Position of Delinquents Facing Proceedings under Part III of the Insolvency and Bankruptcy Code, 2016 in Cheque Bouncing Cases

At the time when the draft of the Insolvency and Bankruptcy Code, 2016¹ was muted and debated upon, it was felt that there were no precise and commercially friendly laws enacted which would separate the judicial functions from the commercial aspects of the day-to-day business operations of large-scale corporate entities. It was further felt that though there are various provisions available in the Sick Industrial Companies (Special Provisions) Act, 1985², the Recovery of Debts and Bankruptcy Act, 1993³, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002⁴ and the Provincial Insolvency Act, 1920⁵ dealing with recovery, asset reconstruction, enforcement of security interest and matters pertaining to insolvency and bankruptcy of corporate entities as well as individuals, there was no single law in India that comprehensively and effectively dealt with insolvency and bankruptcy and postulate a specialised mechanism and specially constituted tribunals to adjudicate matters relating thereto and emanating therefrom.

With these objectives in view, the Parliament enacted the Insolvency and Bankruptcy Code, 2016, which has been divided into various chapters and parts specifically dealing with procedures and mechanisms to handle various types of insolvency and bankruptcy processes.

Looking at the Insolvency and Bankruptcy Code, 2016, one glances upon Section 32-A of the Insolvency and Bankruptcy Code, 2016⁶ which specifically deals with liabilities of corporate debtors with respect to offences which are under investigation/trial and provides a systemic approach in dealing with such corporate defaulters. It cannot be lost sight of that the overall scheme of the Insolvency and Bankruptcy Code, 2016 promotes entrepreneurship and is framed with a view to lubricate the commerce and business processes.

Although on the principle of clean slate, Section 32-A has been inserted in Part II of the Insolvency and Bankruptcy Code, 2016 with effect from 28-12-2019, no such similar or corresponding provision has been incorporated via amendment in the provisions relating to personal insolvency and bankruptcy of individuals.

The aforesaid omission would have ominous potential to run against the very nature of the provisions of the Insolvency and Bankruptcy Code, 2016 and the legislative objective sought to be achieved.

On a conjoint reading of Sections 80⁷, 80(1), 85⁸, 92⁹, 94¹⁰, 95¹¹, 96¹², 101¹³, 103¹⁴, 105¹⁵, 111¹⁶, 114¹⁷, 115¹⁸, 116¹⁹, 119²⁰, 121²¹, 123²², 124²³, 126²⁴, 128²⁵, 131²⁶, 136²⁷, 138²⁸ and 139²⁹ of the Insolvency and Bankruptcy Code, 2016, it would be palpably evident that in case of successful resolution of personal insolvency through a duly approved repayment plan or on the conclusion of bankruptcy proceedings, the delinquent gets discharged in perpetuity as regards the claims and debts either in terms of the repayment plan or the order of discharge passed in the bankruptcy proceedings.

The provisions of Part III of the Insolvency and Bankruptcy Code, 2016 are not intended to be used as tools for recovery but achieve the lofty legislative policy of providing succour and relief to a delinquent individual who may have sustained humongous losses in business which he is unable to cope up with owing to his miserably eroded net worth.

Although in the context of civil liability, the provisions contained in Part III of the Insolvency and Bankruptcy Code, 2016 are crystal clear but in matters relating to debt resulting into initiation of quasi-criminal proceedings, inter alia, under the provisions of the Negotiable Instruments Act, 1881³⁰, there appears to be no clarity whatsoever. The aforesaid legislative omission has resulted into preposterous consequences inasmuch as the debt corresponding to a dishonoured cheque would stand extinguished under Part III of the Insolvency and Bankruptcy Code, 2016 but the delinquent would still continue to face prosecution and stare at a probable conviction as also to a sentence of imprisonment and fine.

To buttress the aforesaid, it is apt to refer to the recent judgment of Supreme Court in Rakesh Bhanot v. Gurdas Agro (P) Ltd.³¹ wherein it has been propounded that Sections 96 and 101 of the Insolvency and Bankruptcy Code, 2016 would not create any embargo on the continuation of criminal prosecution under the Negotiable Instruments Act, 1881, on the premise that the said provisions would only apply to civil proceedings relating to recovery of debt and not to quasi-criminal proceedings even if the same are intrinsically connected with the recovery of the cheque amount.

The following judgments of the Supreme Court may also assume significance:

(i) Meters and Instruments (P) Ltd. v. Kanchan Mehta³² — Wherein the Supreme Court held that offence under Section 138³³ of the Negotiable Instruments Act, 1881 is primarily a civil wrong and the object of the said provision is to ensure the enforcement of compensatory element and it is for this purpose that compounding of the offence is encouraged.

(ii) M. Abbas Haji v. T.N. Channakeshava³⁴ — Wherein the Supreme Court held that proceedings under Section 138 are quasi-criminal in nature.

(iii) Kaushalya Devi Massand v. Roopkishore Khore³⁵ — Wherein the Supreme Court held that an offence under Section 138 is essentially a civil wrong with criminal overtones.

(iv) R. Vijayan v. Baby³⁶ — Wherein it was held that the purpose of Section 138 is to ensure that the complainant receives the amount of the cheque by way of compensation under Section 357(1)(b)³⁷ of the Criminal Procedure Code, 1973³⁸.

Taking into the consideration the aforesaid, the lacuna in the law can be filled up without any further loss of time by incorporating necessary amendments, lest the legislative policy governing the Insolvency and Bankruptcy Code, 2016 should be the casualty.