor, which has nothing to do with such past offences,
should not be penalised for the actions of the erstwhile management of
the corporate debtor, unless they themselves were involved in the
commission of the offence, or were related parties, promoters or other
persons in management and control of the corporate debtor at the time
of or any time following the commission of the offence, and could
acquire the corporate debtor, notwithstanding the prohibition under
Section 29-A. [For example, where the exemption under Section 240-A is
applicable.]
17.7. Thus, the Committee agreed that a new section should be inserted
to provide that where the corporate debtor is successfully resolved, it
should not be held liable for any offence committed prior to the
25
commencement of the CIRP, unless the successful resolution applicant
was also involved in the commission of the offence, or was a related
party, promoter or other person in management and control of the
corporate debtor at the time of or any time following the commission of
the offence.
17.8. Notwithstanding this, those persons who were responsible to the
corporate debtor for the conduct of its business at the time of the
commission of such offence, should continue to be liable for such an
offence, vicariously or otherwise, regardless of the fact that the
corporate debtor's liability has ceased.” (emphasis in original and
supplied)
40. This Court in Manish Kumar v. Union of India [(2021) 5 SCC 1],
upheld the constitutional validity of this provision. This Court observed :
(SCC pp. 170-71, para 326)
“326. We are of the clear view that no case whatsoever is made out to
seek invalidation of Section 32-A. The boundaries of this Court's
jurisdiction are clear. The wisdom of the legislation is not open to
judicial review. Having regard to the object of the Code, the experience
of the working of the Code, the interests of all stakeholders including
most importantly the imperative need to attract resolution applicants
who would not shy away from offering reasonable and fair value as part
of the resolution plan if the legislature thought that immunity be granted
to the corporate debtor as also its property, it hardly furnishes a ground
for this Court to interfere. The provision is carefully thought out. It is not
as if the wrongdoers are allowed to get away. They remain liable. The
extinguishment of the criminal liability of the corporate debtor is
apparently important to the new management to make a clean break with
the past and start on a clean slate. We must also not overlook the
principle that the impugned provision is part of an economic measure.
The reverence courts justifiably hold such laws in cannot but be
applicable in the instant case as well. The provision deals with reference
to offences committed prior to the commencement of the CIRP. With the
admission of the application the management of the corporate debtor
passes into the hands of the interim resolution professional and
thereafter into the hands of the resolution professional subject
undoubtedly to the control by the Committee of Creditors. As far as
protection afforded to the property is concerned there is clearly a
rationale behind it. Having regard to the object of the statute we hardly
see any manifest arbitrariness in the provision.”
41. Section 32-A cannot possibly be said to throw any light on the true in-
terpretation of Section 14(1)(a) as the reason for introducing Section 32-A
had nothing whatsoever to do with any moratorium provision. At the heart
26
of the section is the extinguishment of criminal liability of the corporate
debtor, from the date the resolution plan has been approved by the adjudi-
cating authority, so that the new management may make a clean break with
the past and start on a clean slate. A moratorium provision, on the other
hand, does not extinguish any liability, civil or criminal, but only casts a
shadow on proceedings already initiated and on proceedings to be initiated,
which shadow is lifted when the moratorium period comes to an end. Also,
Section 32-A(1) operates only after the moratorium comes to an end. At the
heart of Section 32-A is the IBC's goal of value maximisation and the need
to obviate lower recoveries to creditors as a result of the corporate debtor
continuing to be exposed to criminal liability.
42. Unfortunately, Section 32-A is inelegantly drafted. The second proviso
to Section 32-A(1) speaks of persons who are in any manner in charge of,
or responsible to the corporate debtor for the conduct of its business or as-
sociated with the corporate debtor and who are, directly or indirectly, in-
volved in the commission of “such offence” i.e. the offence referred to in
sub-section (1), “as per the report submitted or complaint filed by the in-
vestigating authority …”. The report submitted here refers to a police re-
port under Section 173 CrPC, and complaints filed by investigating author-
ities under special Acts, as opposed to private complaints. If the language
of the second proviso is taken to interpret the language of Section 32- A(1)
in that the “offence committed” under Section 32-A(1) would not include
offences based upon complaints under Section 2(d) CrPC, the width of the
language would be cut down and the object of Section 32-A(1) would not be
achieved as all prosecutions emanating from private complaints would be
excluded. Obviously, Section 32-A(1) cannot be read in this fashion and
clearly incudes the liability of the corporate debtor for all offences com-
mitted prior to the commencement of the corporate insolvency resolution
process. Doubtless, a Section 138 proceeding would be included, and
would, after the moratorium period comes to an end with a resolution plan
by a new management being approved by the adjudicating authority, cease
to be an offence qua the corporate debtor.
43. A section which has been introduced by an amendment into an Act
with its focus on cesser of liability for offences committed by the corporate
debtor prior to the commencement of the corporate insolvency resolution
process cannot be so construed so as to limit, by a sidewind as it were, the
moratorium provision contained in Section 14, with which it is not at all
concerned. If the first proviso to Section 32-A(1) is read in the manner
suggested by Shri Mehta, it will impact Section 14 by taking out of its
ken Sections 138/141 proceedings, which is not the object of Section 32-
A(1) at all. Assuming, therefore, that there is a clash between Section 14
IBC and the first proviso of Section 32-A(1), this clash is best resolved
by applying the doctrine of harmonious construction so that the objects
of both the provisions get subserved in the process, without damaging or
limiting one provision at the expense of the other. If, therefore, the ex-
pression “prosecution” in the first proviso of Section 32-A(1) refers to
27
criminal proceedings properly so-called either through the medium of a
first information report or complaint filed by an investigating authority
or complaint and not to quasi-criminal proceedings that are instituted
under Sections 138/141 of the Negotiable Instruments Act against the
corporate debtor, the object of Section 14(1) IBC gets subserved, as does
the object of Section 32-A, which does away with criminal prosecutions
in all cases against the corporate debtor, thus absolving the corporate
debtor from the same after a new management comes in.”
(Emphasis applied)
Thus, the heart of the matter is the second proviso appended to Section 32A(1)
(b) of the IBC which provides statutory recognition of the criminal liability of the
persons who are otherwise vicariously liable under Section 141 of NI Act, in the con-
text of Section 138 offence.
46.Thus, Section 32A broadly leads to:
a.Extinguishment of the criminal liability of the corporate debtor, if the
control of the corporate debtor goes in the hands of the new management
which is different from the original old management.
b.The prosecution in relation to “every person who was a “designated part-
ner” as defined in clause (j) of Section 2 of the Limited Liability Part-
nership Act, 2008 (6 of 2009), or an “officer who is in default”, as
defined in clause (60) of Section 2 of the Companies Act, 2013 (18 of
2013), or was in any manner in charge of, or responsible to the corpo-
rate debtor for the conduct of its business or associated with the corpo-
rate debtor in any manner and who was directly or indirectly involved in
the commission of such offence” shall be proceeded and the law will
take it’s own course. Only the corporate debtor (with new management) as
held in Para 42 of P. Mohanraj will be safeguarded.
c.If the old management takes over the corporate debtor (for MSME
Section 29A does not apply (see 240A), hence for MSME old manage-
ment can takeover) the corporate debtor itself is also not safeguarded
from prosecution under Section 138 or any other offences.
47.Thus, I am of the view that by operation of the provisions of the IBC, the criminal
prosecution initiated against the natural persons under Section 138 read with 141 of the
NI Act read with Section 200 of the CrPC would not stand terminated.
48.In JIK Industries Limited and Others v. Amarlal V. Jumani and Another
reported in (2012) 3 SCC 255, this Court held that the sanction of a scheme under Section
28
391 of the Companies Act, 1956 will not lead to any automatic compounding of offence
under Section 138 of the NI Act without the consent of the complainant. Neither Section
14 nor Section 31 of the IBC can produce such a result. The binding effect contemplated
by Section 31 of the IBC is in respect of the assets and management of the corporate
debtor. No clause in the resolution plan even if accepted by the adjudicating
authority/appellate tribunal can take away the power and jurisdiction of the criminal court
to conduct and dispose of the proceedings before it in accordance with the provisions of
the CrPC.
49.It is true that by virtue of Section 238 of the IBC, the provisions of the CrPC shall
have effect notwithstanding anything inconsistent therewith contained in any other law
for the time being in force or any instrument having effect by virtue of any such law. But,
no provision of the IBC bars the continuation of the criminal prosecution initiated against
the directors and officials.
50.It is equally true that once the corporate debtor comes under the resolution
process, its erstwhile managing director(s) cannot continue to represent the company.
Section 305(2) of the CrPC states that where a corporation is the accused person or one
of the accused persons in an inquiry or trial, it may appoint a representative for the
purpose of the inquiry or trial and such appointment need not be under the seal of the
corporation. Therefore, it is only the Resolution Professional who can represent the
accused company during the pendency of the proceedings under IBC. After the
proceedings are over, either the corporate entity may be dissolved or it can be taken over
by a new management in which event the company will continue to exist. When a new
management takes over, it will have to make arrangements for representing the company.
If the company is dissolved as a result of the resolution process, obviously proceedings
against it will have to be terminated. But even then, its erstwhile directors may not be
able to take advantage of the situation. This is because, this Court in Aneeta
Hada (supra), even while overruling its decision in Anil Hada v. Indian Acrylic Ltd.
reported in (2000) 1 SCC 1, as not laying down the correct law in so far as Anil Hada
(supra) states that the director or any other officer can be prosecuted without
impleadment of the company, proceeded to hold that the matter would stand on a
29
different footing where there is some legal impediment as the doctrine of lex non cogit
ad impossibilia gets attracted. It was specifically observed that the decision in Anil
Hada (supra) is overruled with the qualifier as stated in para 51. Considering the same,
the ratio of the decision of this Court in Ajit Balse (supra) upon which strong reliance is
placed on behalf of the appellant is of no avail.
51.What follows from the aforesaid is that for difficulty in prosecuting the corporate
debtor under Section 138 of the NI Act after the approval of the resolution plan under the
IBC, we need not let the natural persons i.e., the signatories to the cheques/directors of
the corporate debtor escape prosecution. How can one allow the natural persons to escape
liability on such specious plea? In such a situation the Latin maxim Lex Non Cogit Ad
Impossibilia is attracted which means law does not compel a man to do which he cannot
possibly perform. Broom's "Legal Maxims" contains several illustrative cases in support
of the maxim. This maxim has been referred to with approval by this Court in State of
Rajasthan v. Shamsher Singh reported in 1985 supp SCC 416.
52.Thus, where the proceedings under Section 138 of the NI Act had already
commenced and during the pendency the plan is approved or the company gets
dissolved, the directors and the other accused cannot escape from their liability by citing
its dissolution. What is dissolved is only the company, not the personal penal liability of
the accused covered under Section 141 of the NI Act. They will have to continue to face
the prosecution in view of the law laid down in Aneeta Hada (supra). Where the
company continues to remain even at the end of the resolution process, the only
consequence is that the erstwhile directors can no longer represent it.
FEW OF THE ABSURD SITUATIONS THAT MAY ARISE IF SECTION 138
PROCEEDINGS IN RELATION TO THE SIGNATORIES/DIRECTORS ARE
HELD TO BE NOT MAINTAINABLE AFTER THE RESOLUTION PLAN IS
APPROVED
53.If the argument that the signatories/directors are not liable to be proceeded under
Section 138/141 of the NI Act once the resolution plan is approved, the same may lead to
the following absurd situations:
30
i.If during the lifetime of the Section 14 moratorium order, some of the ac-
cused are convicted under Section 138 of the NI Act, they will have to be re-
leased in appeal once the resolution plan is approved. Thus, then, no purpose
would be served by proceeding further against the co-accused under Section
138 during the moratorium.
ii.If the resolution plan is not approved and the corporate debtor goes under liq-
uidation in such circumstances under Section 35(1)(k) of the IBC the liquida-
tor can represent the corporate debtor. Thus, the prosecution under Section
138/141 continues. This may lead to absurd situations in working of the IBC
and its impact on Section 138 proceedings.
iii.At the end of the liquidation, the distribution will take place under Section 53
of the IBC. Therein everyone, including the creditors will get their share as per
the waterfall mechanism statutorily decided and the same would be binding
and mandatory. Thereafter, the corporate debtor is dissolved under Section 54
of the IBC after selling of the assets under liquidation. Now during the said
period, the prosecution might have been completed and appeals would be
pending. Then it would be argued that because under the liquidation the
amount is accepted, the prosecution against the signatory/director cannot con-
tinue after the dissolution of the corporate debtor.
54.Thus, while interpreting Sections 14, 31 & 32A resply of the IBC vis-a-vis Sections
138 and 141 resply of the NI Act, the principle of harmonious construction should be ap-
plied and followed. By permitting to proceed against the signatories/directors even after
the approval of the plan, what is achieved is uniformity in the functioning of the law by
removing the anomalous and absurd situations, thereby, making it compliant with Article
14 of the Constitution. The said interpretation shields the relevant provisions from attack
of being manifestly arbitrary.
55.The distinction between a strict construction and a more free one has disappeared
in the modern times and now mostly the question is, “what is the true construction of the
statute?” A passage in Craies on Statue Law 7th Edn. reads to the following effect:-
“The distinction between a strict and a liberal construction has almost
disappeared with regard to all classes of statutes, so that all statutes,
whether penal or not, are now construed by substantially the same rules.
'All modern Acts are framed with regard to equitable as well as legal
principles.' "A hundred years ago", said the court in Lyons' case, "statutes
were required to be perfectly precise and resort was not had to a
reasonable construction of the Act, and thereby criminals were often
allowed to escape. This is not the present mode of construing Acts of
31
Parliament. They are construed now with reference to the true meaning and
real intention of the legislature.”
56.At page-532 of the same book, observations of Sedgwick are quoted as under:
“The more correct version of the doctrine appears to be that statutes of this
class are to be fairly construed and faithfully applied according to the
intent of the legislature without unwarrantable severity on the one hand or
unjustifiable lenity on the other, in cases of doubt the courts inclining to
mercy.”
ARGUMENT THAT AS THE DEBT STOOD EXTINGUISHED BY VIRTUE OF
SECTION 31 OF THE CODE, THE CRIMINAL PROCEEDINGS U/S. 138 OF
THE NI ACT CANNOT CONTINUE AS REGARDS THE DIRECTOR/SIGNA -
TORY.
57.The argument that as the debt stood extinguished by virtue of Section 31 of the
IBC, the proceedings under Section 138 of the NI Act cannot continue as regards the di-
rector/signatory, would run contrary to the line of reasoning assigned by this Court that
the “Involuntary Act” of the principal debtor would not absolve the guarantors.
58.This Court in Lalit Kumar Jain v. Union of India and Others reported in (2021)
9 SCC 321 has held that the approval of the resolution plan per se does not operate as a
discharge of guarantors’ liability. That is because:
a.an involuntary act of the principal debtor leading to loss of security,
would not absolve a guarantor of its liability.
b.a discharge which the principal debtor may secure by operation of
law in bankruptcy (or in liquidation proceedings in the case of a com-
pany) does not absolve the surety of his liability.
59.The same principle is applicable to the signatory/director in the case of Section
138/141 proceedings. The signatory/director cannot take benefit of discharge obtained
by the corporate debtor by operation of law under the IBC.
60.If the argument that extinguishment of debt under Section 31 of the IBC leads to
the discharge of signatory/director under Section 138 proceedings is accepted, the
same will lead to conflict in law as laid down compared to the guarantor’s liability
32
wherein in spite of the plan being approved, the guarantor is held separately liable for the
remaining amount. If the guarantor does not get the benefit of extinguishment of debt
under Section 31 of the IBC, then similarly for extinguishment of debt, the signatory/di-
rector cannot get any benefit. If accepted, this may lead to uncertainty in the first
Principles of law on interpretation of extinguishment of debt. In Lalit Kumar Jain
(supra) this Court held as under:
“122. It is therefore, clear that the sanction of a resolution plan and finality
imparted to it by Section 31 does not per se operate as a discharge of
the guarantor's liability. As to the nature and extent of the liability, much
would depend on the terms of the guarantee itself. However, this Court has
indicated, time and again, that an involuntary act of the principal debtor
leading to loss of security, would not absolve a guarantor of its liability. In
Maharashtra SEB [Maharashtra SEB v. Official Liquidator, (1982) 3 SCC
358] the liability of the guarantor (in a case where liability of the principal
debtor was discharged under the Insolvency law or the Company law), was
considered. It was held that in view of the unequivocal guarantee,
such liability of the guarantor continues and the creditor can realise the
same from the guarantor in view of the language of Section 128 of the Con-
tract Act, 1872 as there is no discharge under Section 134 of that Act. This
Court observed as follows: (SCC pp. 362-63, para 7)
“7. Under the bank guarantee in question the Bank has undertaken
to pay the Electricity Board any sum up to Rs 50,000 and in order to re-
alise it all that the Electricity Board has to do is to make a demand.
Within forty-eight hours of such demand the Bank has to pay the amount
to the Electricity Board which is not under any obligation to prove any de-
fault on the part of the Company in liquidation before the amount de-
manded is paid. The Bank cannot raise the plea that it is liable only to the
extent of any loss that may have been sustained by the Electricity Board
owing to any default on the part of the supplier of goods i.e. the Com-
pany in liquidation. The liability is absolute and unconditional. The fact
that the Company in liquidation i.e. the principal debtor has gone into liq-
uidation also would not have any effect on the liability of the Bank i.e. the
guarantor. Under Section 128 of the Contract Act, 1872, the liability of
the surety is coextensive with that of the principal debtor unless it is
otherwise provided by the contract. A surety is no doubt discharged un-
der Section 134 of the Contract Act, 1872 by any contract between the
creditor and the principal debtor by which the principal debtor is re-
leased or by any act or omission of the creditor, the legal consequence of
which is the discharge of the principal debtor. But a discharge which the
principal debtor may secure by operation of law in bankruptcy (or in liqui-
dation proceedings in the case of a company) does not absolve the surety
33
of his liability (see Jagannath Ganeshram Agarwale v. Shivnarayan
Bhagirath [1939 SCC OnLine Bom 65 : AIR 1940 Bom 247] ; see also
Fitzgeorge, In re [Fitzgeorge, In re, (1905) 1 KB 462]).””
(Emphasis supplied)
LITIGANT CANNOT TAKE ADVANTAGE OF ITS OWN WRONG
(NULLUS COMMODUM CAPERE POTEST DE INJURIA SUA PROPRIA)
61.This Court while upholding the validity of Section 32A, IBC (Manish Kumar’s
case) has held that “The provision is carefully thought out. It is not as if the wrongdo-
ers are allowed to get away.” That is a very important object and the same should not be
permitted to be defeated by accepting the argument that permits the Signatory/Direc-
tor to enjoy the fruits of their own wrong.
62.In an interesting case titled Goa State Cooperative Bank Limited v. Krishna
Nath A. and Others reported in (2019) 20 SCC 38, the facts were that the liquidation
proceedings were required to be completed within a fixed number of years, but failed.
Thereafter the borrowers claimed in the recovery suit that now no recovery could be
made. This Court held that the defaulters cannot take benefit of their own action. The
disbursement of loan in an arbitrary manner and failure to recover was the very fulcrum
on the basis of which the winding up of the Society was ordered. I quote the relevant ob-
servations as under:-
“21. It is apparent that on the termination of the liquidation proceedings,
liability of the members for the debts taken by them does not come to
an end. There is no such provision in the Act providing once winding-up
period is over, the liability of the members for loans obtained by them
which is in their hands, and for which recovery proceedings are pending
shall come to an end. No automatic termination of recovery proceedings
against the members is contemplated. On the other hand, on completion of
the period fixed to liquidate the Society, final report has to be submitted
as to the amount standing to the credit of the Society in liquidation after
paying off its liabilities including the share or interest of members. Thus,
even in the case of liquidation the accountability remains towards surplus
and liabilities do not come to an end. Even if the period fixed for liquidation
of Society is over, that does not terminate the proceedings for recovery
which have been initiated and appeals are pending.
Xxx xxx xxx
34
24.The concept of restitution is a common law principle and it is a rem-
edy against unjust enrichment or unjust benefit. The court cannot be
used as a tool by a litigant to perpetuate illegality. A person who is on the
right side of the law, should not have a feeling that in case he is dragged
in litigation, and wins, he would turn out to be a loser and wrong-
doer as a real gainer, after 20 or 30 years. Thus, the members who have
obtained stay in appeal or on recovery proceedings or the case is pending,
cannot take advantage of the fact that the period fixed for the Liquidator
under the Act is over.
25.Once a report has been submitted, the Registrar has to take action
in terms of the report and in such circumstances when the proceedings for
recovery are pending against the members and the Society has taken loan
from the banks for its member, the actual money has to go to the creditor
i.e. to the bank who is going to be benefitted by recovery of public money in
the hands of members. In such cases it would be appropriate for the Regis-
trar to send notice of the proceedings to a person who is to be benefit-
ted from the recovery. In the instant case, the Bank itself is a prime lender-
cum- liquidator. The proceedings cannot come to the end. Thus, in our con-
sidered opinion, it is open to the bank to continue with the recovery pro-
ceedings and make recoveries from the defaulting members. Merely on the
liquidation of the Society, or the factum that the period fixed for liqui-
dation is over, liability of the members for the loans cannot be said to
have been wiped off. The disbursement of loan in an arbitrary
manner and failure to recover was the very fulcrum on the basis of
which winding up of the Society was ordered.”
(Emphasis supplied)
TERMS OF THE RESOLUTION PLAN CANNOT CONTROL THE
ENACTMENT/RULES
63.Before I proceed to comment on the aforesaid, it is necessary to look into the rel-
evant clauses of the resolution plan upon which strong reliance is sought to be placed on
behalf of the appellant. The relevant clauses read thus:
“Part K: Extinguishment of Claims/Rights
1.Save and except specifically dealt with under this Resolution Plan, no
other payments or settlements (of any kind) shall be made to any other Per-
son in respect of claims filed under the CIRP (including, for the avoidance of
doubt, any unverified portion of their claim) and all claims against the Cor-
porate Debtor along with any related legal proceedings, including criminal
proceedings, and other penal proceedings, shall stand irrevocably and un-
35
conditionally abated, settled and extinguished in perpetuity on the Effective
Date, and with effect from the Appointed Date.
2.The payment to Persons contemplated in this Resolution Plan shall be
the Corporate Debtors and Resolution Applicant's full and final performance
and satisfaction of all its obligations to such Persons and all Claims (includ-
ing, for the avoidance of doubt, any unverified portion of their Claims) of
such Persons against the Corporate Debtor shall stand irrevocably and un-
conditionally settled and extinguished in perpetuity on the Effective Date and
with effect from the Appointed Date.
3.…Accordingly, the Resolution Applicant and the Corporate Debtor
shall have no responsibility or liability in respect of any claims against the
Corporate Debtor attributable to the period prior to the Effective Date other
than any payments to be made under this Resolution Plan and all claims
along with any related legal proceedings, including criminal proceedings
and other penal proceedings, shall stand irrevocably and unconditionally
abated, settled and extinguished in perpetuity.
Xxx xxx xxx
6.On the Effective Date and with effect from the Appointed Date, all the
outstanding negotiable instruments issued by Director/promoter or Corpo-
rate Debtor or by any Person on behalf of the Corporate Debtor for any
dues of Corporate Debtor including demand promissory notes, post-dated
cheques and letters of credit, shall stand terminated and the Corporate
Debtor's liability under such instruments shall stand extinguished.”
(Emphasis supplied)
64.I have referred to Section 31 of the IBC and Ebix Singapore (supra) to explain
that the resolution plan is binding on the creditors who have not consented to it. This is
a very important factor, which indicates that the complainant under Section 138 NI Act
is bound by the approved resolution plan, even though he may not have consented to it
(if he is part of the CoC) or likes it. If he is not a part of the CoC, then also it is bind-
ing on him.
65.Section 30(2)(e) of the IBC requires the resolution professional to approve
the resolution plan, only if the same does not violate any of the provisions of the
law for the time being in force. Thus, the clauses of the resolution plan cannot con-
trol the Enactment/Rules in force. It is the resolution plan which has to comply with the
laws in force. In the case on hand, any clause giving any effect to the corporate debtor
under Section 138 NI Act proceedings, cannot be used to protect the signatories/direc-
36
tors under Section 138/141 NI Act.
66.Section 61 (3)(i) of the IBC provides for an appeal against an order approving a
resolution plan if it contravenes any provision of law.
“61. Appeals and Appellate Authority.—
xxx xxx xxx
(3)An appeal against an order approving a resolution plan under Sec-
tion 31 may be filed on the following grounds, namely:
(i)theapproved resolution plan isin contravention of
the provisions of any law for the time being in force;….”
67.The complainant-creditor of Section 138 NI Act proceedings may or may not
have any role to play in the approval of the resolution plan and majority of Section 138
creditors may be small players unlike big financial creditors.
68.The terms of the resolution plan cannot run contrary to the enactment i.e. the IBC
or any other plenary law or rules.
69.Thus, the said clauses of the resolution plan have no role to play in answering
the neat question of law, which is dependent on the interpretation of various provi-
sions of the IBC and NI Act.
70.It was also sought to be argued on behalf of the appellant that the plain reading of
the clauses of the resolution plan referred to above, would indicate that the respondent
(complainant) could be said to have compounded the offence punishable under Section
138 of the NI Act.
71.‘Compounding’ and ‘quashing’ are not synonymous terms. In law, they have
different meanings and consequences. They arise from different situations and operate
in different fields and stages. There is no apparent legal interdependence or interlink to
the extent that one could exist only if the conditions of the other were satisfied or vice-
versa. Quashing is one of the facets of inherent powers, while compounding of an
offence being a statutory expression contained under Section 320 the CrPC is entirely a
different concept.
72.The expressions 'compromise' and 'compounding' are not synonyms in criminal
jurisprudence even though these expressions are usually used without any distinction.
37
Any dispute can be compromised between the parties if the terms are not illegal. But
only a compoundable offence allowed by law can be compounded. A dispute relating to
a crime can be compromised even before the case is registered, and in that case, victim
of the crime may refuse to file a complaint. But if in spite of compromise, if he files a
complaint and court finds that what is compromised is a compoundable offence,
depending upon the facts and circumstances of each case Magistrate can refuse to take
cognizance, or acquit the accused as offence was compounded or the complaint can be
quashed in proceedings under Section 482 of the CrPC.
73.In a compromise, consensus between the parties to give and take is more
important and in a compounding, decision of the victim of the offence not to prosecute
and not to continue with prosecution is more important.
74.I am of the view that the clauses as contained in the resolution plan referred to
above, only extinguishes the liability of the corporate debtor and not the natural persons.
75.As per Section 138 of the NI Act, when the cheque was dishonoured and a statu-
tory notice demanding the cheque amount was issued, the accused shall pay the cheque
amount within 15 days from the date of receipt of the said notice. The moment the said
15 days expired, the cause of action arises. In other words, the offence under Section
138 of the NI Act is complete. Once the cause of action arose for the offence commit-
ted, the complainant has to approach the criminal court within one month to take penal
action under Section 138 of the NI Act. To put it clearly, the complainant approaches the
criminal court not for recovery of the legally enforceable debt, but for taking penal ac-
tion under Section 138 of the NI Act for the offence already committed by the accused
by not making the payment of the cheque amount despite the receipt of the statutory no-
tice. The only question before the criminal court is whether the cheque issued by the ac-
cused towards the discharge of his liability was dishonoured and despite the service of
demand notice, whether he had not paid the amount. There is no bar contained in any of
the provisions of the IBC, and the NI Act from approaching the criminal court to seek
penal action under Section 138 of the NI Act.
FEW RELEVANT DECISIONS ON THE SUBJECT
38
76.In State Bank of India v. V. Ramakrishnan and Another reported in (2018) 17
SCC 394, this Court held that:-
“31. The Insolvency Law Committee, appointed by the Ministry of
Corporate Affairs, by its Report dated 26-3-2018, made certain key
recommendations…..
32. The Committee insofar as the moratorium under Section 14 is
concerned, went on to find:…
“5.11. Further, since many guarantees for loans of corporates are given
by its promoters in the form of personal guarantees, if there is a stay on
actions against their assets during a CIRP, such promoters (who are also
corporate applicants) may file frivolous applications to merely take
advantage of the stay and guard their assets. In the judgments analysed
in this relation, many have been filed by the corporate applicant under
Section 10 of the Code and this may corroborate the above apprehension
of abuse of the moratorium provision. The Committee concluded that
Section 14 does not intend to bar actions against assets of guarantors to
the debts of the corporate debtor and recommended that an explanation
to clarify this may be inserted in Section 14 of the Code. The scope of the
moratorium may be restricted to the assets of the corporate debtor only.”
Xxx xxx xxx
25. Section 31 of the Act was also strongly relied upon by the respondents.
This section only states that once a resolution plan, as approved by the
Committee of Creditors, takes effect, it shall be binding on the corporate
debtor as well as the guarantor. This is for the reason that otherwise,
under Section 133 of the Contract Act, 1872, any change made to the debt
owed by the corporate debtor, without the surety's consent, would relieve
the guarantor from payment. Section 31(1), in fact, makes it clear that the
guarantor cannot escape payment as the resolution plan, which has been
approved, may well include provisions as to payments to be made by such
guarantor. This is perhaps the reason that Annexure VI(e) to Form 6
contained in the Rules and Regulation 36(2) referred to above, require
information as to personal guarantees that have been given in relation to
the debts of the corporate debtor. Far from supporting the stand of the
respondents, it is clear that in point of fact, Section 31 is one more factor
in favour of a personal guarantor having to pay for debts due without any
moratorium applying to save him.
Xxx xxx xxx
26.1. Section 14 refers only to debts due by corporate debtors, who are
limited liability companies, and it is clear that in the vast majority of cases,
39
personal guarantees are given by Directors who are in management of the
companies. The object of the Code is not to allow such guarantors to
escape from an independent and co-extensive liability to pay off the entire
outstanding debt, which is why Section 14 is not applied to them. …”
(Emphasis supplied)
77.In Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta
and Others reported in (2020) 8 SCC 531, this Court held that:
“106. Following this judgment in V. Ramakrishnan case (2018) 17 SCC
394, it is difficult to accept Shri Rohatgi's argument that that part of the
resolution plan which states that the claims of the guarantor on account of
subrogation shall be extinguished, cannot be applied to the guarantees
furnished by the erstwhile Directors of the corporate debtor. So far as the
present case is concerned, we hasten to add that we are saying nothing
which may affect the pending litigation on account of invocation of these
guarantees. However, NCLAT judgment being contrary to Section 31(1) of
the Code and this Court's judgment in V. Ramakrishnan case (2018) 17
SCC 394, is set aside.”
(Emphasis supplied)
78.In Vijay Kumar Jain v. Standard Chartered Bank reported in (2019) 20 SCC
455, this Court held that:
“19.3… we find that Section 31(1) of the Code would make it clear that
such members of the erstwhile Board of Directors, who are often
guarantors, are vitally interested in a resolution plan as such resolution
plan then binds them. Such plan may scale down the debt of the principal
debtor, resulting in scaling down the debt of the guarantor as well, or it
may not. The resolution plan may also scale down certain debts and not
others, leaving guarantors of the latter kind of debts exposed for the entire
amount of the debt.
19.4. The regulations also make it clear that these persons are vitally
interested in resolution plans as they affect them.” (Emphasis
supplied)
79.In Lalit Kumar Jain (supra), this Court held that:
“122. It is therefore, clear that the sanction of a resolution plan and
finality imparted to it by Section 31 does not per se operate as a discharge
of the guarantor's liability. As to the nature and extent of the liability,
40
much would depend on the terms of the guarantee itself. However, this
Court has indicated, time and again, that an involuntary act of the
principal debtor leading to loss of security, would not absolve a guarantor
of its liability…..”
(Emphasis supplied)
80.In JIK Industries Limited and Others v. Amarlal V. Jumani and Another
reported in (2012) 3 SCC 255, this Court held that:
“19. In the instant appeal in most of the cases the offence under the NI Act
has been committed prior to the scheme. Therefore, the offence which has
already been committed prior to the scheme does not get automatically
compounded only as a result of the said scheme. Therefore, even by relying
on the ratio of the aforesaid judgment in J.K. (Bombay) (P) Ltd. [J.K.
(Bombay) (P) Ltd. v. New Kaiser-I-Hind Spg. And Wvg. Co. Ltd., AIR 1970
SC 1041], this Court cannot accept the appellant's contention that the
scheme under Section 391 of the Companies Act will have the effect of
automatically compounding the offence under the NI Act.
Xxx xxx xxx
27. The compounding of an offence is always controlled by statutory
provision. There are various features in the compounding of an offence and
those features must be satisfied before it can be claimed by the offender that
the offence has been compounded. Thus, compounding of an offence
cannot be achieved indirectly by the sanctioning of a scheme by the
Company Court.
Xxx xxx xxx
70. In the instant case no special procedure has been prescribed under the
NI Act relating to compounding of an offence. In the absence of special
procedure relating to compounding, the procedure relating to
compounding under Section 320 shall automatically apply in view of
clear mandate of sub-section (2) of Section 4 of the Code.
Xxx xxx xxx
83. For the reasons aforesaid, this Court is unable to accept the contentions
of the learned counsel for the appellant(s) that as a result of sanction of a
scheme under Section 391 of the Companies Act there is an automatic
compounding of offences under Section 138 of the NI Act even without the
consent of the complainant.” (Emphasis supplied)
81.In Indorama Synthetics (I) Ltd., Nagpur v. State of Maharashtra and others
41
reported in 2016 SCC OnLine Bom 2611, the question that arose before the Bombay
High Court was whether the expression “suit or other proceedings” mentioned in
Section 446(1) of the Companies Act, 1956 would include criminal proceedings under
Section 138 NI Act. It was held that:-
“17. Thus, the main object of section 138 of N.I. Act, which can be inferred,
is to safeguard the credibility of commercial transactions and to prevent
bouncing of cheques by providing a personal criminal liability against the
drawer of the cheque in public interest. No civil liability or any liability
against the assets of the drawer of the cheque is contemplated under
section 138 of the N.I. Act. Hence, it follows that the provisions of section
446(1) of the Companies Act can have apparently and in essence no
application to the proceedings under section 138 of Negotiable Instruments
Act, as it is not a suit or proceeding having direct bearing on the
proceedings for winding-up or the assets of the Company.
xxx xxx xxx
24. Thus, the sum and substance of all these judicial decisions is that the
provisions of section 446(1) of the Companies Act are to be invoked
judiciously only when it has got any concern with either the winding-up
proceedings or with the assets of the Company. The expression “suit or
other proceedings”, therefore, as used in section 446(1) of the Companies
Act, has to be construed accordingly and not to be interpreted so liberally
and widely so as to include each and every proceeding of whatsoever
nature initiated against the Company, including even the criminal
proceedings like for the offence under section 138 of N.I. Act, which has
got no bearing on the winding-up proceedings of the Company and are
not concerned with, directly with the assets of the Company, but are
mainly dealing with the penal and personal liability of the Directors of
the Company.
25. The conflict involved in the case can also be looked into from another
aspect ‘as to whether the provisions of section 138 of N.I. Act can
override the provisions of Companies Act, as it is a very special provision
incorporated in the Negotiable Instruments Act, though the Companies Act
contains certain special provisions in order to safeguard the rights of the
Company under liquidation?’
Xxx xxx xxx
28. If one considers the provisions of section 138 of the N.I. Act, which are
introduced subsequently by way of amendment in the said Act, in the year
1988, it being a subsequent Statute, it will necessarily override the
42
provisions of General Statute, like, the Companies Act.
Xxx xxx xxx
30. Thus, there is a long line of decisions making the position clear that
the expression ‘suit or legal proceedings’, used in section 446(1) of the
Companies Act, can mean only those proceedings which can have a
bearing on the assets of the companies in winding-up or have some
relation with the issue in winding-up. It does not mean each and every
civil proceedings, which has no bearing on the winding-up proceedings,
or criminal offences where the Director of the Company is presently
liable for penal action.”
(Emphasis supplied)
82.In Manish Kumar (supra), this Court upheld Section 32A of the IBC and stated
thus:
“318. The first proviso in sub-section (1) declares that if there is approval
of a resolution plan under Section 31 and a prosecution has been instituted
during the CIRP against the corporate debtor, the corporate debtor will
stand discharged. This is, however, subject to the condition that the
requirements in sub-section (1), which have been elaborated by us, have
been fulfilled. In other words, if under the approved resolution plan, there is
a change in the management and control of the corporate debtor, to a
person, who is not a promoter, or in the management and control of the
corporate debtor, or a related party of the corporate debtor, or the person
who acquires control or management of the corporate debtor, has neither
abetted nor conspired in the commission of the offence, then, the
prosecution, if it is instituted after the commencement of the CIRP and
during its pendency, will stand discharged against the corporate debtor.
Under the second proviso to sub-section (1), however, the designated
partner in respect of the liability partnership or the officer in default, as
defined under Section 2(60) of the Companies Act, 2013, or every person,
who was, in any manner, in charge or responsible to the corporate debtor
for the conduct of its business, will continue to be liable to be prosecuted
and punished for the offence committed by the corporate debtor. This is
despite the extinguishment of the criminal liability of the corporate debtor
under sub-section (1). Still further, every person, who was associated with
the corporate debtor in any manner, and, who was directly or indirectly
involved in the commission of such offence, in terms of the report
submitted and report filed by the investigating authority, will continue to
be liable to be prosecuted and punished for the offence committed by the
corporate debtor.
319. Thus, the combined reading of the various limbs of sub-section (1)
43
would show that while, on the one hand, the corporate debtor is freed from
the liability for any offence committed before the commencement of the
CIRP, the statutory immunity from the consequences of the commission of
the offence by the corporate debtor is not available and the criminal
liability will continue to haunt the persons, who were in charge of the
assets of the corporate debtor, or who were responsible for the conduct of
its business or those who were associated with the corporate debtor in any
manner, and who were directly or indirectly involved in the commission
of the offence, and they will continue to be liable.
Xxx xxx xxx
326. We are of the clear view that no case whatsoever is made out to seek
invalidation of Section 32-A. The boundaries of this Court's jurisdiction
are clear. The wisdom of the legislation is not open to judicial review.
Having regard to the object of the Code, the experience of the working of
the Code, the interests of all stakeholders including most importantly the
imperative need to attract resolution applicants who would not shy away
from offering reasonable and fair value as part of the resolution plan if the
legislature thought that immunity be granted to the corporate debtor as
also its property, it hardly furnishes a ground for this Court to interfere.
The provision is carefully thought out. It is not as if the wrongdoers are
allowed to get away. They remain liable. The extinguishment of the
criminal liability of the corporate debtor is apparently important to the
new management to make a clean break with the past and start on a
clean slate. We must also not overlook the principle that the impugned
provision is part of an economic measure. The reverence courts justifiably
hold such laws in cannot but be applicable in the instant case as well. The
provision deals with reference to offences committed prior to the
commencement of the CIRP. With the admission of the application the
management of the corporate debtor passes into the hands of the interim
resolution professional and thereafter into the hands of the resolution
professional subject undoubtedly to the control by the Committee of
Creditors. As far as protection afforded to the property is concerned there is
clearly a rationale behind it. Having regard to the object of the statute we
hardly see any manifest arbitrariness in the provision.
327…..Significantly every person who was associated with the corporate
debtor in any manner and who was directly or indirectly involved in the
commission of the offence in terms of the report submitted continues to
be liable to be prosecuted and punished for the offence committed by the
corporate debtor.”
(Emphasis supplied)
83.In P. Mohanraj (supra) Full Bench of this Court held thus:
44
“41. Section 32-A cannot possibly be said to throw any light on the true
interpretation of Section 14(1)(a) as the reason for introducing Section 32-
A had nothing whatsoever to do with any moratorium provision. At the
heart of the section is the extinguishment of criminal liability of the
corporate debtor, from the date the resolution plan has been approved by
the adjudicating authority, so that the new management may make a clean
break with the past and start on a clean slate. A moratorium provision, on
the other hand, does not extinguish any liability, civil or criminal, but only
casts a shadow on proceedings already initiated and on proceedings to be
initiated, which shadow is lifted when the moratorium period comes to an
end. Also, Section 32-A(1) operates only after the moratorium comes to
an end. At the heart of Section 32-A is the IBC's goal of value
maximisation and the need to obviate lower recoveries to creditors as a
result of the corporate debtor continuing to be exposed to criminal
liability.
42. Unfortunately, Section 32-A is inelegantly drafted. The second proviso
to Section 32-A(1) speaks of persons who are in any manner in charge of,
or responsible to the corporate debtor for the conduct of its business or
associated with the corporate debtor and who are, directly or indirectly,
involved in the commission of “such offence” i.e. the offence referred to in
sub-section (1), “as per the report submitted or complaint filed by the
investigating authority …”. The report submitted here refers to a police
report under Section 173 CrPC, and complaints filed by investigating
authorities under special Acts, as opposed to private complaints. If the
language of the second proviso is taken to interpret the language of Section
32-A(1) in that the “offence committed” under Section 32-A(1) would not
include offences based upon complaints under Section 2(d) CrPC, the width
of the language would be cut down and the object of Section 32-A(1) would
not be achieved as all prosecutions emanating from private complaints
would be excluded. Obviously, Section 32-A(1) cannot be read in this
fashion and clearly incudes the liability of the corporate debtor for all
offences committed prior to the commencement of the corporate
insolvency resolution process. Doubtless, a Section 138 proceeding would
be included, and would, after the moratorium period comes to an end
with a resolution plan by a new management being approved by the
adjudicating authority, cease to be an offence qua the corporate debtor.
43….the expression “prosecution” in the first proviso of Section 32-A(1)
refers to criminal proceedings properly so-called either through the
medium of a first information report or complaint filed by an investigating
authority or complaint and not to quasi-criminal proceedings that are
instituted under Sections 138/141 of the Negotiable Instruments Act against
the corporate debtor, the object of Section 14(1) IBC gets subserved, as
does the object of Section 32-A, which does away with criminal
45
prosecutions in all cases against the corporate debtor, thus absolving the
corporate debtor from the same after a new management comes in.
Xxx xxx xxx
45. Section 138 contains within it the ingredients of the offence made out.
The deeming provision is important in that the legislature is cognizant of
the fact that what is otherwise a civil liability is now also deemed to be an
offence, since this liability is made punishable by law. It is important to
note that the transaction spoken of is a commercial transaction between
two parties which involves payment of money for a debt or liability. The
Explanation to Section 138 makes it clear that such debt or other liability
means a legally enforceable debt or other liability. Thus, a debt or other
liability barred by the law of limitation would be outside the scope of
Section 138. This, coupled with fine that may extend to twice the amount of
the cheque that is payable as compensation to the aggrieved party to cover
both the amount of the cheque and the interest and costs thereupon, would
show that it is really a hybrid provision to enforce payment under a
bounced cheque if it is otherwise enforceable in civil law. Further, though
the ingredients of the offence are contained in the first part of Section 138
when the cheque is returned by the bank unpaid for the reasons given in the
section, the proviso gives an opportunity to the drawer of the cheque,
stating that the drawer must fail to make payment of the amount within 15
days of the receipt of a notice, again making it clear that the real object of
the provision is not to penalise the wrongdoer for an offence that is already
made out, but to compensate the victim.”
(Emphasis supplied)
84.In Narinder Garg and Others v. Kotak Mahindra Bank Ltd. and Others
reported in (2022) SCC OnLine SC 517, this Court held that:
“3. In P. Mohanraj v. Shah Brothers Ispat Private Limited, (2021) 6 SCC
258, a Bench of three-Judges of this Court considered the matter whether a
corporate entity in respect of which moratorium had become effective
could be proceeded against in terms of Sections 138 and 141 of the
Negotiable Instruments Act, 1881 (“the Act” for short).
4. A subsidiary issue was also about the liability of natural persons like a
Director of the Company. In paragraph 77 of its judgment, this Court
observed that the moratorium provisions contained in Section 14 of the
Insolvency and Bankruptcy Code, 2016 would apply only to the corporate
debtor and that the natural persons mentioned in Section 141 of the Act
would continue to be statutorily liable under the provisions of the Act.
5. It is submitted by Mr. Gopal Sankaranarayanan, learned Senior
46
Advocate that the resolution plan having been accepted in which the dues
of the original complainant also figure, the effect of such acceptance
would be to obliterate any pending trial under Sections 138 and 141 of
the Act.
6. The decision rendered in P. Mohanraj is quite clear on the point and,
as such, no interference in this petition is called for.”
(Emphasis supplied)
85.Thus, the upshot of all the decisions referred to above is where the proceedings
under Section 138 of the NI Act had already commenced with the Magistrate taking
cognizance upon the complaint and during the pendency, the company gets dissolved,
the signatories/directors cannot escape from their penal liability under Section 138 of
the NI Act by citing its dissolution. What is dissolved, is only the company, not the per-
sonal penal liability of the accused covered under Section 141 of the NI Act.
86.I may draw my final conclusions as under:
(a)After passing of the resolution plan under Section 31 of the IBC by the adjudi-
cating authority & in the light of the provisions of Section 32A of the IBC, the
criminal proceedings under Section 138 of the NI Act will stand terminated
only in relation to the corporate debtor if the same is taken over by a new man-
agement.
(b)Section 138 proceedings in relation to the signatories/directors who are
liable/covered by the two provisos to Section 32A(1) will continue in
accordance with law.
87.In view of the aforesaid discussion, the appeal fails and is hereby dismissed.
88.The connected appeals also fail and are hereby dismissed.
89.Pending application(s), if any, shall stand disposed of.
………………………………………..J.
(J.B. PARDIWALA)
NEW DELHI;
MARCH 15, 2023.
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