Case BriefsHigh Courts

Punjab and Haryana High Court: Gurvinder Singh Gill, J., observed that,

Right to appeal against conviction is an invaluable statutory right vested upon a convict by Criminal Procedure Code which cannot be allowed to be defeated by imposing any condition for availing such right.

“..depriving a convict of his right to appeal by imposing any pre-requisite for availing his statutory right to challenge conviction in a higher Court would amount to depriving his liberty without adhering to the established procedure of law.”

Petitioners were arrayed as accused in the complaint filed by the respondent under Section 138 of Negotiable Instruments Act, 1881.

It was alleged that the cheques drawn by the accused upon their presentation in the bank by the complainant for their encashment were dishonoured.

In light of the above background, accused were tried by the Judicial Magistrate and directed to pay compensation.

Accused, on being aggrieved by the above decision preferred appeals before the Sessions Court, wherein at the time of admission of appeals, impugned orders dated 28-2-2020 were passed, wherein following was stated:

“Criminal Appeal received by entrustment. As there are fairly arguable points involved in the adjudication of the present appeal, hence, the present appeal is admitted for hearing, subject to just exceptions and to deposit of 20% of the compensation amount in view of latest amendment in Section 148 of Negotiable Instruments Act (applicable w.e.f. 01.09.2018), within one month from today. It is registered as Criminal Appeal. Now notice of this appeal be issued to the respondent through ordinary process as well as speed post on furnishing of speed post charges and copies of grounds of appeal within a week for 02-07-2020. Trial Court Record be also called for that date.”

Counsel representing the complainant argued that the lower Appellate Court having passed the orders in question in exercise of jurisdiction under statutory provisions of Section 148 of the Act, the same cannot be called to question.

Analysis, Law and Decision

The language of Section 148 of the NI Act would show that the amended provisions vest the Appellate Court with a discretion to direct deposit of an amount not less than 20% of the compensation amount as awarded by the trial Court. Although the word ‘may’ has been used in the Section but the Supreme Court in Surinder Singh Deswal v. Virender Gandhi, (2019) 11 SCC 341 has interpreted the said provisions to mean that issuance of such a direction is more in the nature of a mandate.

In view of the above-stated Supreme Court decision, power of Appellate Court, though discretionary is supposed to be a ‘rule’ and said discretion should be exercised in all the cases unless there are some exceptional circumstances

In the instant case, there were no exceptional circumstances before the lower Appellate Court so as to justify non-deposit of an amount as provided under Section 148 of the Act.

Section 148(2) of the Act would show that it is provided in unambiguous terms that the amount is required to be deposited within a period of 60 days which may further be extended by another 30 days.

In the instant case, lower Appellate Court having granted only 1 month’s period for depositing the amount, the same is contrary to the above-stated provisions.

Right of Appeal

Section 374 CrPC does not prescribe any condition for admission of an appeal.

Provisions of the statute which vests a convict with a valuable right to challenge his conviction are not circumscribed by any conditions.

Nor does any provision of the Negotiable Instruments Act, 1881 refer to any pre-condition for availing a valuable right of the first appeal.

Further, the Bench expressed that Section 148 of the Act just vests the Appellate Court with the power to direct the appellant to deposit an amount not less than 20% of the compensation amount but under no circumstances the same can be interpreted to be a condition pre-requisite for availing the right of appeal.

Imposition of any condition at the time of suspending of sentence may be a different matter and the trial Court may in its wisdom, impose such a condition failing which the order suspending sentence may be vacated.

Supreme Court in Babu Rajirao Shinde v. State of Maharashtra, (1971) 3 SCC 337, observed that a convicted person must be held to be at least entitled to one appeal as a substantial right.

High Court also made another significant observation:

Even though the Negotiable Instruments Act, 1881 is a special Act and could override provisions of Cr.P.C., but there is no such specific provision in the Act which could be interpreted to mean that availing of right to appeal by a person convicted for an offence under the Act, has been made subject to some conditions.

While parting with the decision, Court held that:

(i) The condition made in the impugned orders wherein the admission of appeal has been made subject to deposit of 20% of the compensation amount is set aside and it is ordered that the appeals shall stand admitted before the lower Appellate Court. The petitioners are, however, directed to deposit an amount equivalent to 20% of the amount of compensation awarded by the trial Court within 60 days from today.

(ii)  In case the aforesaid amount is deposited within 60 days from today, the bail already granted vide order dated 28.2.2020 by lower Appellate Court shall continue subject to any such fresh conditions as may be imposed by lower Appellate Court.

(iii)  In case bail of any of the petitioner has been cancelled on account of non-deposit of the amount or has already been taken into custody, he shall be released forthwith on bail subject to any such conditions as may be imposed by the lower Appellate Court. He shall, however, deposit the amount of 20% within 60 days from today.

(iv) In case of failure to deposit the amount in question within a period of 60 days from today, it shall be open to the lower Appellate Court to cancel bail and to hear the appeal on merits, provided, however, subject to any such general directions issued by the High Court in the matter of hearing of cases, having regard to the present circumstances of spread of pandemic COVID-19.[Sudarshan Kumar v. Manish Manchanda, 2020 SCC OnLine P&H 2321, decided on 15-12-2020]


Advocates who appeared before the matter:

Vaibhav Sehgal, Advocate, counsel for the petitioner(s).

Nitin Thatai, Advocate for the respondent (s)

Case BriefsHigh Courts

And, that’s a wrap!

Here’s the list of our coverage on Negotiable Instruments Act in the year 2020.

 [Allahabad High Court]

All HC | Can a complaint filed in light of S. 138 NI Act be dismissed on ground of one day delay? Read Court’s reasoned order

[Pankaj Sharma v. State of U.P., 2020 SCC OnLine All 1339, decided on 22-09-2020]

All HC | Principle contained in S. 141 of NI Act is not applicable to a sole-proprietary concern, firm need not be arraigned as an accused while making a claim for recovery under S. 138 of the NI Act

[Dhirendra Singh v. State of U.P., 2020 SCC OnLine All 1130, decided on 13-10-2020]

All HC | Once the intention of the party is clear that he does not wish to make payment, should complainant wait for 15 days to file a complaint for dishonour of cheque? HC answers

[Ravi Dixit v. State of U.P., 2020 SCC OnLine All 1056, decided on 23-09-2020]


[Bombay High Court]

Bom HC | Does NI Act authorises a complainant to fill an incomplete cheque? Court discusses while reversing acquittal of accused under S. 138 NI Act

[Kiran Rameshlal Bhandari v. Narayan Purushottam Sarada, 2020 SCC OnLine Bom 3562, decided on 07-12-2020]

Bom HC | Appeal filed against conviction under S. 138 NI Act cannot be dismissed for non-payment of fine without going into merits of appeal

[Adesh Prakashchand Jain v. Harish Punamchand Une, 2020 SCC OnLine Bom 96, decided on 08-01-2020]

Bom HC | S. 139 NI Act imposes evidentiary burden and not a persuasive burden; acquittal upheld where complainant failed to prove capacity to give loan

[Tasneem Murshedkar Mazhar v. Ramesh, 2020 SCC OnLine Bom 20, decided on 02-01-2020]


[Delhi High Court]

Del HC | Can a director who has resigned from company be held liable for cheques subsequently issued and dishonoured? HC explains in light of S. 141 NI Act

[Alibaba Nabibasha v. Small Farmers Agri-Business Consortium, 2020 SCC OnLine Del 1250, decided on 23-09-2020]

Del HC | Proceedings under S. 138 NI Act quashed against Independent Non-executive Directors not involved in day-to-day affairs of Company

[Sunita Palta v. Kit Marketing (P) Ltd., Crl. MC No. 1410 of 2018, decided on 03-03-2020]

Del HC | Ss. 143-147 NI Act lay down Special Code for trial, recourse to S. 482 CrPC as a substitute for initiating second revision petition denied

[Tathagat Exports (P) Ltd. v. PEC Ltd., 2020 SCC OnLine Del 405, decided on 20-01-2020]


[Himachal Pradesh High Court]

HP HC | Legislative intent of NI Act, 1881 is not to send the people to suffer incarceration but to execute recovery of cheque amount by showing teeth of penalty loss; conviction set aside

[Gaurav Sharma v. Ishwari Nand, 2020 SCC OnLine HP 2464, decided on 13-11-2020]

HP HC | Whether the trial court can exercise any discretion while entertaining an application under S.145 of the NI Act; HC elucidates upon procedural nuances

[Vikas Sharma v. Vishant Bali,  2020 SCC OnLine HP 2876, decided on 08-12-2020]

HP HC | While exercising power under S. 147 of NI Act the Court can proceed to compound the offence even after recording of conviction

[Satish Kumar v. Rahul Kumar, 2020 SCC OnLine HP 338, decided by 03-03-2020]


[Jharkhand High Court]

 Jhar HC | Object of NI Act is primarily compensatory; Court can discharge accused on full payment and amicable settlement

[Alok Kumar v. State of Jharkhand, Cr. Revision No. 694 of 2019, decided on 06-03 2020]


[Kerala High Court]

[Negotiable Instruments Act] Ker HC | What determines commencement of period of presentation is date of cheque and not the date of delivery of cheque

[Subanamma Ninan v. George Veeran, 2020 SCC OnLine Ker 4151, decided on 18-09-2020]


[Karnataka High Court]

 Kar HC | In a case where both the complainant and the accused remained continuously absent, Court ought to have “dismissed the complaint for non-prosecution under S. 256 CrPC and not on merits”

[Karage Gowda v. S. Nagaraj, 2020 SCC OnLine Kar 2012, decided on 11-12-2020]

Kar HC | If the complainant produces evidence regarding the transaction as well as dishonour of cheque, is it still necessary to examine the banker to prove the endorsement issued by him? HC decides

[M. Narayanaswamy v. Nagaraj N.S., 2020 SCC OnLine Kar 2013, decided on 11-12-2020]

Kar HC | No legal basis for Family Courts insisting on personal presence of petitioners at the time of filing cases; Presence of complainant while filing S. 138 NI Act case not necessary

[High Court of Karnataka v. State of Karnataka, 2020 SCC OnLine Kar 543 , decided on 03-06-2020]


[Madras High Court]

Madras HC | Can a ‘Non-Executive Director’ who is not responsible for day-to-day affairs of company be made vicariously liable for offence committed by the company? Court’s interpretation in light of S. 141 NI Act

[Vijaya Arun v. New Link Overseas Finance Ltd., Crl. OP Nos. 5, 8 & 11 of 2020, decided on 18-08-2020]

[Malafide Litigation] Madras HC | Proceedings under S. 420 IPC quashed for being counterblast to complaint instituted under S. 138 NI Act

[M. Chandrasekar v. R. Rajamani, 2020 SCC OnLine Mad 4777, decided on 24-08-2020]


[Madhya Pradesh High Court]

[Dishonour of Cheque] MP HC | Director/MD/JD/other officers and employees of a company can not be prosecuted under S. 138 of NI Act unless the company is impleaded as an accused

[Bhupendra Suryawanshi v. Sai Traders, 2020 SCC OnLine MP 1277, decided on 09-06-2020]


[Punjab and Haryana High Court]

[S. 138 NI Act] P&H HC | Do sympathetic consideration have any role to play in the matter of sentencing? Court discusses

[Rakesh Kumar v. Jasbir Singh, 2020 SCC OnLine P&H 1197, decided on 11-08-2020]


[Tripura High Court]

Tri HC | What is the purpose of a serving a ‘Statutory Notice’ under Negotiable Instruments Act? Detailed analysis of significance of ‘Statutory Presumption’

[Nitai Majumder v. Tanmoy Krishna Das, 2020 SCC OnLine Tri 537, decided on 17-11-2020]


Also Read:

2020 Wrap Up — Flashback of Stories on Consumer Cases

2020 Wrap-Up — Family Law & Allied Provisions

Case BriefsHigh Courts

Karnataka High Court: John Michael Cunha J., allowed the appeal and set aside the impugned judgment.

The case involves default under Section 138 Negotiable Instruments Act, 1881 wherein after the complaint was made summons were issued to the respondent. The complainant examined himself and produced 8 documents pertaining to his claim as evidence. However, during the trial accused remained continuously absent. Hence the Trial Court dismissed the complaint stating that further cross-examination of PW1 was taken as “not tendered for further cross-examination”. When the complainant failed to tender himself for cross-examination, the only course open for the court was to eschew the entire evidence from record and as a result no evidence would have been available before the Trial Court to render a finding on merits of the case, But unfortunately the Trial Court proceeded to discuss the matter on merits and held that the complainant has failed to prove the existence of the debt or other liability and hence acquitted the accused. Aggrieved by the same, present appeal was filed.

Counsel for the complainant submitted that such procedure is legally untenable and cannot be approved.

The Court observed that when no legal evidence was available on record, the Trial Court could have passed an order on merits and rejected the claim of the complainant. It was further observed that the order sheet clearly indicates that not only the accused but also the complainant remained continuously absent.

Thus, the Court held that the trial Court ought to have dismissed the complaint about non-prosecution under Section 256 of the Criminal Procedure Code and not on merits. It further held that complainant is equally responsible for keeping the matter pending for more than 4 years from 2016 onwards.

In view of the above, the appeal was allowed and the impugned order was set aside. [Karage Gowda v. S. Nagaraj, 2020 SCC OnLine Kar 2012, decided on 11-12-2020]


Arunima Bose, Editorial Assistant has put this story together

Case BriefsHigh Courts

Tripura High Court: S.G. Chattopadhyay, J., highlights the essence of the provisions of Negotiable Instruments Act, in light of the object of a statutory notice.

It has been stated that the Courts below have concurrently held that the respondent has already established his case under the provisions of Section 138 of Negotiable Instruments Act, 1981 against the accused, who is the present petitioner.

The present petitioner was convicted for committing an offence under Section 138 of the Negotiable Instruments Act and he/she was penalised for a sentence of 1 year along with a fine of Rs 7,00,000.

Session Judge had also affirmed the above decision of the Chief Judicial Magistrate while reducing the sentence to fine and directing the petitioner to pay only Rs 4,00,000.

Being aggrieved with the above, the present criminal revision petition was filed.

Facts

Since both the petitioner and respondent were on good terms and known to each other, the petitioner used to borrow money from the respondents and repay the same in time. On 15-01-2014, he took a loan of Rs 3,50,000 and promised to repay the money within 30-11-2014.

On being requested for the above-amount, past the said date, petitioner handed over a cheque to the respondent but the said cheque was returned with an endorsement “insufficient funds”.

Demand Notice was issued with 15 days of time given for the repayment of the said amount. Every time that the postman visited the house for the service of the demand notice, housemates of the petitioner refused to receive the said letter and said that the petitioner was out of station.

Hence, in view of the above circumstance, the notice was returned to the respondent.

Later the matter reached the trial and the petitioner was convicted under Section 138 NI Act.

Misutilization of the Cheque

Petitioner contended in regard to the cheque that the accused had never issued any cheque in discharge of any debt or liability, but only a blank cheque was issued as a security for the loan which was borrowed by him from the complainant and after the loan was repaid, the complainant, instead of returning the cheque, misutilized it against him.

Statutory Presumption

Respondent’s counsel submitted that the presumption under Section 139 read with the Rule of Evidence as provided under Section 118, NI Act with regard to the existence of debt or liability is not a discretionary presumption, it is a statutory presumption which is obligatory on the part of the Court. Hence, a heavy burden is cast on the accused to rebut such presumption.

Further, the counsel added that apart from making mere denial of the existence of debt or liability, the accused did not lead any evidence to prove that he had no legal liability to be discharged and as such the courts below had drawn the statutory presumptions against him.

Section 138 NI Act requires proof of the essential ingredients:

  • there is legally enforceable debt
  • a cheque is drawn on an account maintained by the accused with his banker for payment of any amount to another person from his account in the discharge in whole or in part of the debt or liability
  • the cheque is returned by the bank unpaid, either because of the insufficient fund in the account of the accused to honour the cheque or that the cheque amount exceeds the amount arranged to be paid from that account by an agreement made with the bank.

Bench noted that the petitioner in his defence merely offered an explanation throwing suggestion to the prosecution witnesses in their cross-examination that he gave a blank signed cheque as security and did not deny the fact that he borrowed loan from the complainant.

Question for consideration:

In the instant matter, whether such an explanation offered by the petitioner is enough to disprove the statutory presumptions under Sections 138 and 139, NI Act?

In the decision of Hiten P. Dalal v. Bratindranath Banerjee, (2001) 6 SCC 16, Supreme Court that the presumptions to be drawn by the court under Sections 138 and 139, NI Act are presumptions of law which cast the evidential burden on the accused to disprove the presumptions.

Further, in the case of Mallavarapu Kasivisweswara Rao v. Thavikonda Ramulu Firm, (2008) 7 SCC 655, it was held that it is a settled position that the initial burden lies if the accused to prove the non-existence of consideration.

Decision

Bench on perusal of the above held that the explanation offered by the accused petitioner is not founded on proof and it does not stand to reason.

The object of the statutory notice is to protect an honest drawer of the cheque by providing him with a chance to make the fund sufficient in his bank account and correct his mistake.

Accused had an opportunity to explain himself, he instead repeatedly avoided the service of demand notice and did not state that he already has the repayment of the loan.

Therefore, Court held that the prosecution successfully discharged its burden in proving the case against the petitioner with the help of the statutory presumptions under the NI Act, and the accused failed to rebut those presumptions and prove the contrary by offering provable explanation founded on the proof.

Adding to the above, Bench also observed that the overall conduct of the accused depicted that he wanted to avoid the service of the notice. Impugned judgment by the below courts does not require any interference and the conviction and sentence were upheld by the High Court.

Bench directed the fine of Rs 4,00,000 within a period of 2 months.[Nitai Majumder v. Tanmoy Krishna Das, 2020 SCC OnLine Tri 537, decided on 17-11-2020]

Case BriefsHigh Courts

Himachal Pradesh High Court: Anoop Chitkara, J., setting aside the conviction against the petitioner, discussed the effect of compromise between the parties in cases attracting Section 138 of Negotiable Instruments Act, 1881 and the cases of compounding of offence under the same.

Background

The petitioner stands convicted under Section 138 of the Negotiable Instruments Act, 1881, vide order dated 26-07-2018 by the Additional Chief Judicial Magistrate, Shimla. Application under Section 389 Code of Criminal Procedure, 1973, was made by the petitioner before the Sessions Judge, which stands dismissed in default by order dated 07-01-2019. The petition hereby was moved invoking Inherent powers of the High Court under Section 482 Code of Criminal Procedure, 1973, against the said conviction. 

Observations

The Court reiterating the objective of the Negotiable Instruments Act, 1881, said, “The jurisprudence behind the N.I. Act is that the business transactions are honoured. The legislative intention is not to send the people to suffer incarceration because their cheque was bounced. These proceedings are simply to execute the recovery of cheque amount by showing teeth of penalty loss.”  Considering the peculiar facts of the present case and the power of Court to interfere in matters like such, the Court observed, “This Court has inherent powers under Section 482 of the Code of Criminal Procedure which are further supported by Section 147 of the N.I. Act to interfere in this kind of matter where parties have paid the entire money and where the complainant does not object to clear all the proceedings.” Reliance was placed on Shakuntala Sawhney v. Kaushalya Sawhney, (1980) 1 SCC 63, wherein the Supreme Court held, “The finest hour of Justice arise propitiously when parties, despite falling apart, bury the hatchet and weave a sense of fellowship or reunion.”  With respect to the compromise made and its effect over the FIR, the Court said, “(…) It is a fit case where the inherent jurisdiction of the High Court under Section 482 of the Code of Criminal Procedure read with 147 of Negotiable Instruments Act, is invoked to compound the offence and consequently to quash the above-mentioned FIR and consequent proceedings” The Court further reproduced the guidelines as laid down by Damodar S. Prabhu v. Sayed Babalal H., (2010) 5 SCC 663, with respect to the compounding of offences under the Negotiable Instruments Act, 1881.

Decision

While setting aside the impugned order of conviction by the Additional Chief Judicial Magistrate, the Court directed the petitioner to be released from the prison with immediate effect.[Gaurav Sharma v. Ishwari Nand, 2020 SCC OnLine HP 2464, decided on 13-11-2020]


Sakshi Shukla, Editorial Assistant has up this story together

Case BriefsHigh Courts

Allahabad High Court: While deciding a petition filed under Article 227 of the Constitution of India, Suresh Kumar Gupta, J., dismissed the same and declined to interfere in the judgment delivered by Sessions Court.

The present petition has been filed by the petitioner to set aside the impugned orders dated 31-10-2018 passed by Additional Court No. 3, Agra in Complaint No. 1500 of 2011 (Nepal Singh v. Dhirendra Singh) under Section 138 of Negotiable Instruments Act, 1881(Hereinafter referred as N.I. Act) and the order dated 6-02-2020 passed by Additional Sessions Judge, Agra in Criminal Revision No. 552 of 2018 (Dhirendra v. State of U.P. ) and to quash the summoning order dated 28-3-2012 as well as an entire proceeding of Complaint Case No. 1500 of 2011 pending in the Additional Court No. 3, Agra.

The factual matrix in the instant case is such that the present petitioner borrowed Rs 1,00,000 from respondent 2 and handed over cheques bearing Nos. 850213 & 850214 for repayment of the borrowed amount. However, the cheques were dishonoured by the bank due to insufficient amount in the account subsequent to which respondent 2 served a notice to the petitioner on 18-10-2011. Later, on 08-11-2011, respondent 2 filed a complaint case no. 1500 of 2011 (Nepal Singh v. Dhirendra Singh) under Section 138 of N.I. Act against the petitioner in the trial court. The trial court vide its order dated 28-3-2012 has taken cognizance and summoned the petitioner.

Counsel for the petitioner, Deepak Kumar Kulshrestha has relied on Section 138 of the N.I. Act, submitting that the complainant/respondent is incompetent to lodge the prosecution as the cheques were issued by the firm Rashmi Arosole & Chemicals and the petitioner is the proprietor of this firm but the firm is not arraigned as an accused. He relied on the judgments delivered in the cases of Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661 and Devendra Kumar Garg v. State of U.P., 1990 SCC OnLine All 806 and added that until and unless company or firm is arraigned as an accused director or the other officer of the company/firm cannot be prosecuted/punished in the complaint.

Counsel for the respondent, S.B. Maurya attempted to refute these contentions by submitting that the cheques were drawn by the petitioner in his personal capacity and were given by way of security for payment of money. The circumstances do not warrant the arraignment of the aforementioned firm as a party.

The Court perused the cheques closely and concluded that the cheques bear the petitioner’s signature and that there is no dispute with regard to the fact that the petitioner is the sole proprietor of Rashmi Arosole & Chemicals. Also, on perusal of the registration certificate of the firm, it can be established that the petitioner is the sole proprietor of the firm namely Rashmi Arosole & Chemicals.

Upon careful consideration of the facts, circumstances and arguments advances, the Court observed that-

“While a partnership results in the collective identity of a firm coming into existence, a proprietorship is nothing more than a cloak or a trade name acquired by an individual or a person for the purpose of conducting a particular activity. With or without such trade name, it (sole proprietary concern) remains identified to the individual who owns it. It does not bring to life any new or other legal identity or entity. No rights or liabilities arise or are incurred, by any person (whether natural or artificial), except that otherwise attach to the natural person who owns it. Thus it is only a ‘concern’ of the individual who owns it. The trade name remains the shadow of the natural person or a mere projection or an identity that springs from and vanishes with the individual. It has no independent existence or continuity.”

The Court was able to conclude that in a sole proprietary concern, vicarious liability cannot arise because there’s only one person involved. The identity of the sole proprietor and his concern remain one, even if the sole proprietor may adopt a different name for his concern. Hence, there is no defect in the complaint lodged by the respondent. The sole proprietorship firm need not be impleaded for the respondent to realise his claim against the petitioner.

In view of the above, the petition has been dismissed for lack of merit. The Court found no reason to interfere in the orders dated 31-10-2018 passed by Additional Court No. 3, Agra and the order dated 6-2-2020 passed by Additional Sessions Judge against the petitioner. [Dhirendra Singh v. State of U.P., 2020 SCC OnLine All 1130, decided on 13-10-2020]


Yashvardhan Shrivastav, Editorial Assistant has put this story together

OP. ED.SCC Journal Section Archives

The National Company Law Appellate Tribunal (hereinafter “Nclat”) recently in Shah Bros. Ispat1, approved parallel continuation of proceedings under the Negotiable Instruments Act, 1881 (hereinafter “the NI Act”) against a company subjected to moratorium while undergoing resolution process under the Insolvency and Bankruptcy Code, 2016 (hereinafter “the IB Code”). The decision of Nclat raises multiple issues ranging from an apparent conflict between the NI Act and the IB Code to practical impossibilities in allowing both the proceedings to continue simultaneously. The object of the article is to discuss the legal problems that may arise in light of the decision in Shah Bros. Ispat1, and why the decision needs to be revisited in light of the settled law.

DECISION IN SHAH BROS. ISPAT2

The appellant creditors before Nclat had initiated two separate proceedings under Section 138 of the NI Act, one prior to the admission of insolvency proceedings under the IB Code and one post the admission of insolvency proceedings under the IB Code. The respondent debtor contended that once a moratorium is imposed under Section 14(1)2 of the IB Code, proceedings under the NI Act would have to be halted. Nclat categorically rejected the submission and held:

6. … as Section 138 is a penal provision, which empowers the court of competent jurisdiction to pass order of imprisonment or fine, [and] cannot be held to be proceeding or any judgment or decree of money claim. Imposition of fine cannot held to be a money claim or recovery against the Corporate Debtor nor order of imprisonment, if passed by the court of competent jurisdiction on the Directors, they cannot come within the purview of Section 14. Infact no criminal proceeding is covered under Section 14 of I&B Code.3

The major precise for allowing parallel continuation of proceedings was that the moratorium does not cover criminal proceedings, but it is submitted that while this position might be true, proceedings under the NI Act cannot be classified as criminal proceedings in strict sense. The decision of Nclat raises multiple issues, namely:

(a) whether proceedings under the NI Act are purely criminal in nature,

(b) whether the accused company’s right to compose (and put an end to) a cheque bounce case is circumvented during the imposition of moratorium, and

(c) whether continuation of parallel proceedings under the NI Act and the IB Code conflict with the object as well as the procedure of the resolution process and if whether it affects the rights of other creditors.

For the purposes of the argument, the article does not distinguish between the NI proceedings initiated prior to the initiation of proceedings under the IB Code and the NI proceedings initiated post the initiation of proceedings under the IB Code since the reasoning of Nclat permeates both the scenarios.

NATURE OF PROCEEDINGS UNDER NI ACT

The Supreme Court in a catena of cases has laid down that the proceedings under Section 138 of the Negotiable Instruments Act, 1881 are civil in nature with the primary object to be compensatory. In Kaushalya Devi Massand4, the Supreme Court categorically held that “the gravity of a complaint under the Negotiable Instruments Act cannot be equated with an offence under the provisions of the Penal Code, 1860 or other criminal offences.”

The extent to which the proceedings under Section 138 of the Negotiable Instruments Act, 1881 have been categorised to be civil in nature can also be gauged from the question of law that was before the Hon’ble Court in the aforesaid case of Meters and Instruments5. The Court was confronted with the issue as to whether the consent of the complainant is required to bring an end to the proceedings under Section 138 of the Negotiable Instruments Act, 1881 or not. And noting the legislative history of the Act, it stated:

11. … The statutory scheme post-2002 amendment … has brought about a change in law and it needs to be recognised. … [b]asic object of the law is to enhance credibility of the cheque transactions by providing speedy remedy to the complainant without intending to punish the drawer of the cheque whose conduct is reasonable or where compensation to the complainant meets the ends of justice.6

(emphasis supplied)

The Court ultimately held that:

18. ***

18.2. The object of the provision being primarily compensatory, punitive element being mainly with the object of enforcing the compensatory element, compounding at the initial stage has to be encouraged….

18.3. Though compounding requires consent of both parties, even in absence of such consent, the court, in the interests of justice, on being satisfied that the complainant has been duly compensated, can in its discretion close the proceedings and discharge the accused.7

From the above percipience, it becomes clear that a crucial element of a proceeding under Section 138 of the NI Act is its nature that basically involves an in personam legal action. Generally criminal law as enshrined under the Penal Code, or special Acts like the Narcotics, Drugs and Psychotropic Substances Act involves legal action in rem with the State initiating legal action against an accused. While understandably, the reason behind providing criminal overtone to the proceedings under Section 138 of the NI Act is to instil faith in the mode of conducting business, but the inherent nature of the cases under Section 138 of the NI Act remains the same i.e. to provide for a mechanism wherein a debtor can recover its dues from the creditors in a timely and more secured manner since fear of incarceration is the stick that dangles over the head of the accused debtor.

RIGHT TO COMPOSE A CHEQUE BOUNCE CASE IS CIRCUMVENTED DURING THE IMPOSITION OF MORATORIUM

The decisions of the Supreme Court in Meters and Instruments5, Kaushalya Devi Massand4 and Damodar Prabhu8, categorically lay down the option of paying reasonable compensation to the cheque-holder and thereby putting an end to the proceeding under Section 138 of the NI Act. It is submitted that this particular right gets circumvented when insolvency proceedings are admitted against a corporate debtor and a moratorium is imposed.

The IB Code has led to considerable change in the legal landscape pertaining to corporate entities and has brought in radical shift to the bankruptcy and insolvency process. Under the IB Code, in order to initiate resolution process of an insolvent company, it is necessary to prove that the alleged corporate debtor is insolvent. Once an insolvency petition is “admitted”, the resolution process is initiated and the current management is suspended and an Interim Resolution Professional (IRP) is appointed.9 Section 17 of the IB Code is categorical in its ambit when it stipulates:

17. Management of affairs of corporate debtor by interim resolution professional.—(1) From the date of appointment of the interim resolution professional—

(a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional;

(b) the powers of the Board of Directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional;

(emphasis supplied)

IRP is mandated to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.10 The Resolution Professional who replaces IRP carries forward the mandate to protect and preserve the assets of the “corporate debtor company”11 and is statutorily mandated to conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period.12

Subsequent to all these steps, the resolution plan submitted by any resolution applicant is required to be presented for the approval of the “committee of creditors”13. Section 3114 of the Insolvency and Bankruptcy Code, 2016 stipulates that the resolution plan once approved would be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. In case the resolution plan is not approved, then the company goes into liquidation. However, during all this time, the Board of Directors of the company are suspended and possess no control over the financial decisions or the functioning of the company.

The Code in order to give full effect to its provisions and the object of insolvency resolution of companies, unencumbered by any other pending legal proceedings or legal right, provides for the imposition of moratorium that prohibits any interference with the assets of the company. The object of moratorium under Section 14 IBC is to keep the corporate debtor’s assets together during the corporate insolvency resolution process and to facilitate orderly completion of the entire process. A “moratorium” ensures that the company continues as a “going concern”, as long as the creditors take a view on the resolution of default. In its report, the Bankruptcy Law Reforms Committee states that the motivation behind the “moratorium” is that it is value-maximising for the entity to continue operations even as the company’s viability is being assessed by the Interim Resolution Professional. The same report further states that:

there should be no additional stress on the business after the public announcement of the Interim Resolution Professional. The order for the moratorium during the Interim Resolution Professional imposes a stay not just on debt recovery actions, but also any claims or expected claims from old lawsuits, or on new lawsuits, for any manner of recovery from the entity.

The report added that the moratorium would be active for the period over which IRP is active.

In light of the above-mentioned discussion, the position under the Insolvency and Bankruptcy Code can be summarised in the following terms:

(a) once proceedings for Insolvency and Bankruptcy against a company are initiated and “admitted” before the National Law Company Tribunal, the company goes into resolution process,

(b) once resolution process is initiated the Board of Directors of the debtor company are suspended from their positions,

(c) during the resolution process, the operations of the company are carried on by the “interim resolution process” only,

(d) during the resolution process there is an imposition of “moratorium” which prohibits institution of suits or continuation of pending suits or proceedings against the corporate debtor; also prohibits transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; and

(e) the financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the “Resolution Professional” only and in relation to such accounts and furnish all information relating to the corporate debtor available with them to the “Resolution Professional”.

Therefore, it is clear that the proceedings under Section 138 of the NI Act cannot be composed/settled during the time moratorium is operational since the control over the financial and functioning of the Company is tied up in the hands of the Resolution Professionals with the object of allowing the “committee of creditors” explore and evaluate better plans to make the company solvent again.

POSSIBLE CONFLICT BETWEEN THE NI ACT AND THE IB CODE

It is submitted that carrying on of the proceedings under the Negotiable Instruments Act, 1881 also conflicts with the overriding, non obstante clause in the Code under Section 23815. Once an insolvency application is admitted by the adjudicating authority, it is mandated that a public announcement be released intimating admission of insolvency proceedings against a company and imposition of a moratorium.16 The same is required so that all the creditors can submit their respective claims before IRP who can process them further.17 Consequently, all the creditors have to submit their claims to the committee of creditors that has to evaluate the claims and prepare a resolution plan that once approved, is binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.14

Therefore, if a creditor seeks recovery of its dues independent of the resolution proceedings, there is an attempt to reclaim dues by two parallel proceedings. Furthermore, by allowing parallel proceedings, rights of other creditors according to the “priority” list prescribed under the IB Code are compromised:

178. Priority of payment of debts.—(1) Notwithstanding anything to the contrary contained in any law enacted by Parliament or the State Legislature for the time being in force, in the distribution of the final dividend, the following debts shall be paid in priority to all other debts

(a) firstly, the costs and expenses incurred by the bankruptcy trustee for the bankruptcy process in full;

(b) secondly—

(i) the workmen’s dues for the period of twenty-four months preceding the bankruptcy commencement date; and

(ii) debts owed to secured creditors;

(c) thirdly….

(emphasis supplied)

Once the drawee complainant is provided compensation under the NI Act, the priority list of the creditors is affected and the entire purpose of all the creditors submitting their claims for the resolution process to collate is defeated.

Furthermore, while proceedings under Section 138 of the NI Act are against “individuals” and result in personal liability of the person implicated and charged, in case a cheque is issued by an artificial person i.e. “company”, the liability is put primarily on the issuing company. If the company were solvent, then it would not be undergoing an insolvency resolution process, but if it has to escape prosecution under Section 138 of the NI Act, it would have to pay the amount in toto. On account of the insolvency of a company and the consequent inability to pay the cheque amount, the criminal liability in effect falls upon the Directors of a company, who are more often than not, the signatory on the cheques when acting on behalf of the company. On the other hand, the Directors cannot take the funds of the company to settle the NI proceedings, since they are suspended from their positions in the company. Clearly, there is an inherent contradiction between the two Acts and the respective framework they envisage.

CONCLUSION

Due to the admission of insolvency proceedings against a company under the IB Code, and imposition of moratorium, two consequences arise, namely, (a) the option to compose a cheque bounce is not available to the company and its erstwhile Directors, and (b) since the claims of the creditors have to be submitted before a committee of creditors, there would result a scenario where two separate recoveries over same cause of action would be carried on. The primary liability in a cheque bounce case is upon the drawer company, and since the accounts of the same are under the control of a resolution professional, there is a sword hanging over the former suspended Directors of the company whereby vicarious criminal liability is imposed on them.

Apart from the practical impossibilities that arise by carrying on proceedings under the Negotiable Instruments Act, 1881, there are legal conflicts that result. Proceedings under Section 138 of the NI Act are not purely criminal in nature with the provision for incarceration and fine provided only to pressurise the accused debtor to repay the debt owed to the complainant. When all types of civil proceedings are suspended, allowing continuation of proceedings under Section 138 of the NI Act results in defeating the object of resolution process. Also, the resolution process and the resolution plan caters to the claims of all creditors since under Section 31 of the IB Code once a resolution plan is approved, it binds all the creditors. By allowing independent recovery process to the drawee complainant, the entire process of resolution stands undermined.

In light of the above discussion, it is needed that this issue is thoroughly addressed in light of the letter and spirit of the IB Code.


Advocate, Punjab and Haryana High Court, Chandigarh, BA LLB (Hons.) and Executive Member, Bar Association of Punjab and Haryana High Court. Graduated in 2016 from National Law University, Delhi. Ph. No: +918447586173. Email Address mittalakaant@gmail.com, akaant.mittal.alumni@nludelhi.ac.in.

** This article was first published in Supreme Court Cases (2020) 1 SCC J-23. It has been reproduced with the kind permission of Eastern Book Company

[1] Shah Bros. Ispat (P) Ltd. v. P. Mohanraj, 2018 SCC OnLine NCLAT 415.

[2] Insolvency and Bankruptcy Code 2016, Section 14(1) states:

14. Moratorium.—(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the adjudicating authority shall by order declare moratorium for prohibiting all of the following, namely:

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(emphasis supplied)

[3] Shah Bros. Ispat (P) Ltd., 2018 SCC OnLine NCLAT 415, para 6.

[4] Kaushalya Devi Massand v. Roopkishore Khore, (2011) 4 SCC 593, 595, para 11.

[5] Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.

[6] Id, 568, para 11.

[7] Id, 571-72, para 18.

[8] Damodar S. Prabhu v. Sayed Babalal H., (2010) 5 SCC 663. The Court framed guidelines for compounding cases under Section 138 of the NI Act.

[9] Insolvency and Bankruptcy Code, 2016, Section 17.

[10] Insolvency and Bankruptcy Code, 2016, Section 20.

[11] Insolvency and Bankruptcy Code, 2016, Section 25.

[12] Insolvency and Bankruptcy Code, 2016, Section 23.

[13] Insolvency and Bankruptcy Code, 2016, Section 30.

[14] Insolvency and Bankruptcy Code, 2016, Section 31 stipulates:

31. Approval of resolution plan.—(1) If the adjudicating authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of Section 30 meets the requirements as referred to in sub-section (2) of Section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

(emphasis supplied)

[15] Insolvency and Bankruptcy Code, 2016, Section 238 states:

238. Provisions of this Code to override other laws.—The provisions of this Code 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.

(emphasis supplied)

[16] Insolvency and Bankruptcy Code, Section 13.

[17] Insolvency and Bankruptcy Code, Section 15.

Case BriefsSupreme Court

Supreme Court: On the question of liability to be proceeded with for offence under Section 68 of FERA, 1973, the bench of Ashok Bhushan and R. Subhash Reddy, JJ has held that the same depends on the role one plays in the affairs of the company and not on mere designation or status. The Court explained,

“for proceeding against a Director of a company for contravention of provisions of FERA, 1973, the necessary ingredient for proceeding shall be that at the time offence was committed, the Director was in charge of and was responsible to the company for the conduct of the business of the company.”

Drawing correlation between Section 141 of the Negotiable Instruments Act, 1981 and Section 68 of FERA, 1973, the Court explained that Section 141 of NI Act contains the same conditions for a person to be proceeded with and punished for offence as contained in Section 68 of FERA, 1973. While coming to the aforementioned conclusion, the Court noticed that Section 141(1) of NI Act uses the same expression “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”. It, hence, said that Section 68 of FERA, 1973 as well as Section 141 of the Negotiable Instruments Act deals with the offences by the companies in the same manner.

The bench noticed that Section 68 of FERA, 1973 deals with “Offences by companies” and Section 68(1) creates a legal fiction, i.e., “shall be deemed to be guilty”. The legal fiction triggers on fulfilment of conditions as contained in the section. The words “every person who, at the time of the contravention was committed, was in charge of, and was responsible to, the company for the conduct of business” has to be given some meaning and purpose.

“The provision cannot be read to mean that whosoever was a Director of a company at the relevant time when contravention took place, shall be deemed to be guilty of the contravention. Had the legislature intended that all the Directors irrespective of their role and responsibilities shall be deemed to be guilty of contravention, the section could have been worded in different manner. When a person is proceeded with for committing an offence and is to be punished, necessary ingredients of the offence as required by Section 68 should be present.”

The bench agreed with the submission that FERA, 1973 does not contemplate any complaint but the Scheme of the Act indicates that a person, who is to be proceeded with has to be made aware of the necessary allegations, which may constitute an offence on his part. It said that though a person in the commercial world having a transaction with company is entitled to presume that the Directors of the company are in charge of the affairs of the company, the presumption of a person in the commercial world is a rebuttable presumption and when adjudicating authority proceeds to impose a penalty for a contravention of FERA, 1973, essential ingredients constituting an offence under the FERA read with Section 68 has to be communicated to the person proceeded with to enable him to make effective representation in the matter.

It further explained that in FERA, 1973 for imposing a penalty under Section 50, the adjudicating officer is required to hold an enquiry after giving the person a reasonable opportunity for making a representation in the matter. Even though, FERA, 1973 does not contemplate filing of a written complaint but in proceedings as contemplated by Section 51, the person, who has to be proceeded with has to be informed of the contravention for which penalty proceedings are initiated. The expression “after giving that person a reasonable opportunity for making a representation in the matter” as occurring in Section 51 itself contemplate due communication of the allegations of contravention and unless allegations contains complete ingredients of offence within the meaning of Section 68, it cannot be said that a reasonable opportunity for making a representation in the matter has been given to the person, who is to be proceeded with.

[Shailendra Swarup v. Deputy Director, Enforcement Directorate, 2020 SCC OnLine SC 600 , decided on 27.07.2020]


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Case BriefsHigh Courts

Delhi High Court: A Single Judge Bench comprising of Vinod Goel, J. dismissed a revision petition filed against the order of Additional District Judge whereby petitioners application under Order 7 Rule 11 CPC was dismissed.

The respondents, an unregistered partnership firm, had filed a suit against the petitioners for recovery of Rs 24,41,967 on account of dishonour of cheques. The petitioners filed an application under Order 7 Rule 11 CPC for rejection of plaint on the ground that the suit was barred under Section 69(2) of the Indian Partnership Act, 1932. The application was dismissed as mentioned above. Notably, Section 69(2) specifies that no suit to enforce a right arising from a contract shall be instituted in any court against any third party by an unregistered firm. Aggrieved by the dismissal of the application, the petitioners were before the High Court.

The High Court noted that in the instant case, the respondents were seeking enforcement of liability of the petitioners created under Sections 30 and 37 of the Negotiable Instruments Act, 1881 as the cause of action for the plaint was based on dishonour of cheques. Reference was made to the judgment of Kerala High Court in Afsal Baker v. Maya Printers, 2016 SCC OnLine Ker 29914,  wherein it was observed, “by virtue of Section 30 and 37 of the Negotiable Instruments Act, on the dishonour of a cheque, the statute creates liability on the drawer, apart from the general law of contracts.” In such view of the matter, the Court held that since the suit was not based on any contract between the parties, the bar under Section 69(2) of the Partnership Act would not apply. Resultantly, the petition was dismissed. [Hindustan Infrastructure Construction Corpn. Ltd. v. R.S. Woods International Ltd., 2018 SCC OnLine Del 12960, Order dated 13-12-2018]

Case BriefsHigh Courts

Himachal Pradesh High Court: A Single Judge Bench comprising of Chander Bhushan Barowalia, J. allowed a criminal appeal filed under Section 378 CrPC against the order of the trial court whereby complaint filed by the appellant was dismissed for non-appearance of the complainant-appellant.

The appellant filed a complaint under Section 138 of Negotiable Instruments Act 1881, alleging that the respondent had to pay a legally liable debt to the appellant. The respondent issued a cheque in favour of the appellant for the same. The appellant presented the said cheque before the respondent’s bank for payment. However, the cheque was returned with the endorsement ‘Funds Insufficient’. The appellant issued a demand notice to the respondent in compliance with the provisions of NI Act, but even then the respondent did not discharge his debt. Consequently, the appellant filed a complaint under Section 138 of the Act. The trial court issued notice for the service on the accused-respondent on 23-12-2015. On that date, the appellant did not appear before the court as he was under the impression that it was a formal hearing and it would be attended to by his counsel. However, appellant’s counsel was busy in conducting a criminal trial before the first Appellate Court and even he could not appear before the trial court on the given date. Resultantly, the trial court, under Section 256 CrPC, dismissed the complaint and acquitted the respondent. Aggrieved by the same, the appellant was in appeal before the High Court.

The High Court perused the record and was of the view that the trial court was not right in dismissing appellant’s complaint. The Court noted that non-appearance of the appellant, as well as his counsel, was not due to inadvertence. The appellant was relying on his counsel to appear before the trial court as it was a formal hearing, and the counsel was busy in conducting the criminal trial as stated hereinabove. The Court was of the opinion that such non-appearance was due to unavoidable circumstances. The Court concluded that the non-appearance of the appellant as well his counsel was neither intentional nor willful, but was beyond their control. Therefore, the High Court allowed the appeal and set aside the impugned judgment of the trial court dismissing the complaint of the appellant herein. [Padam Singh Saini v. Megh Singh,2018 SCC OnLine HP 784, dated 18-6-2018]