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CASE NO.:

Appeal (crl.) 11 of 1999

PETITIONER:

PANKAJ MEHRA AND ANR. ETC.

RESPONDENT:

STATE OF MAHARASHTRA AND ORS.

DATE OF JUDGMENT: 15/02/2000

BENCH:

K.T. THOMAS & A.P. MISRA

JUDGMENT:

JUDGMENT

2000 (1) SCR 825

The Judgment of the Court was delivered by

THOMAS, J. Can a company escape from penal liability under Section 138 of

the Negotiable Instruments Ad (for short "the NI Act") on the premise that

a petition for winding up of the company has been presented and was pending

during the relevant time? A Division Bench of the Bombay High Court held

that the company canno! avert its liability on the mere ground that such

petition was presented prior to the company being called upon by a notice

to pay the amount of the cheque. By holding so, the Division Bench

dismissed a batch of writ petitions filed by different companies

challenging the criminal proceedings initiated against them in different

criminal courts for the offence under Section 138 of the NI Act. We have

now to deal with the same question in this batch of appeals filed by

special leave.

Though different cases now before us have differing facts we arc not

bothering ourselves with such differences. The common features in all the

appeals, which alone are relevant for dealing with the aforesaid question,

can be culled out from one of the appeals. The company involved in the said

sample appeal will be referred to as "the Company". The cheque which the

company issued bore the date 30.10.1996 and the amount covered by the

cheque was Rs. 5,72,432. [There is a contention that the cheque was

actually drawn much before that date). When the cheque was presented for

encashment the drawee bank dishonoured it on 26.12.1996. The payee of the

cheque issued a notice to the Company on 21.12.1996 calling upon it to pay

the amount. As the Company failed to pay the amount a complaint was filed

before the magistrate on 29.1.1997 against the Company and two of its

directors for the offence under Section 138 of the NI Act.

The magistrate who took cognizance of the offence issued process to all the

accused. It was that the accused challenged the criminal proceedings by

means of a writ petition filed before the Bombay High Court, on the premise

that a petition for winding up of the Company has been filed on 27.5.1996

before the court concerned and a provisional liquidator was appointed by

that court two years later i.e. on 21.4.1998. As the facts stated above

were not substantially disputed the Division Bench of the High Court

proceeded to hear the writ petition along with the other writ petitions in

the batch, on the limited question whether the Company can avert the penal

liability on that premise. The main footing on which the Company resisted

the prosecution was that under Section 536(2) of the Companies Act any

disposition of the property of the Com-pany shall be void if it was made

after the commencement of winding up proceedings by the court. To bolster

up the said ground the Company relied on Section 441(2) of the Companies

Act which says that winding up of a company by the court shall be deemed to

commence at the time of presentation of the petition for winding up. The

Division Bench of the High Court noticed the common features in all the

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cases in the following sentences:

"In all these matters, a petition for winding up had been filed either

before the cheques were issued (in some cases) and in any event before the

period of 15 days, after receipt of notice, expired. Thus the question for

consideration is whether merely by reason of a winding up petition being

presented there was a bar or legal disability in making payment."

Learned Judges proceeded to consider the question on the aforesaid admitted

premise and, therefore, examined the contention whether disposi-tion of any

property by the company would become "void" immediately on presentation of

the petition for winding up, or it would become void only when an order of

winding up had been passed, or at least when a provisional liquidator has

been appointed. Section 536(2) of the Companies Act was sought to be

interpreted in a wide dimension so as to render all transactions void

merely because a petition for winding up was presented - whether or not it

was succeeded by an order of winding up or appointment of a provisional

liquidator. The Division Bench of the High Court repelled the said

contention on the following reasoning :

"If this argument is accepted, persons who purchased shares in the open

market through the Stock Exchange without any knowledge of a petition for

winding up having been presented, would also get affected as all such

transactions would be void. Therefore, if this wide propositions were to be

accepted then once a petition for winding up is presented, even without an

order for winding up, there would be for all practical purposes closure of

the Company. All activities of the company would have to a standstill. If

this were the law then unscrupulous parties could blackmail/pressurise all

companies to succumb to unjustified demands by merely threaten-ing to or

presenting petitions for winding up. Conversely un-scrupulous companies

could avoid payment/discharge of its liabilities by having their own

parties present bogus petitions for winding up. After one is dismissed

another could be filed. In this manner, the company could avoid discharging

its liabilities in-definitely if not permanently. If the law was that

merely on the filing of a petition for winding up all dispositions were

void, it would lead to absurd or catastrophic results. In our view that can

never be the legal position."

It was then argued before the Division Bench that the words "in the winding

up" appearing in Section 536(2) of the Companies Act should mean "during

winding up proceedings''. Reliance was placed on the decision in Kamani

Matallic Oxides Ltd. v. Kamani Tubes Ltd., (1984) Company Cases Page 19,

wherein it was held that the words "in the winding up" do not mean "after

or upon the passing of the winding up order". Learned Judge of the Division

Bench of the High Court pointed out the distinguishing context in the said

case in which such a view was taken and then expressed the view that merely

because a petition for winding up has been presented all transactions or

dispositions undertaken during the period cannot become ab initio void. The

following reasoning of the Division Bench for repelling the said contention

is worthy to be extracted :

"If they were to be void ab initio i.e. immediately on their being entered

into, then on the petition being withdrawn or dismissed, they would not

revive. It is clear that if the petition is withdrawn or dismissed then the

transactions would never have been void. This clearly shows that the

transactions/dispositions are not void ab initio but become void on the

passing of an order for winding up or on appointment of a Provisional

Liquidator. What Section 536(2) read with Section 441(2) provides for is to

convert what was otherwise valid into void by virtue or the legal fiction.

Thus the voidness taken effect on the passing of the order of winding up or

appointment of Provisional Liquidator. By virtue of the legal fietion, in

Section 441(2), it then relates back to the date of presen-tation of the

petition for winding up."

We will presently consider the effect of Section 536(2) of the Com-panies

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Act, The entire Section is quoted below :

"Avoidance of transfers, etc., after commencement of winding up. -

(1) la the case of a voluntary winding up, any transfer of shares in the

company, not being a transfer made to or with the sanction of the

liquidator, and any alteration in the status of the members of the company,

made after the commencement of the winding up, shall be void.

(2) In the case of a winding up by or subject to the supervision of the

Court, any disposition of the property (including actionable claims) of the

company, and any transfer of shares in the company Or alteration in the

status of its members, made after the commen-cement of the winding up,

shall, unless the Court otherwise orders, be void."

Contextually Section 441(2) of the Companies Act is very relevant and hence

that is also extracted here :

"441. Commencement of winding up by Court. - Where, before the presentation

of a petition for the winding up of a company by the court, a resolution

has been passed by the company for voluntary winding up, the winding up of

the company shall be deemed to have commenced at the time of the passing of

the resolution, and unless the Court on proof of fraud or mistake, thinks

fit to direct otherwise, all proceedings taken ia the voluntary winding up

shall be deemed to have been validly taken.

(2) In any other case, the winding up of a company by the Court Shall be

deemed to commence at the time of the presentation of the petition for the

winding up."

Three modes of winding up have been prescribed in Part VII of the Companies

Act, (vide Section 425). First is, winding up by the court, next is

voluntary winding up and the third is winding up by subjecting to the

supervision of the court. We need not bother ourselves with the first sub-

section of Section 536 of the Companies Act as it deals with a case of

voluntarily winding up of the company, because none of the companies in the

present batch of appeals is involved in such a contingency. Sub-section (2)

deals with the other two types of winding up. Section 439 of the Companies

Act con-templates an application to the court for the winding up of the

company. It can be done by presenting a petition by any one of the persons

enumerated in sub-section (1) of Section 439. Such persons include any

creditor, including any prospective creditor.

Once a petition for winding up is presented it is not a necessary

concomitant that the winding up would follow. This position is made clear

in Section 440(2) which says that ''the court shall not make a winding up

order on a petition presented to it under sub-section (1), unless it is

satisfied that the voluntary winding up or winding up subject to the super-

vision of the Court cannot be continued with due regard to the interests of

the creditors or contributories or both."

So a judicial exercise is called for to reach the satisfaction of the court

that winding up has to be continued with due regard to the interest of the

creditors or the contributors. Section 443 of the Companies Act is

important in this context. Sub-section (1) of that Section says that on

hearing a petition for winding up the court may either (1) dismiss the

petition or (2) make any interim order as it thinks fit or (3) make an

order for a winding up. Sub-section (2) says that "where the petition is

presented on the ground that it is just and equitable that the company

should be wound up, the Court may refuse to make ar order of winding up. if

it is of opinion that some other remedy is available to the petitioners and

that they are acting unreasonably in seeking to have the company wound up

instead of pursuing that other remedy."

Two more provisions are relevant in this context. Section 450 says : "At

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any time after the presentation of a winding up petition and before the

making of a winding up order, the Court may appoint the Officer Liquida-tor

to be liquidator provisionally". Before appointing a provisional liquida-

tor the court has to give notice to the company and reasonable opportunity

to make his representation. Section 449 enjoins that "on a winding up order

being made in respect of a company the Official Liquidator shall, by virtue

of his office, become the liquidator of the company." In the above backdrop

alone we can consider the impact of the legislative direction in Section

536(2) that any disposition of the property of the company made after the

commencement of the winding up (i,e. after the presentation of a petition

for winding up) shall be void. There are two important aspects here. First

is that the word "void" need not automatically indicate that any

disposition should be ab initio void. The legal implication of the word

"void" need not necessarily be a stage of nullity in all contin-gencies.

Black's Law Dictionary gives the meaning of the word !'void" as having

different nuances in different connotations. Once of them is of course

"null, or having no legal force or binding effect". And the other is

"unable in law, to support the purpose for which it was intended". After

referring to the nuances between void and voidable the Lexicographer

pointed out the following :

"The word 'void' in its strictest sense, means that which has no force and

effect, is without legal efficacy, is incapable of being enforced by law,

or has no legal or binding force, but frequently the word is used an

construed as having the more liberal meaning of 'voidable. The word 'void'

is used in statutes in the sense of utterly void so as to be incapable of

ratification, and also in the sense of voidable and resort must be had to

the rules of construc-tion in many cases to determine in which sense the

Legislature intended to use it. An act or contract neither wrong in itself

nor against public policy, which has been declared void by statute for the

protection or benefit of a certain party, or class of parties, is voidable

only."

For discerning the legislative idea in employing the word "void" in the

context set out in Section 536(2) of the Companies Act the second aspect to

be noticed is that the provision itself shows that the word void is not

employed peremptorily since court has power to order otherwise. The words

"unless the court otherwise order" are capable of diluting the rigor of the

word "void" and to choose the alternative meaning attached to that word.

In Chittoor District Cooperative Marketing Society Ltd. v. M/s. Vegetoh

Ltd, and Ors., [1987] Suppl. SCC 167 a two Judge Bench of this Court

considered a plea for validation of payments made by a company after

presentation of a petition for winding up. One set of payments were made

before the passing of the winding up order and the other set of payments

were made thereafter. This Court declined to validate such payments on the

ground that "there is no evidence to show that those payments were made

either under compulsion of circumstances in order to save or protect the

property of the company or that there was any commercial compulsion to

enable it to run its business". The decision only indicates that such

payments could have been made valid if evidence was adduced to show that

there was compulsion of circumstances. In facts, this decision lands

support to the interpretation that the payments which were made after the

commencement of winding up proceedings, would not become ab initio void.

An early decision of a Division Bench of the Bombay High Court in Tulsidas

Jasraj Parekh v. Industrial Bank of Western India, AIR (1931) Bombay 2 was

sought to be relied on by most of the learned counsel who argued for

different appellant The question which the Court considered therein

pertained to Section 227(2) of the old Companies Act, 1913 which was

identical to Section 536(2) of the present Act. Certain payments made by a

company after commencement of the winding up proceedings were questioned

and the Division Bench considered the scope of the sub-section and noticed

that the principle had been borrowed from the English Com-panies Act. Hence

some of the English authorities were also referred to by Marten C.J., who

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spoke for the Division Bench. Learned Judges stated thus :

"Now here as regards S 227(2) the Court has to steer a middle course

between two extremes. On the one hand the words of the section are wide

enough to include any sale or payment that a company may make after the

date of the winding-up petition. On that basis any business would

practically have to he stopped if a petition was presented, because it

would be unsafe to dispose of any of the company's assets. For instance, a

mill company might not be able to buy a ton of coal for the use of its

furnaces or, on the other hand, it might not be able to sell any of its

goods in the ordinary course of business. Consequently, the Court has very

properly laid down that, speaking generally, any bona fide trans-action

carried out and completed in the ordinary course of current business will

be sanctioned by the Court under S. 227(2). On the Other hand it will not

allow the assets to be disposed of at the mere pleasure of the company, and

thus cause the fundamental principle of equality amongst creditors to be

violated. To do so would in effect be to add to the preferential debts

enumerated in s. 230 a further category of all debts which the company

might choose to pay wholly or in part."

It is useful to refer to the reasoning adopted by a Division Bench of the

Gujarat High Court in Navjivan Mills Ltd., In re (1986) 59 Company Cases

201 in favour of adopting a pragmatic attitude when a Company Court was

approached for approval of certain dispositions which a com-pany made after

presentation of a petition for winding-up. A clear distinc-tion was drawn

by the Division Bench between the period till the passing of the order for

winding-up and thereafter, so far as dispositions are concerned. The

following reasoning is useful for consideration of the issues involved :

"The court can exercise the jurisdiction under section 536(2) of the

Companies Act, 1956, of giving directions validating proposed transactions

pending a petition for winding up but before the winding up order is made

for the obvious reason that unless these transactions are saved from the

consequence which may ensue, if at all, on an order of winding up being

made, the company might find it difficult to keep itself going and its

business might be paralysed. The purpose underlying the investment of the

power ia court is for the benefit and the interest of the company so as to

ensure that a company which is made the subject of a winding-up petition

may nevertheless obtain the money necessary for carrying out its business

and so as to avoid its business being paralyzed. If that is the purpose and

object of the section, it would hardly be proper and just to stultify the

power and restrict its operation since otherwise it is bound to be counter-

productive in the sense that the very purpose of keeping the company as a

going concern so as to ensure the interest of the shareholders and

creditors would be defeated,"

In Re Grays Inn Construction Company Ltd (1980) 1 All E.R. 814 the Court of

Appeal (Civil Division) considered the principle on which discretion of the

court to validate the dispositions of property made by a company, during

the interregnum between presentation of a winding up petition and the

passing of the order for winding up, has been dealt with. Section 227 of

the English Companies Act, 1948 is almost the same as Section 536(2) of the

Indian Companies Act. Dispositions which could be alidated are mentioned in

the decision. The said decision was cited before us in order to emphasise

the point that courts would be very circumspect in the matter of validating

the payments and the interest of the creditors as well as the company would

be kept uppermost in consideration. Be that so, the said decision is not

sufficient to support the contention that disposi-tion during the

interregnum would be irretrievably void.

It is difficult to lay down that all dispositions of property made by a

company during the interregnum between the presentation of a petition for

winding up and the passing of the order for winding up would be null and

void. If such a view is taken the business of the company would be

paralysed, for, the company may have to deal with very many day-to-day

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transactions, make payments of salary to the staff and other employees and

meet urgent contingencies. An interpretation which could lead to such a

catastrophic situation should be averted. That apart, if any such view is

adopted, a fraudulent company can deceive any bona fide person transact-ing

business with the company by stage-managing a petition to be presented for

winding up in order to defeat such bona fide customers. This conse-quence

has been correctly voiced by the Division Bench in the impugned judgment.

If the payment is not ab initio void the company cannot contend that it is

legally forbidden from making payment of the cheque amount when notice was

issued by the payee regarding dishonour of the cheque. To circumvent this

hurdle an endeavour was made by some of the appellants' counsel to show

that the very issuance of a cheque would amount to disposition of property.

We are unable to accept the said contention particularly in view of the

definition of "cheque" in the NI Act. "A Cheque is a bill of exchange drawn

on a specified banker and not expressed to be payable otherwise than on

demand."

Bill of exchange is "an instrument in writing containing an uncondi-tional

order, signed by the maker, directing certain person to pay a certain sum

of money only to, or to the order of a certain person or to the bearer of

the instrument". The cheque, therefore, can be an order on the banker to

pay the amount to the holder thereof and no disposition of property would

take place until the payment is made by the banker pursuant thereto. At the

most, drawing of a cheque can be considered as a step towards disposition

of property, but that is insufficient to amount disposition of property.

It was next contended that since one of the conditions to constitute the

offence of Section 138 of the NI Act is that a cheque should have been

drawn for the discharge of a legally enforceable "debt or other liability"

no such cheque can possibly be conceived in a situation such as this

because the creditor would be disabled from legally enforcing the debt with

the commencement of winding up proceedings. Section 138 of the NI Act, no

doubt, contemplates only when the cheque is drawn by a person "for the

discharge, in whole or in part, of any debt or other liability".

Explanation to Section 138 says that "for the purposes of this Section

'debt or other liability* means a legally enforceable debt or liability".

Therefore, the first limb of the contention is forceful that for the

offence under Section 138 the cheque should have been drawn for discharging

a legally enforceable debt or other liability. But the second limb of the

contention is tenuous as the debt would not cease to be legally enforceable

merely because some body has filed a petition for winding up.

In this context a reference to Section 139 of the NI Act is indispen-sable.

It 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."

Thus, when a cheque is received by a holder the court has to presume that

(1) it is a cheque of the nature referred to in Section 138; and (2) such

cheque was received for the discharge of a legally enforceable debt or

liability. It is a legislative mandate that the court should proceed with

the assumption that such cheque was received for the discharge of a legally

enforceable debt or other liability until the drawer proves that it is not

so. Learned counsel contended that the burden of proof cast On the drawer

of the cheque would stand discharged and the presumption would stand

rebutted when it is shown that the company has been brought into winding up

proceedings, as then no debt can be legally enforced against the company.

There is no provision in the Companies Act which prohibits enfor-cement of

the debt due from a company. When a company goes into liquidation,

enforcement of debt due from the company is only made subject to the

conditions prescribed therein. But that does not mean that the debt has

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become unenforceable altogether. Perhaps due to want of sufficient assets

for the company the realisation of a debt would be difficult. But that is

no premise to hold that the debt is legally unenforceable. Enforceability

of a debt is not to be tested on the touchstone of the modality or the

procedure provided for its realisation or recovery. Hence the contention

that the special provision incorporated in the Companies Act regarding the

debts and liabilities due from the company will render the debt

unenforceable, cannot be accepted.

The alternative approach is this : Even assuming that any disposition of

the property made by a company after commencement of the winding up

proceedings is null and void, how that is an escape ground from the offence

under Section 138 of the NI Act? That section created a statutory offence

which on the confluence of the various factors enumerated therein,

commencing with the drawing of the cheque and ending with the failure of

the drawer of the cheque to pay the amount covered by it within the time

stipulated, ripens into a penal liability.

The last factor for constituting the offence under Section 138 of the NI

Act is formulated in clause c of the proviso to the Section which reads

thus : "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."

The words "the drawer of such cheque fails to make the payment" are

ostensibly different from saying "the drawer refuses to make payment".

Failure to make payment can be due to the reasons beyond the control of the

drawer. An illustrative case is, if the drawer is not a company but

individual who has become so pauper or so sick as he cannot raise the money

to pay the demanded sum. Can he contend that since failure to make payment

was on account of such conditions he is entitled to be acquitted? The

answer cannot be in the affirmative though the aforesaid conditions can be

put forth while considering the question of sentence.

We therefore feel that legislature has thoughtfully used the word "fails"

instead of other expressions as failure can be due to variety of reasons

including his disability to pay. But the offence would be complete when the

drawer "fails" to make payment within the stipulated time, whatever be the

cause for such failure.

The drawer of the cheque can have different explanations for the failure to

pay the amount covered by the cheque. But no such explanations would be

sufficient to extricate him from the tentacles of the offence contemplated

in the Section. Perhaps same kind of explanations would be sufficient to

alleviate the rigor of the offence which may be useful to mitigate the

quantum of sentence to be imposed. But that is no ground for consideration

at this stage.

For all the above reasons, we are not inclined to interfere with impugned

judgment of the Bombay High Court. However, learned counsel who argued for

one of the appellants in this batch of appeals (M/s. Atash Industries

(India) Ltd.) pointed out that an observation made by the Division Bench in

the impugned judgment would cause prejudice to that company when the case

proceeds to the trial. We noticed that the following observation in

paragraph 59 of the impugned judgment has the potency of creating a

prejudice against them :

"The conduct of Atash Industries (India) Limited in suppressing facts and

obtaining orders from Courts without pointing out cor-rect facts must be

deprecated. In our view this conduct precludes the Company from getting any

equitable reliefs."

We make it clear that the observation was made only for the Writ Petition

pending in the High Court and that will not be counted against the said

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company during the remaining stages of trial.

All the appeals are accordingly dismissed.