Section 138

Supreme Court: In the case where the 3-judge bench of Sanjay Kishan Kaul*, Abhay S. Oka and JB Pardiwala**, JJ was called upon to decide whether during the pendency of the proceedings under the Insolvency and Bankruptcy Code, 2016 which have been admitted, the proceedings under the Negotiable Instruments Act, 1881 can continue simultaneously or not, it has been held the scope of nature of proceedings under the two Acts are quite different and would not intercede each other.

In the case at hand, the Appellant 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. When the company defaulted in payment of the amount, the Appellant was charged for the same.

It was argued before the Court that the trigger of Section 138 of the NI Act, is the non-payment of legally enforceable debt and that 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.

Kaul, J, writing for himself and Oka, J, rejected the contention and observed that the process under the IBC whether under Section 31 or Sections 38 to 41 which can extinguish the debt would not 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. However, the plea that if proceedings against the company come to an end then the Appellant as the Managing Director cannot be proceeded against, cannot be accepted.

“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.”

Writing a separate but concurring opinion, Pardiwala, J added that 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 personal penal liability of the accused covered under Section 141 of the NI Act.

He observed,

“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?”

He, hence, concluded:

(a) After passing of the resolution plan under Section 31 of the IBC by the adjudicating authority & in the light of the provisions of Section 32-A 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 management.

(b) Section 138 NI Act 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.

[Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation India Ltd, 2023 SCC OnLine SC 266, decided on 15.03.2023]

*Judgment authored by Justice Sanjay Kishan Kaul.

Justice Sanjay Kishan Kaul — A torch bearer of Freedom of Speech and Expression

**Concurring Opinion by Justice JB Pardiwala.

Know Thy Judge| Justice J B Pardiwala

Advocates who appeared in this case :

For Appellant: Advocates Nikhil Goel, Naveen Goel, Kartik Kaushal, Aditya Koshy Roy;

For Respondent(s): Advocates Rajiv Ranjan Dwivedi, Ved Parkash, Vishal, Manoj Kumar Jha, Ashish Singh, Kapil Chaturvedi.

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