AJAY KUMAR RADHEYSHYAM GOENKA Versus TOURISM FINANCE CORPORATION OF INDIA LTD

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

REPORTABLE

IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO.172 OF 2023

AJAY KUMAR RADHEYSHYAM GOENKA …APPELLANT

Versus

TOURISM FINANCE CORPORATION

OF INDIA LTD. …RESPONDENT

With

Crl. A. No.170/2023

Crl.A. No.171/2023

J U D G M E N T

SANJAY KISHAN KAUL, J.

Factual Background:

1. M/s Rainbow Papers Limited (company incorporated and registered

under the Companies Act, 1956), of which Ajay Kumar Radheyshyam

Goenka, the Appellant before us, was the Promoter and Managing Director,

sought loans from a public financial institution, Tourism Finance

Corporation of India Limited, the Respondent before us, to fulfil its various

corporate requirements. The proposal of the company was considered by the

Respondent and approval was granted for a Term Loan of Rs. 30.00 crores.

In pursuance to the approval, a Loan Agreement was executed on

27.03.2012 in New Delhi.

2. In order to satisfy its obligations under the Agreement, the Accused

company issued post-dated cheque of Rs. 25,47,945/- bearing cheque

number 090656 dated 15.02.2016, drawn on Indian Overseas Bank, Kalupur

Circle Branch, Railway Pura, Ahmedabad, towards the payment of one of

the instalments. On the cheque being presented to the bankers of the

Respondent i.e., HDFC Bank Limited, Nehru Place Branch, New Delhi, the

cheque was returned vide Memo dated 07.04.2016 for the reason “Account

Closed”.

3. On 19.04.2016, a demand-cum-legal notice under Section 138 of

Negotiable Instruments Act, 1881, (hereinafter referred to as ‘the NI Act’)

was issued on behalf of the Respondent calling upon the company as

Accused no.1 and the Appellant herein as Accused no. 2 to settle the debt

advanced by way of corporate loan dated 27.03.2012. The Accused

acknowledged their liability to pay the loan amount vide reply dated

28.04.2016. The amount was not paid and, thus, on 16.05.2016, Criminal

Complaint No. 632982/2016 was filed in the Court of Chief Metropolitan

Magistrate, Saket Courts, New Delhi, under Section 190 of the Code of

Criminal Procedure, 1973, read with Section 1381

, Section 1412

and Section

1423

of the NI Act. The complaint was signed and verified by Mr. N.

Ramachandran, Deputy General Manager (Law) of the Respondent

company. An endeavor for mediation was made but was not successful and,

thus, the next date was scheduled before the Magistrate for 15.01.2018. In

the meantime, a development, which took place, was that in 2017 M/s

Neeraj Paper Agencies Limited, styling itself as ‘Operational Creditor’, filed

an application under Section 9 of the Insolvency and Bankruptcy Code,

2016 (hereinafter referred to as ‘IBC’) read with Rule 6 of Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules, 2016,

(hereinafter referred to as ‘IB Rules, 2016’) with the request to initiate

Corporate Insolvency Resolution Process against the Accused company,

treating it as the 'Corporate Debtor'. The National Company Law Tribunal

vide order dated 12.09.2017 admitted the aforesaid insolvency application.

4. The Respondent herein filed its claim qua the debt, which was the

subject matter of the N.I. Act proceedings, on 13.10.2017. In terms of the

Resolution Plan dated 26.05.2018, the Resolution Applicant (Kushal

Limited) filed the Resolution Plan and during the course of meeting the

1Dishonour of cheque for insufficiency, etc., of funds in the account.

2Offences by companies.

3Cognizance of offences.

Committee of Creditors on 05.06.2018, it was informed that the respondent

herein could not be considered as a Secured Financial Creditor as per

definitions contained in Section 3(30) and Section 3(31) of the IBC. In

effect, on legal advice, the Respondent was opined as an Unsecured

Financial Creditor. This resulted in the Respondent filing applications, in

the form of objections, before the NCLAT where the status was sought to be

changed from the Unsecured to Secured Financial Creditor.

5. Now turning back to the NIA proceedings, the Metropolitan

Magistrate passed an interim order dated 12.11.2018 dismissing the

application of the Appellant for exemption from personal appearance. This,

in turn, was predicated on the observations of NCLAT in Shah Brothers

Ispat Pvt. Ltd. Vs P. Mohan Raj &Ors, Company Appeal (AT) Insolvency

No.306 of 2018, opining that Section 138 of NI Act is a penal provision,

which empowers the court of competent jurisdiction to pass order of

imprisonment or fine, which cannot be held to be proceedings or any

judgment or decree of money claim. Thus, it would not come within the

purview of Section 14 of the IBC and, thus, the proceedings under Section

138 of the NI Act, 1881 could continue simultaneously.

6. The Appellant, thus, filed an application for discharge of the

Complaint Case in question herein in the present case, which was dismissed

by the Metropolitan Magistrate vide order dated 01.11.2019. The Criminal

Revision Petition preferred by the Appellant bearing Criminal Revision

Petition No. 784 of 2019 also met with a similar fate before the High Court

and was dismissed with cost of Rs. 20,000/- to be paid by the Appellant to

the Respondent. It is this order, which is now, sought to be assailed before

us.

Appellant’s submissions:

7. Mr. Nikhil Goel, learned counsel, sought to urge on behalf of the

appellant that the trigger of Section 138 of the NI Act, is the non-payment of

legally enforceable debt. Once the debt is itself extinguished, either under

Section 31 or in process from Sections 38 to 41 and 54 of IBC, the basis of

Section 138 of the NI Act disappears. We may note that these provisions fall

under Chapter III4

of the IBC.

8. The term ‘Debt’ would mean ‘legally enforceable debt’ under the

Explanation to Section 138 of the NI Act and this may be read with Sections

2(6) and 2(8) of the IBC.

9. It was submitted that the nature of the proceedings under Section 138

of the NI Act is primarily compensatory in nature and the punitive element

is incorporated at enforcing the compensatory provisions. Therefore, once

4 Liquidation Process

recovery is made partly by the receipt of money and partly by waiver,

Section 138 of the NI Act should not be permitted to be continued.

10. It was lastly urged that if the debt of the company is resolved then the

payment would be governed under the Resolution Plan. If the debts are not

resolved, then the assets of the company are to be distributed in terms of

Section 53 of the IBC.

Plea of the Respondent:

11. On behalf of the Respondent, it was urged that the cheque was

given for repayment of the aforementioned loan amount of Rs.30 crore

for which the accused company agreed to repay the principal amount in

two installments with first installment of Rs.10 crore payable on

31.03.2015 and the second installment of Rs.20 crore payable on

31.03.2016. The accused company had to pay interest @ 15 per cent per

annum on the said principal amount of loan and such interest was payable

monthly on the 15th day of every month, which was in consonance with

the dates and the cheque amount.

12. It was urged that the accused company along with the Appellant

deliberately and with the mala fide intention gave the cheque to defraud

the Respondent to take loan from it and subsequently to usurp the loan

amount and hence had closed the bank account. The Appellant being the

signatory was directly liable along with the accused company. The

Appellant was actively involved in the day to day affairs of the company

as can be inferred from the aforementioned loan agreement signed by

him as well.

Our View:

13. We may note that on 20.09.2022 with some of the SLPs being

withdrawn, in respect of the SLPs in question, the interim order was

made absolute with the direction for urgent listing as criminal

proceedings had been stayed. Learned counsel for the parties stated that

they will file short synopsis not running into more than three pages each

and will not take more than 15-20 minutes each for their respective

submissions. On the conspectus of the aforesaid we heard the arguments

on 17.01.2023 when we granted leave and reserved the judgment.

14. The Appellant had submitted the synopsis in advance. The

Respondent however, despite assuring that they would submit the

synopsis has not cared to do so and we have gone on the basis of the

record. This position is prevalent right till 12.03.2023 and we do not

consider it appropriate to wait any more. We assume that the Respondent

is not interested in rendering any further assistance to the Court by filing

synopsis. Fortunately for them, for the reasons to be recorded hereinafter,

they have not really suffered the consequences thereof.

15. The issue whether the respondent is a Secured Financial Creditor

or an Unsecured Financial Creditor within the meaning of the said Code

is not something we can deal with as that is the matter of the proceedings

under the said Code or any appeal preferred therefrom. The only issue

with which we are concerned with is whether during the pendency of the

proceedings under the said Code which have been admitted, the present

proceedings under the N.I. Act can continue simultaneously or not.

16. We have no hesitation in coming to the conclusion that the scope

of nature of proceedings under the two Acts and quite different and

would not intercede each other. In fact, a bare reading of Section 14 of

the IBC would make it clear that the nature of proceedings which have to

be kept in abeyance do not include criminal proceedings, which is the

nature of proceedings under Section 138 of the N.I. Act. We are unable

to appreciate the plea of the learned counsel for the Appellant that

because Section 138 of the N.I. Act proceedings arise from a default in

financial debt, the proceedings under Section 138 should be taken as akin

to civil proceedings rather than criminal proceedings. We cannot lose

sight of the fact that Section 138 of the N.I. Act are not recovery

proceedings. They are penal in character. A person may face

imprisonment or fine or both under Section 138 of the N.I. Act. It is not

a recovery of the amount with interest as a debt recovery proceedings

would be. They are not akin to suit proceedings.

17. It cannot be said that the process under the IBC whether under

Section 31 or Sections 38 to 41 which can extinguish the debt would ipso

facto apply to the extinguishment of the criminal proceedings. No doubt

in terms of the Scheme under the IBC there are sacrifices to be made by

parties to settle the debts, the company being liquidated or revitalized.

The Appellant before us has been roped in as a signatory of the cheque as

well as the Promoter and Managing Director of the Accused company,

which availed of the loan. The loan agreement was also signed by him on

behalf of the company. What the Appellant seeks is escape out of

criminal liability having defaulted in payment of the amount at a very

early stage of the loan. In fact, the loan account itself was closed. So

much for the bona fides of the Appellant.

18. We are unable to accept the plea that if proceedings against the

company come to an end then the Appellant as the Managing Director

cannot be proceeded against. We are unable to accept the plea that

Section 138 of the N.I. Act proceedings are primarily compensatory in

nature and that the punitive element is incorporated only at enforcing the

compensatory proceedings. The criminal liability and the fines are built

on the principle of not honouring a negotiable instrument, which affects

trade. This is apart from the principle of financial liability per se. To say

that under a scheme which may be approved, a part amount will be

recovered or if there is no scheme a person may stand in a queue to

recover debt would absolve the consequences under Section 138 of the

N.I. Act, is unacceptable.

19. We are, thus, conclusively of the view that the impugned order

takes the correct view in law and cannot be assailed before us.

Conclusion:

20. The appeals are accordingly dismissed but without costs before us

on account of what we have recorded in para 14.

...................……………………J.

[Sanjay Kishan Kaul]

...................……………………J.

[Abhay S. Oka]

New Delhi.

March 15, 2023.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO. 170 OF 2023

(@SLP(CRL) NO. 417 OF 2020)

AJAY KUMAR RADHESHYAM GOENKA ……APPELLANT(S)

VERSUS

TOURISM FINANCE CORPORATION OF ......RESPONDENT(S)

INDIA LTD.

WITH

CRIMINAL APPEAL NO. 172 OF 2023

(@SLP(CRL) NO. 482 OF 2020)

CRIMINAL APPEAL NO. 171 OF 2023

(@SLP (CRL) 446 OF 2020)

J U D G M E N T

J.B. PARDIWALA, J. :

1. I have carefully, gone through the perspicuous opinion of my esteemed brother

Sanjay Kishan Kaul, J. I am entirely in agreement with the discussion contained in the

said judgment on all the cardinal issues that have arisen for consideration in these

proceedings. At the same time, having regard to the fact that the issues involved are of

seminal importance, I am also inclined to pen down my thoughts.

2. For the sake of convenience, the Criminal Appeal No. 170 of 2023 (@ SLP

(Crl) No. 417 of 2020) is treated as the lead matter.

3. This appeal by special leave is at the instance of the original accused No. 2 in a

complaint lodged by the respondent herein (original complainant) for the offence

punishable under Section 138 of the Negotiable Instruments Act, 1881 (for short, ‘the

NI Act’) and is directed against the order passed by the Additional Sessions Judge-02

South East District, Saket Court, New Delhi dated 23.11.2019 in the Criminal

Revision Application No. 593 of 2019 by which the Additional Sessions Judge

affirmed the order passed by the Metropolitan Magistrate – 09, SED dated 01.11.2019

rejecting the application filed by the appellant herein seeking discharge from the

criminal proceedings i.e. Complaint Case No. 632984 of 2016 instituted by the

respondent-complainant under Section 138 of the NI Act.

4. It is necessary to clarify why the appellant challenged the impugned order

passed by the Additional Sessions Judge directly before this Court invoking Article

136 of the Constitution of India. In this regard, the following averments made in the

synopsis are reproduced hereinbelow:

“The petitioner is directly approaching this Hon’ble Court, because the

first two facets are already being considered by this Hon’ble Court, in

which view, the Hon’ble High Court is not likely to entertain a quashing

petition. This apart, a petition before any other court is likely to result in

conflicting orders and would be an exercise in futility. The earlier matters

pending before this Hon’ble Court also arose directly out of the summons

issued by the concerned Learned Magistrate.”

FACTUAL MATRIX

5. The respondent herein, namely, the “Tourism Finance Corporation of India

Limited” (hereinafter shall be referred to as, ‘the complainant’), had advanced a sum

of Rs. 30,00,00,000/- (thirty crore) as a corporate loan to the Rainbow Papers Limited

(Original Accused No. 1/corporate debtor). The appellant herein at the relevant point

of time was the Managing Director of the company i.e. the corporate debtor. The

transaction between the parties took place on 31.03.2012. It appears that an amount of

Rs. 10.88 crore came to be repaid before the disputes arose between the parties.

Sometime in 2016, the complainant issued a notice to the corporate debtor to settle the

balance amount. On 16.05.2016, a complaint was lodged under Section 138 of the NI

Act by the complainant against the corporate debtor and the appellant herein

(Managing Director of the Corporate Debtor) for dishonour of the three cheques issued

by the appellant herein for discharge of the debt in part to the tune of Rs. 57,00,000/-

(fifty-seven lakhs).

6. The aforesaid complaint under Section 138 of the NI Act was registered in the

Court of the Chief Metropolitan Magistrate, Saket Court, New Delhi.

7. In 2017, one of the operational creditors filed an application under Section 9 of

the Insolvency and Bankruptcy Code, 2016 (for short, ‘the IBC’ or ‘the IBC, 2016’)

before the NCLT, Ahmedabad, seeking to initiate Corporate Insolvency Resolution

Process (for short, ‘the CIRP’) with respect to the corporate debtor.

8. The Insolvency application came to be admitted by the NCLT on 12.09.2017.

9. On 3.10.2017, the complainant filed its claim of Rs. 22,50,00,000/- crore

(approximately) before the Interim Resolution Professional (for short, ‘the IRP’).

10. On 26.05.2018, the resolution applicant filed its resolution plan under the terms

of which, the payment to the complainant was in full and final settlement of all its

claims against the corporate debtor.

11. On 05.06.2018, the Committee of Creditors (for short, ‘the CoC’) approved the

resolution plan proposed by the resolution applicant. The complainant was one of the

members of the CoC.

12. On 23.07.2018, the complainant lodged his objections before the NCLT to the

resolution plan in so far as it changed its status from secured to unsecured creditor.

13. It appears that in the meantime, the appellant preferred an application before the

trial court seeking exemption from his personal appearance invoking a moratorium

under Section 14 of the IBC. The Magistrate vide order dated 12.11.2018 rejected the

said application on the ground that the criminal proceedings under the NI Act had

nothing to do with the proceedings under the IBC.

14. On 27.02.2019, the NCLT approved the resolution plan so far as the corporate

debtor is concerned.

15. As the resolution plan came to be approved by the NCLT, the appellant herein

filed an application dated 20.07.2019 before the trial court, praying that he be

discharged from the criminal proceedings. The case of the appellant herein before the

Magistrate was that as the debt stood settled in the proceedings under the IBC, the

criminal proceedings would not survive.

16. The trial court vide order dated 01.11.2019 rejected the aforesaid application

essentially on the ground that it had no jurisdiction to discharge an accused in a

summons triable case.

17. In view of the aforesaid, the appellant herein filed the Criminal Revision

Application No. 593 of 2019 before the Additional Sessions Court, challenging the

order passed by the Magistrate dated 01.11.2019 referred to above. The appellant

contended before the revisional court that as the debt in connection with which the

criminal proceedings had been initiated, formed part of the approved resolution plan

the outstanding debt under the NI Act could be said to have stood settled.

18. The Additional Judge vide the impugned order dated 23.11.2019 rejected the

Revision Application.

19. In such circumstances, referred to above, the appellant is here before this Court

with the present appeal.

THE SUBMISSIONS ON BEHALF OF THE APPELLANT

20. Mr. Nikhil Goel, the learned counsel appearing for the appellant made the

following submissions:

A. The trigger of Section 138 of the NI Act, is the non-payment of legally

enforceable debt. Once the debt itself gets extinguished either under Section 31

of the IBC or in the process from Sections 38 to 41 and 54 resply of the IBC, the

basis of Section 138 of the NI Act no longer remains. The term debt would mean

the ‘legally enforceable debt’ under the explanation to Section 138 of the NI Act.

This may be read with Section 2(6) & 2(8) resply of the IBC.

B. The liability is primarily of the company and prosecution of natural

persons under Section 141 of the NI Act is vicarious to the prosecution of the

company. It is for this reason that a director cannot be prosecuted without making

the company as an accused. [See Ajit Balse v. Ranga Karkere: (2015) 15 SCC

748.]

C. The nature of proceedings under Section 138 of the NI Act is primarily

compensatory and the punitive element is incorporated at enforcing the

compensatory provisions. (paras 53 & 63 resply in P. Mohanraj and Others v.

Shah Brothers Ispat Private Limited reported in (2021) 6 SCC 258). Therefore,

once recovery is made, partly by receipt of money and partly by waiver, Section

138 of the NI Act should not be permitted to be continued.

D. If the debt of the company is resolved then payments would be governed

under the resolution plan. If the debts are not resolved then the assets of the

company are to be distributed in terms of Section 53 of the IBC. Permitting two

proceedings to continue would therefore defeat either Section 31 or Section 53 of

the IBC, as the case may be.

E. Mr. Goel submitted that this Court in P. Mohanraj (supra) considered the

position of law as regards the continuation of the criminal proceedings under

Section 138 of the NI Act vis-a-vis the proceedings under the IBC and answered

the same in para 102 of the judgment. It was pointed out by Mr. Goel that this

Court drew a fine distinction between the corporate debtor and natural persons &

ultimately held that while a corporate debtor would be protected from Section

138 proceedings during the period of moratorium, the natural persons would not

enjoy such protection and Section 138 proceedings would continue against the

natural persons. However, according to Mr. Goel, this Court may not go in the

correctness of such bifurcation as in the case on hand, the proceedings are

beyond the period of moratorium. Mr. Goel pointed out that the question framed

in para 6 of the decision in P. Mohanraj (supra) is restricted only to the

applicability of Section 14 of the IBC to the proceedings under Section 138 of the

NI Act.

F. The principal argument of Mr. Goel is that if the IBC proceedings have

travelled beyond Section 14, the process would either lead to acceptance of a

resolution plan under Section 31 of the IBC or liquidation of the company after

determination of the claims under Chapter III of the IBC. According to Mr. Goel,

Section 31 of the IBC is applicable to the present litigation.

21. In such circumstances referred to above, Mr. Goel prays that there being merit

in his appeal, the same may be allowed and the appellant may be discharged from the

criminal liability under Section 138 of the NI Act.

THE SUBMISSIONS ON BEHALF OF THE RESPONDENT (COMPLAINANT)

22. On the other hand, this appeal has been vehemently opposed by Mr. Rajiv

Ranjan Dwivedi, the learned counsel appearing for the complainant by submitting that

in the case on hand, the criminal proceedings under the NI Act were initiated much

before the proceedings under the IBC came to be initiated. In other words, cognizance

was taken by the learned Magistrate upon the complaint filed under Section 138 of the

NI Act much before the scheme came to be approved under the IBC. He would submit

that the offence alleged to have been committed by the appellant herein prior to the

scheme would not get automatically compounded only as a result of the said scheme.

He would further submit that none of the provisions of the IBC bars the continuation

of the criminal prosecution initiated against the corporate debtor or its directors or

officials. According to the learned counsel, if the company is dissolved as a result of

the resolution process, the criminal proceedings against it would stand terminated,

however, the signatory to the cheque or its erstwhile directors are not entitled in law to

take advantage of such a situation created by operation of law.

23. The learned counsel appearing for the complainant, laid much stress on Section

32A of the IBC, which states that every person who was a ‘designated partner’ or an

‘officer who is in default’ or was in any manner in charge of/responsible to the

corporate debtor for the conduct of its business or associated with the corporate debtor

in any manner and who was directly or indirectly involved in the commission of such

offence in accordance with the report submitted or complaint filed by the investigating

authority shall continue to be liable to be prosecuted and punished for such an offence

committed by the corporate debtor notwithstanding that the corporate debtor’s liability

has ceased under the provision of Section 32A of the IBC.

24. In such circumstances, referred to above, the learned counsel prays that there

being no merit in the present appeal, the same may be dismissed.

ANALYSIS

25. Having heard the learned counsel appearing for the parties and having gone

through the materials on record, the seminal question of law that falls for the

consideration of this Court may be formulated as under:

Whether in light of:

(i) the complainant having participated in the proceedings under the IBC,

2016 by putting forward its claim and consenting to accept some share as

a creditor; coupled with

(ii) the approval of the resolution plan under Section 31 of the IBC, 2016;

the signatory/director in charge of the day-to-day affairs would stand

discharged/relieved from the penal liability under Section 138 of the NI

Act?

26. Before adverting to the rival submissions canvassed on either side, it is

necessary to look into few relevant provisions of the NI Act as well as IBC, 2016.

27. Section 138 of the NI Act reads thus:

“138. Dishonour of cheque for insufficiency, etc., of funds in the

account.—

Where any cheque drawn by a person on an account maintained by him

with a banker for payment of any amount of money to another person

from out of that account for the discharge, in whole or in part, of any

debt or other liability, is returned by the bank unpaid, either because of

the amount of money standing to the credit of that account is insufficient

to honour the cheque or that it exceeds the amount arranged to be paid

from that account by an agreement made with that bank, such person

shall be deemed to have committed an offence and shall, without

prejudice to any other provision of this Act, be punished with

imprisonment for a term which may be extended to two years, or with

fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless—

(a) the cheque has been presented to the bank within a period of six

months from the date on which it is drawn or within the period of its

validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case

may be, makes a demand for the payment of the said amount of money

by giving a notice in writing, to the drawer of the cheque, within thirty

days of the receipt of information by him from the bank regarding the

return of the cheque as unpaid; and

amount of money to the payee or, as the case may be, to the holder in

due course of the cheque, within fifteen days of the receipt of the said

notice.

Explanation.— For the purposes of this section, “debt of other

liability” means a legally enforceable debt or other liability.”

28. Section 139 of the NI Act raises presumption. The same reads thus:

“139. Presumption in favour of holder.— It shall be presumed, unless the

contrary is proved, that the holder of a cheque received the cheque of the

nature referred to in section 138 for the discharge, in whole or in part, of

any debt or other liability.”

29. Section 141 of the NI Act fastens vicarious liability upon every person, who at

the time of the offence, was in charge of and was responsible to the company for the

conduct of the business of the company. Section 141 reads thus:

“141. Offences by companies.— (1) If the person committing an offence

under section 138 is a company, every person who, at the time the offence

was committed, was in charge of, and was responsible to, the company for

the conduct of the business of the company, as well as the company, shall be

deemed to be guilty of the offence and shall be liable to be proceeded

against and punished accordingly:

Provided that nothing contained in this sub-section shall render any person

liable to punishment if he proves that the offence was committed without his

knowledge, or that he had exercised all due diligence to prevent the

commission of such offence:

Provided further that where a person is nominated as a Director of a

company by virtue of his holding any office or employment in the Central

Government or State Government or a financial corporation owned or

controlled by the Central Government or the State Government, as the case

may be, he shall not be liable for prosecution under this Chapter.

(2) Notwithstanding anything contained in sub-section (1), where any

offence under this Act has been committed by a company and it is proved

that the offence has been committed with the consent or connivance of, or is

attributable to, any neglect on the part of, any director, manager, secretary

or other officer of the company, such director, manager, secretary or other

officer shall also be deemed to be guilty of that offence and shall be liable

to be proceeded against and punished accordingly.

Explanation.— For the purposes of this section, —

(a) "company" means any body corporate and includes a firm or other

association of individuals; and

(b) "director", in relation to a firm, means a partner in the firm.”

30. Section 142 of the NI Act is in regard to the cognizance of offence. The same

reads thus:

“142. Cognizance of offences.— (1) Notwithstanding anything contained

in the Code of Criminal Procedure, 1973 (2 of 1974),

(a) no court shall take cognizance of any offence punishable under section

138 except upon a complaint, in writing, made by the payee or, as the case

may be, the holder in due course of the cheque;

(b) such complaint is made within one month of the date on which the cause

of action arises under clause (c) of the proviso to section 138:

Provided that the cognizance of a complaint may be taken by the Court

after the prescribed period, if the complainant satisfies the Court that he

had sufficient cause for not making a complaint within such period.

Magistrate of the first class shall try any offence punishable under section

138.

(2) The offence under section 138 shall be inquired into and tried only by a

court within whose local jurisdiction,—

(a) if the cheque is delivered for collection through an account, the branch

of the bank where the payee or holder in due course, as the case may be,

maintains the account, is situated; or

(b) if the cheque is presented for payment by the payee or holder in due

course, otherwise through an account, the branch of the drawee bank

where the drawer maintains the account, is situated.

Explanation.— For the purposes of clause (a), where a cheque is delivered

for collection at any branch of the bank of the payee or holder in due

course, then, the cheque shall be deemed to have been delivered to the

branch of the bank in which the payee or holder in due course, as the case

may be, maintains the account.”

31. Section 147 of the NI Act provides that the offence under the NI Act shall be

compoundable. Section 147 reads thus:

“147. Offences to be compoundable.— Notwithstanding anything

contained in the Code of Criminal Procedure, 1973 (2 of 1974), every

offence punishable under this Act shall be compoundable.”

32. The offence under Section 138 of the NI Act, is committed, after the conditions

set out therein are fulfilled. Thereafter, the payee of the cheque has the option of

prosecuting the drawer of the cheque by instituting a complaint under Section 200 of

the Code of Criminal Procedure, 1973 (for short, ‘the CrPC’) before the jurisdictional

criminal court. After cognizance of the offence is taken, the criminal court is seized of

the matter. The case will have to be disposed of in terms of the provisions set out in the

CrPC. If the complainant fails to turn up on any hearing date, the Magistrate can

invoke Section 256 of the CrPC and acquit the accused. Under Section 257 of the

CrPC, the complaint can be withdrawn at any point of time before the final order is

passed. Under Section 147 of the NI Act the offence can be compounded. The case

may end in acquittal or conviction at the conclusion of the trial.

33. Section 141 of the NI Act states that if the person committing an offence under

Section 138 is a company, every person who, at the time the offence was committed,

was in charge of, and was responsible to the company for the conduct of the business

of the company, as well as the company, shall be deemed to be guilty of the offence

and shall be liable to be proceeded against and punished accordingly. The expression

“as well” is occurring in Section 141 of the NI Act. This expression means “on par”.

Therefore, the liability of such persons in charge of and responsible to the company for

the conduct of its business is thus co-extensive.

SCHEME OF THE IBC, 2016

34. I shall now try to understand the scheme of the IBC.

35. It is a comprehensive Code enacted, as the Preamble states, to “consolidate and

amend the laws relating to reorganisation and insolvency resolution of corporate

persons, partnership firms and individuals in a time bound manner for maximisation of

value of assets of such persons, to promote entrepreneurship, availability of credit and

balance the interests of all the stakeholders including alteration in the order of priority of

payment of Government dues and to establish an Insolvency and Bankruptcy Board of

India, and for matters connected therewith or incidental thereto”.

36. The Statement of Objects and Reasons of the IBC indicates that the Legislature

was of the opinion that the existing framework for insolvency and bankruptcy was

inadequate and ineffective and resulted in undue delays in resolution. The IBC was

proposed with the objective of consolidating and amending the laws relating to

reorganisation and insolvency resolution of corporate persons, partnership firms and

individuals in a time bound manner for maximisation of the value of assets of such

persons, to promote entrepreneurship, availability of credit and balance the interests of all

the stakeholders, including alteration in the priority of payment of Government dues and

to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or

incidental thereto. The IBC provides for designating the NCLT and the Debts Recovery

Tribunal (DRT) as the adjudicating authorities for corporate persons, firms and

individuals for resolution of insolvency, liquidation and bankruptcy. The IBC was

published in the Gazette of India dated 28.05.2016. Provisions of the IBC were, however,

brought into effect from different dates in terms of the proviso to Section 1(3) of the IBC.

37. Section 7 of IBC lays down the procedure for the initiation of the corporate

insolvency resolution process by the financial creditor or any other person or more

financial creditors jointly. The financial creditor may file an application before the

adjudicating authority along with the proof of default and the name of a resolution

professional proposed to act as the interim resolution professional in respect of the

corporate debtor. Once the adjudicating authority is satisfied, as to the extent of the

default and is ensured that the application is complete and no disciplinary proceedings are

pending against the proposed resolution professional, it shall admit the application.

38. Section 8 of the IBC provides that an operational creditor may, on the occurrence

of a default, deliver a demand notice of unpaid operational debt or copy of an invoice

demanding payment of the amount involved in the default to the corporate debtor in such

form and manner as may be prescribed.

39. Section 9 of the IBC stipulates that after the expiry of the period of 10 days from

the date of delivery of the notice or invoice demanding payment under sub-section (1) of

Section 8 if the operational creditor does not receive payment from the corporate debtor

or notice of the dispute under sub-section (2) of Section 8, it would be open for the

operational creditor to file an application before the adjudicating authority for initiating a

corporate insolvency resolution process.

40. After the initiation of the CIRP the following takes place:

(a) All the creditors are mandatorily required to put forward their claims before the

CIRP in light of the public announcement.

(b) In the aforesaid context, I must look into Sections 13 and 15 resply of the IBC.

Sections 13 and 15 resply are reproduced hereinbelow:

“13. Declaration of moratorium and public announcement.— (1) The

Adjudicating Authority, after admission of the application under section 7

or section 9 or section 10, shall, by an order—

(a) declare a moratorium for the purposes referred to in section 14;

(b) cause a public announcement of the initiation of corporate insolvency

resolution process and call for the submission of claims under section 15;

and

in section 16.

(2) The public announcement referred to in clause (b) of subsection (1) shall be made immediately after the appointment of the interim

resolution professional.

Xxx xxx xxx

15. Public announcement of corporate insolvency resolution process.—

(1) The public announcement of the corporate insolvency resolution

process under the order referred to in section 13 shall contain the

following information, namely:—

(a) name and address of the corporate debtor under the corporate

insolvency resolution process;

(b) name of the authority with which the corporate debtor is

incorporated or registered;

(d) details of the interim resolution professional who shall be vested

with the management of the corporate debtor and be responsible for

receiving claims;

(e) penalties for false or misleading claims; and

(f) the date on which the corporate insolvency resolution process shall

close, which shall be the one hundred and eightieth day from the date of

the admission of the application under sections 7, 9 or section 10, as

the case may be.

(2) The public announcement under this section shall be made in such

manner as may be specified.”

in regard to the claims unlike the liquidator. The resolution professional only collates the

claims. In this regard, the decision of this Court in the case of Swiss Ribbons Private

Limited and Another v. Union of India and Others reported in (2019) 4 SCC 17

assumes importance. I quote paras 88-91 of Swiss Ribbons (supra) as under:

Resolution professional has no adjudicating powers

“88. It is clear from a reading of the Code as well as the Regulations that the

resolution professional has no adjudicatory powers. Section 18 of the Code

lays down the duties of an interim resolution professional as follows:

“18. Duties of interim resolution professional.—(1) The interim

resolution professional shall perform the following duties, namely—

(a) collect all information relating to the assets, finances and

operations of the corporate debtor for determining the financial

position of the corporate debtor, including information relating to—

(i) business operations for the previous two years;

(ii) financial and operational payments for the previous two

years;

(iii) list of assets and liabilities as on the initiation date; and

(iv) such other matters as may be specified;

(b) receive and collate all the claims submitted by creditors to him,

pursuant to the public announcement made under Sections 13 and 15;

(d) monitor the assets of the corporate debtor and manage its

operations until a resolution professional is appointed by the

Committee of Creditors;

(e) file information collected with the information utility, if necessary;

and

(f) take control and custody of any asset over which the corporate

debtor has ownership rights as recorded in the balance sheet of the

corporate debtor, or with information utility or the depository of

securities or any other registry that records the ownership of assets

including—

(i) assets over which the corporate debtor has ownership rights

which may be located in a foreign country;

(ii) assets that may or may not be in possession of the corporate

debtor;

(iii) tangible assets, whether movable or immovable;

(iv) intangible assets including intellectual property;

(v) securities including shares held in any subsidiary of the

corporate debtor, financial instruments, insurance policies;

(vi) assets subject to the determination of ownership by a court or

authority;

(g) to perform such other duties as may be specified by the Board.

Explanation.—For the purposes of this section, the term “assets” shall

not include the following, namely—

(a) assets owned by a third party in possession of the corporate

debtor held under trust or under contractual arrangements including

bailment;

(b) assets of any Indian or foreign subsidiary of the corporate

debtor; and

Government in consultation with any financial sector regulator.”

89. Under the CIRP Regulations, the resolution professional has to vet and

verify claims made, and ultimately, determine the amount of each claim as

follows:

“10. Substantiation of claims.—The interim resolution professional or

the resolution professional, as the case may be, may call for such other

evidence or clarification as he deems fit from a creditor for substantiating

the whole or part of its claim.

* * *

12. Submission of proof of claims.—(1) Subject to sub-regulation (2), a

creditor shall submit claim with proof on or before the last date mentioned in

the public announcement.

(2) A creditor, who fails to submit claim with proof within the time

stipulated in the public announcement, may submit the claim with proof to

the interim resolution professional or the resolution professional, as the

case may be, on or before the ninetieth day of the insolvency

commencement date.

(3) Where the creditor in sub-regulation (2) is a financial creditor under

Regulation 8, it shall be included in the committee from the date of

admission of such claim:

Provided that such inclusion shall not affect the validity of any decision

taken by the committee prior to such inclusion.

13. Verification of claims.—(1) The interim resolution professional or the

resolution professional, as the case may be, shall verify every claim, as on

the insolvency commencement date, within seven days from the last date of

the receipt of the claims, and thereupon maintain a list of creditors

containing names of creditors along with the amount claimed by them, the

amount of their claims admitted and the security interest, if any, in respect of

such claims, and update it.

(2) The list of creditors shall be—

(a) available for inspection by the persons who submitted proofs of

claim;

(b) available for inspection by members, partners, Directors and

guarantors of the corporate debtor;

(d) filed with the adjudicating authority; and

(e) presented at the first meeting of the committee.

14. Determination of amount of claim.—(1) Where the amount claimed

by a creditor is not precise due to any contingency or other reason, the

interim resolution professional or the resolution professional, as the case

may be, shall make the best estimate of the amount of the claim based on

the information available with him.

(2) The interim resolution professional or the resolution professional, as

the case may be, shall revise the amounts of claims admitted, including the

estimates of claims made under sub-regulation (1), as soon as may be

practicable, when he comes across additional information warranting

such revision.”

It is clear from a reading of these Regulations that the resolution

professional is given administrative as opposed to quasi-judicial powers. In

fact, even when the resolution professional is to make a “determination”

under Regulation 35-A, he is only to apply to the adjudicating authority for

appropriate relief based on the determination made as follows:

“35-A. Preferential and other transactions.—(1) On or before the

seventy-fifth day of the insolvency commencement date, the resolution

professional shall form an opinion whether the corporate debtor has been

subjected to any transaction covered under Sections 43, 45, 50 or 66.

(2) Where the resolution professional is of the opinion that the corporate

debtor has been subjected to any transactions covered under Sections 43,

45, 50 or 66, he shall make a determination on or before the one hundred

and fifteenth day of the insolvency commencement date, under intimation

to the Board.

(3) Where the resolution professional makes a determination under subregulation (2), he shall apply to the adjudicating authority for appropriate

relief on or before the one hundred and thirty-fifth day of the insolvency

commencement date.”

90. As opposed to this, the liquidator, in liquidation proceedings under the

Code, has to consolidate and verify the claims, and either admit or reject

such claims under Sections 38 to 40 of the Code. Sections 41 and 42, by

way of contrast between the powers of the liquidator and that of the

resolution professional, are set out hereinbelow:

“41. Determination of valuation of claims.—The liquidator shall

determine the value of claims admitted under Section 40 in such

manner as may be specified by the Board.

42. Appeal against the decision of liquidator.—A creditor may appeal

to the adjudicating authority against the decision of the liquidator

accepting or rejecting the claims within fourteen days of the receipt of

such decision.”

It is clear from these sections that when the liquidator “determines” the

value of claims admitted under Section 40, such determination is a

“decision”, which is quasi-judicial in nature, and which can be appealed

against to the adjudicating authority under Section 42 of the Code.

91. Unlike the liquidator, the resolution professional cannot act in a

number of matters without the approval of the Committee of Creditors

under Section 28 of the Code, which can, by a two-thirds majority, replace

one resolution professional with another, in case they are unhappy with

his performance. Thus, the resolution professional is really a facilitator of

the resolution process, whose administrative functions are overseen by the

Committee of Creditors and by the adjudicating authority.”

(d) Section 29 of the IBC deals with the information memorandum on the basis of

which the resolution plan would be submitted. In this regard, Regulation 36 of the

Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate

Persons) Regulations, 2016, assumes importance wherein Regulation 36(2)(d) covers the

claims of different kinds of creditors. Regulation 36(2)(d) reads thus:

“36. Information memorandum.-(1) Subject to sub-regulation (4), the

resolution professional shall submit the information memorandum in

electronic form to each member of the committee within two weeks of his

appointment, but not later than fifty-fourth day from the insolvency

commencement date, whichever is earlier.

(2) The information memorandum shall contain the following details of the

corporate debtor-

(a) xxxx

Xx xx xx

(d) a list of creditors containing the names of creditors, the amounts claimed

by them, the amount of their claims admitted and the security interest, if any,

in respect of such claims;…..”

(e) In the aforesaid context, I may look into the decision of this Court in the case of

Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and

Others reported in (2020) 8 SCC 531, more particularly, paras 42-45 which read thus:

“42. Under Section 29(1) of the Code, the resolution professional shall

prepare an information memorandum containing all relevant information, as

may be specified, so that a resolution plan may then be formulated by a

prospective resolution applicant. Under Section 30 of the Code, the resolution

applicant must then submit a resolution plan to the resolution professional,

prepared on the basis of the information memorandum. After this, the

resolution professional must present to the Committee of Creditors, for its

approval, such resolution plans which conform to the conditions referred to in

Section 30(2) of the Code — see Section 30(3) of the Code. If the resolution

plan is approved by the requisite majority of the Committee of Creditors, it is

then the duty of the resolution professional to submit the resolution plan as

approved by the Committee of Creditors to the Adjudicating Authority

— see Section 30(6) of the Code.

43. The aforesaid provisions of the Code are then fleshed out in the 2016

Regulations. Under Chapter IV of the aforesaid Regulations, claims by

operational creditors, financial creditors, other creditors, workmen and

employees are to be submitted to the resolution professional along with proofs

thereof — see Regulations 7 to 12. Thereafter, under Regulation 13, the

resolution professional shall verify each claim as on the insolvency

commencement date, and thereupon maintain a list of creditors containing the

names of creditors along with the amounts claimed by them, the amounts

admitted by him, and the security interest, if any, in respect of such claims,

and constantly update the aforesaid list — see Regulation 13(1).

44. Chapter X of the Regulations then deals with resolution plans that are

submitted. Under Regulation 35, “fair value” as defined by Regulation 2(1)

(hb) [Under Regulation 2(1)(hb), Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for Corporate Persons) Regulations, 2016:“2.

(1)(hb) “fair value” means the estimated realisable value of the assets of the

corporate debtor, if they were to be exchanged on the insolvency

commencement date between a willing buyer and a willing seller in an arm's

length transaction, after proper marketing and where the parties had acted

knowledgeably, prudently and without compulsion;”] and “liquidation value”

as defined by Regulation 2(1)(k) [Id. Under Regulation 2(1)(k):“2. (1)(k)

“liquidation value” means the estimated realisable value of the assets of the

corporate debtor, if the corporate debtor were to be liquidated on the

insolvency commencement date;”] shall be determined by two registered

valuers appointed under Regulation 27, which shall be handed over to the

resolution professional.

45. After receipt of the resolution plans in accordance with the Code and the

Regulations, the resolution professional shall then provide the fair value and

liquidation value to every member of the Committee of Creditors

— see Regulation 35(2). Regulation 36 is important as it forms the basis for the

submission of a resolution plan. The information memorandum, spoken of by this

regulation, must contain the following:

“36.(2)(a) assets and liabilities with such description, as on the

insolvency commencement date, as are generally necessary for ascertaining

their values.

Explanation.—“Description” includes the details such as date of

acquisition, cost of acquisition, remaining useful life, identification number,

depreciation charged, book value, and any other relevant details.

(b) the latest annual financial statements;

financial years and provisional financial statements for the current financial

year made up to a date not earlier than fourteen days from the date of the

application;

(d) a list of creditors containing the names of creditors, the amounts

claimed by them, the amount of their claims admitted and the security

interest, if any, in respect of such claims;

(e) particulars of a debt due from or to the corporate debtor with respect

to related parties;

(f) details of guarantees that have been given in relation to the debts of

the corporate debtor by other persons, specifying which of the guarantors is

a related party;

(g) the names and addresses of the members or partners holding at least

one per cent stake in the corporate debtor along with the size of stake;

(h) details of all material litigation and an ongoing investigation or

proceeding initiated by Government and statutory authorities;

(i) the number of workers and employees and liabilities of the corporate

debtor towards them;

(j)-(k)***

(l) other information, which the resolution professional deems relevant to

the committee.””

(f) On the basis of the information memorandum, the resolution plan is submitted

under Section 30(1) of the IBC.

(g) It is important to note that the operational creditors are mandatorily entitled to the

liquidation value or the amount that the plan entitles them if distributed in accordance

with the waterfall mechanism under Section 53 whichever is higher. (See Section 30 (2)

(b))

(h) For dissenting financial creditors, they are mandatorily entitled to the amount

under Section 53 in the event of liquidation.

(i) The constitutional validity of the said provision was upheld by this Court in the

decision of Essar Steel India Limited (supra). (See paras 128-131)

(j) If the plan fails to comply with the above, the resolution plan is liable to be

mandatorily rejected.

(k) Section 31 of the IBC deals with the approval of the resolution plan which shall

bind everyone i.e. the corporate debtor, guarantors, creditors, other stakeholders etc.

Thus, whatever amount is allotted to the creditor under the plan, the same will have to be

accepted without any option.

(l) The new avatar of the corporate debtor does not have to deal with the various

“hydra heads”, i.e. multiple new claims popping up after the approval of the plan (para

107 of the Essar Steel (supra)

(m) The aforesaid has been accepted as a “Clean Slate Theory”. (See paras 93-94 of

Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.,

(2021) 9 SCC 657).

(n) This Court in Ebix Singapore Private Limited v. Committee of Creditors of

Educomp Solutions Limited and Another reported in (2022) 2 SCC 401, has held that

the resolution plan binds even the persons who have not consented. Paras 115 & 117

resply read thus:-

“115. While the above observations were made in the context of a scheme

that has been sanctioned by the court, the resolution plan even prior to the

approval of the adjudicating authority is binding inter se the CoC and the

successful resolution applicant. The resolution plan cannot be construed

purely as a “contract” governed by the Contract Act, in the period intervening its acceptance by the CoC and the approval of the adjudicating authority.

Even at that stage, its binding effects are produced by IBC framework. The

BLRC Report mentions that “[w]hen 75% of the creditors agree on a revival

plan, this plan would be binding on all the remaining creditors” [ 3.3.1, The

Report of the Bankruptcy Law Reforms Committee, Vol. I : Rationale and

Design (November 2015), p. 13, available at <https://ibbi.gov.in/BLRCReportVol1_04112015.pdf> last accessed 20-8-2021.]. The BLRC Report also

mentions that, “the RP submits a binding agreement to the adjudicator before the default maximum date” [Id, p. 92.]. We have further discussed the

statutory scheme of IBC in Sections I and J of this judgment to establish that

a resolution plan is binding inter se the CoC and the successful resolution

applicant. Thus, the ability of the resolution plan to bind those who have

not consented to it, by way of a statutory procedure, indicates that it is not

a typical contract.

Xxx xxx xxx

117. ….. The terms of the resolution plan contain a commercial bargain

between the CoC and resolution applicant. There is also an intention to

create legal relations with binding effect. However, it is the structure of IBC

which confers legal force on the CoC-approved resolution plan. The

validity of the resolution plan is not premised upon the agreement or

consent of those bound (although as a procedural step IBC requires sixtysix per cent votes of creditors), but upon its compliance with the procedure

stipulated under IBC.” (Emphasis

supplied)

41. Thus, from the aforesaid, it is evident that the creditor has no option but to join the

process under the IBC. Once the plan is approved, it would bind everyone under the sun.

The making of a claim and accepting whatever share is allotted could be termed as an

“Involuntary Act” on behalf of the creditor. The making of a claim under the IBC and accepting the same and not making any claim, will not make any difference in light of Section 31 of the IBC. Both the situations will lead to Section 31 and the finality and binding value of the resolution plan.

42. Keeping the aforesaid discussion in mind, at best, it could be said that from the

cheque amount under Section 138 of the NI Act, the amount received under the resolution

plan may be deducted. (akin to what happens to the guarantors)

SECTION 32A OF THE IBC

43. P. Mohanraj (supra) has harmoniously construed Section 32A with Section 14 of

the IBC so as to apply to Section 138 NI Act, proceedings. Section 32A(1) is very crucial

and hence, is quoted below:-

“32A. Liability for prior offences, etc.—(1) Notwithstanding anything to the

contrary contained in this Code or any other law for the time being in force,

the liability of a corporate debtor for an offence committed prior to the

commencement of the corporate insolvency resolution process shall cease,

and the corporate debtor shall not be prosecuted for such an offence from

the date the resolution plan has been approved by the Adjudicating Authority

under section 31, if the resolution plan results in the change in the

management or control of the corporate debtor to a person who was not—

(a) a promoter or in the management or control of the corporate debtor or

a related party of such a person; or

(b) a person with regard to whom the relevant investigating authority has,

on the basis of material in its possession, reason to believe that he had

abetted or conspired for the commission of the offence, and has submitted

or filed a report or a complaint to the relevant statutory authority or

court:

Provided that if a prosecution had been instituted during the corporate

insolvency resolution process against such corporate debtor, it shall stand

discharged from the date of approval of the resolution plan subject to

requirements of this sub-section having been fulfilled:

Provided further that every person who was a “designated partner” as

defined in clause (j) of section 2 of the Limited Liability Partnership Act,

2008 (6 of 2009), or an “officer who is in default”, as defined in clause

(60) of section 2 of the Companies Act, 2013 (18 of 2013), or was in any

manner incharge of, or responsible to the corporate debtor for the

conduct of its business or associated with the corporate debtor in any

manner and who was directly or indirectly involved in the commission

of such offence as per the report submitted or complaint filed by the

investigating authority, shall continue to be liable to be prosecuted and

punished for such an offence committed by the corporate debtor

notwithstanding that the corporate debtor's liability has ceased under

this sub-section.”

44. Section 32A of the IBC has been upheld by this Court in Manish Kumar v. Union

of India and Another reported in (2021) 5 SCC 1. This Court has held that the said

section does not permit the wrong-doer to get away. Thus, if the argument of allowing the

signatory/director to go scot-free after the approval of the resolution plan is accepted the

same would run contrary to the legislative intent of Section 32A which has been upheld

by this Court as under:

“326. We are of the clear view that no case whatsoever is made out to seek

invalidation of Section 32-A. The boundaries of this Court's jurisdiction are

clear. The wisdom of the legislation is not open to judicial review. Having

regard to the object of the Code, the experience of the working of the Code,

the interests of all stakeholders including most importantly the imperative

need to attract resolution applicants who would not shy away from offering

reasonable and fair value as part of the resolution plan if the legislature

thought that immunity be granted to the corporate debtor as also its

property, it hardly furnishes a ground for this Court to interfere. The

provision is carefully thought out. It is not as if the wrongdoers are allowed

to get away. They remain liable. The extinguishment of the criminal liability

of the corporate debtor is apparently important to the new management to

make a clean break with the past and start on a clean slate. We must also not

overlook the principle that the impugned provision is part of an economic

measure. The reverence courts justifiably hold such laws in cannot but be

applicable in the instant case as well. The provision deals with reference to

offences committed prior to the commencement of the CIRP. With the

admission of the application the management of the corporate debtor passes

into the hands of the interim resolution professional and thereafter into the

hands of the resolution professional subject undoubtedly to the control by the

Committee of Creditors. As far as protection afforded to the property is

concerned there is clearly a rationale behind it. Having regard to the object

of the statute we hardly see any manifest arbitrariness in the provision.”

(Emphasis supplied)

45. In P. Mohanraj (supra), this Court in clear terms held that Section 32A only

protects the corporate debtor and not the signatories/directors etc. The prosecution against

the signatories/directors would continue. In P. Mohanraj (supra): -

a. The issue involved was whether the institution/continuation of a

proceeding under Section 138/141 of the NI Act, 1881 is said to be

covered by Section 14 of the IBC, 2016.

b. That Section 138 proceedings can be said to be a "civil sheep" in a

"criminal wolf's" clothing.

i. The Court relied upon Kaushalya Devi Massand v. Roopkishore

Khore, (Para 59) [(2011)4 SCC 593] and Meters & Instruments (P)

Ltd. v. Kanchan Mehta, (Para 63) [(2018)1 SCC 560]

c. Section 138 proceedings are covered by Section 14 of the IBC, 2016.

(Para 67)

d. Moratorium under Section 14, IBC only applies to the Corporate

Debtor and does not apply to natural persons mentioned under Section

141 of NI Act, 1881. The said conclusion is reached after considering

Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC

661. (Para 102)

e. I quote para 102 of P. Mohanraj (supra) as under:

“102. Since the corporate debtor would be covered by the moratorium

provision contained in Section 14 IBC, by which continuation of Sections 138/141 proceedings against the corporate debtor and initiation

of Sections 138/141 proceedings against the said debtor during the corporate insolvency resolution process are interdicted, what is stated in

paras 51 and 59 in Aneeta Hada ((2012) 5 SCC 661) would then become applicable. The legal impediment contained in Section 14 IBC

would make it impossible for such proceeding to continue or be instituted against the corporate debtor. Thus, for the period of moratorium, since no Sections 138/141 proceeding can continue or be initiated against the corporate debtor because of a statutory bar, such proceedings can be initiated or continued against the persons mentioned

in Sections 141(1) and (2) of the Negotiable Instruments Act. This being the case, it is clear that the moratorium provision contained in

Section 14 IBC would apply only to the corporate debtor, the natural

persons mentioned in Section 141 continuing to be statutorily liable

under Chapter XVII of the Negotiable Instruments Act.”

(Emphasis supplied)

46. While dealing with the issue of Section 14, IBC, this Court had the occasion to

deal in detail with Section 32A also. The 2

proviso to Section 32A(1) is a complete

answer to the issue in question. The said provision is discussed in detail from Paras 39-43

in P. Mohanraj’s case. Paras 39 to 43 read thus:

“39. The raison d'être for the enactment of Section 32-A has been stated by

the Report of the Insolvency Law Committee of February 2020, which is as

follows:

“17. LIABILITY OF CORPORATE DEBTOR FOR OFFENCES COMMITTED

PRIOR TO INITIATION OF CIRP [Recommendations contained herein have

been implemented pursuant to Section 10 of the Insolvency and

Bankruptcy Code (Amendment) Ordinance, 2019.]

17.1. Section 17 of the Code provides that on commencement of the

CIRP, the powers of management of the corporate debtor vest with the

interim resolution professional. Further, the powers of the Board of

Directors or partners of the corporate debtor stand suspended, and are

to be exercised by the interim resolution professional. Thereafter, Section

29-A, read with Section 35(1)(f), places restrictions on related parties of

the corporate debtor from proposing a resolution plan and purchasing

the property of the corporate debtor in the CIRP and liquidation process,

respectively. Thus, in most cases, the provisions of the Code effectuate a

change in control of the corporate debtor that results in a clean break of

the corporate debtor from its erstwhile management. However, the legal

form of the corporate debtor continues in the CIRP, and may be

preserved in the resolution plan. Additionally, while the property of the

corporate debtor may also change hands upon resolution or liquidation,

such property also continues to exist, either as property of the corporate

debtor, or in the hands of the purchaser.

17.2. However, even after commencement of CIRP or after its successful

resolution or liquidation, the corporate debtor, along with its property,

would be susceptible to investigations or proceedings related to criminal

offences committed by it prior to the commencement of a CIRP, leading

to the imposition of certain liabilities and restrictions on the corporate

debtor and its properties even after they were lawfully acquired by a

resolution applicant or a successful bidder, respectively.

Liability where a Resolution Plan has been approved

17.3. It was brought to the Committee that this had created apprehension

amongst potential resolution applicants, who did not want to take on the

liability for any offences committed prior to commencement of CIRP. In

one case, JSW Steel had specifically sought certain reliefs and

concessions, within an annexure to the resolution plan it had submitted

for approval of the adjudicating authority. [SBI v. Bhushan Steel Ltd.,

2018 SCC OnLine NCLT 32305, para 83(i)] Without relief from

imposition of the such liability, the Committee noted that in the long run,

potential resolution applicants could be disincentivised from proposing a

resolution plan. The Committee was also concerned that resolution plans

could be priced lower on an average, even where the corporate debtor

did not commit any offence and was not subject to investigation, due

to adverse selection by resolution applicants who might be apprehensive

that they might be held liable for offences that they have not been able to

detect due to information asymmetry. Thus, the threat of liability falling

on bona fide persons who acquire the legal entity, could substantially

lower the chances of its successful takeover by potential resolution

applicants.

17.4. This could have substantially hampered the Code's goal of value

maximisation, and lowered recoveries to creditors, including financial

institutions who take recourse to the Code for resolution of the NPAs on

their balance sheet. At the same time, the Committee was also conscious

that authorities are duty-bound to penalise the commission of any

offence, especially in cases involving substantial public interest. Thus,

two competing concerns need to be balanced.

Xxx xxx xxx

17.6. Given this, the Committee felt that a distinction must be drawn

between the corporate debtor which may have committed offences under

the control of its previous management, prior to the CIRP, and the

corporate debtor that is resolved, and taken over by an unconnected

resolution applicant. While the corporate debtor's actions prior to the

commencement of the CIRP must be investigated and penalised, the

liability must be affixed only upon those who were responsible for the

corporate debtor's actions in this period. However, the new management

of the corporate debtor, which has nothing to do with such past offences,

should not be penalised for the actions of the erstwhile management of

the corporate debtor, unless they themselves were involved in the

commission of the offence, or were related parties, promoters or other

persons in management and control of the corporate debtor at the time

of or any time following the commission of the offence, and could

acquire the corporate debtor, notwithstanding the prohibition under

Section 29-A. [For example, where the exemption under Section 240-A is

applicable.]

17.7. Thus, the Committee agreed that a new section should be inserted

to provide that where the corporate debtor is successfully resolved, it

should not be held liable for any offence committed prior to the

commencement of the CIRP, unless the successful resolution applicant

was also involved in the commission of the offence, or was a related

party, promoter or other person in management and control of the

corporate debtor at the time of or any time following the commission of

the offence.

17.8. Notwithstanding this, those persons who were responsible to the

corporate debtor for the conduct of its business at the time of the

commission of such offence, should continue to be liable for such an

offence, vicariously or otherwise, regardless of the fact that the

corporate debtor's liability has ceased.” (emphasis in original and

supplied)

40. This Court in Manish Kumar v. Union of India [(2021) 5 SCC 1],

upheld the constitutional validity of this provision. This Court observed :

(SCC pp. 170-71, para 326)

“326. We are of the clear view that no case whatsoever is made out to

seek invalidation of Section 32-A. The boundaries of this Court's

jurisdiction are clear. The wisdom of the legislation is not open to

judicial review. Having regard to the object of the Code, the experience

of the working of the Code, the interests of all stakeholders including

most importantly the imperative need to attract resolution applicants

who would not shy away from offering reasonable and fair value as part

of the resolution plan if the legislature thought that immunity be granted

to the corporate debtor as also its property, it hardly furnishes a ground

for this Court to interfere. The provision is carefully thought out. It is not

as if the wrongdoers are allowed to get away. They remain liable. The

extinguishment of the criminal liability of the corporate debtor is

apparently important to the new management to make a clean break with

the past and start on a clean slate. We must also not overlook the

principle that the impugned provision is part of an economic measure.

The reverence courts justifiably hold such laws in cannot but be

applicable in the instant case as well. The provision deals with reference

to offences committed prior to the commencement of the CIRP. With the

admission of the application the management of the corporate debtor

passes into the hands of the interim resolution professional and

thereafter into the hands of the resolution professional subject

undoubtedly to the control by the Committee of Creditors. As far as

protection afforded to the property is concerned there is clearly a

rationale behind it. Having regard to the object of the statute we hardly

see any manifest arbitrariness in the provision.”

41. Section 32-A cannot possibly be said to throw any light on the true interpretation of Section 14(1)(a) as the reason for introducing Section 32-A

had nothing whatsoever to do with any moratorium provision. At the heart

of the section is the extinguishment of criminal liability of the corporate

debtor, from the date the resolution plan has been approved by the adjudicating authority, so that the new management may make a clean break with

the past and start on a clean slate. A moratorium provision, on the other

hand, does not extinguish any liability, civil or criminal, but only casts a

shadow on proceedings already initiated and on proceedings to be initiated,

which shadow is lifted when the moratorium period comes to an end. Also,

Section 32-A(1) operates only after the moratorium comes to an end. At the

heart of Section 32-A is the IBC's goal of value maximisation and the need

to obviate lower recoveries to creditors as a result of the corporate debtor

continuing to be exposed to criminal liability.

42. Unfortunately, Section 32-A is inelegantly drafted. The second proviso

to Section 32-A(1) speaks of persons who are in any manner in charge of,

or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor and who are, directly or indirectly, involved in the commission of “such offence” i.e. the offence referred to in

sub-section (1), “as per the report submitted or complaint filed by the investigating authority …”. The report submitted here refers to a police report under Section 173 CrPC, and complaints filed by investigating authorities under special Acts, as opposed to private complaints. If the language

of the second proviso is taken to interpret the language of Section 32- A(1)

in that the “offence committed” under Section 32-A(1) would not include

offences based upon complaints under Section 2(d) CrPC, the width of the

language would be cut down and the object of Section 32-A(1) would not be

achieved as all prosecutions emanating from private complaints would be

excluded. Obviously, Section 32-A(1) cannot be read in this fashion and

clearly incudes the liability of the corporate debtor for all offences com-

mitted prior to the commencement of the corporate insolvency resolution

process. Doubtless, a Section 138 proceeding would be included, and

would, after the moratorium period comes to an end with a resolution plan

by a new management being approved by the adjudicating authority, cease

to be an offence qua the corporate debtor.

43. A section which has been introduced by an amendment into an Act

with its focus on cesser of liability for offences committed by the corporate

debtor prior to the commencement of the corporate insolvency resolution

process cannot be so construed so as to limit, by a sidewind as it were, the

moratorium provision contained in Section 14, with which it is not at all

concerned. If the first proviso to Section 32-A(1) is read in the manner

suggested by Shri Mehta, it will impact Section 14 by taking out of its

ken Sections 138/141 proceedings, which is not the object of Section 32-

A(1) at all. Assuming, therefore, that there is a clash between Section 14

IBC and the first proviso of Section 32-A(1), this clash is best resolved

by applying the doctrine of harmonious construction so that the objects

of both the provisions get subserved in the process, without damaging or

limiting one provision at the expense of the other. If, therefore, the expression “prosecution” in the first proviso of Section 32-A(1) refers to

criminal proceedings properly so-called either through the medium of a

first information report or complaint filed by an investigating authority

or complaint and not to quasi-criminal proceedings that are instituted

under Sections 138/141 of the Negotiable Instruments Act against the

corporate debtor, the object of Section 14(1) IBC gets subserved, as does

the object of Section 32-A, which does away with criminal prosecutions

in all cases against the corporate debtor, thus absolving the corporate

debtor from the same after a new management comes in.”

(Emphasis applied)

Thus, the heart of the matter is the second proviso appended to Section 32A(1)

(b) of the IBC which provides statutory recognition of the criminal liability of the

persons who are otherwise vicariously liable under Section 141 of NI Act, in the context of Section 138 offence.

46. Thus, Section 32A broadly leads to:

a. Extinguishment of the criminal liability of the corporate debtor, if the

control of the corporate debtor goes in the hands of the new management

which is different from the original old management.

b. The prosecution in relation to “every person who was a “designated partner” as defined in clause (j) of Section 2 of the Limited Liability Part-

nership Act, 2008 (6 of 2009), or an “officer who is in default”, as

defined in clause (60) of Section 2 of the Companies Act, 2013 (18 of

2013), or was in any manner in charge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who was directly or indirectly involved in

the commission of such offence” shall be proceeded and the law will

take it’s own course. Only the corporate debtor (with new management) as

held in Para 42 of P. Mohanraj will be safeguarded.

c. If the old management takes over the corporate debtor (for MSME

Section 29A does not apply (see 240A), hence for MSME old management can takeover) the corporate debtor itself is also not safeguarded

from prosecution under Section 138 or any other offences.

47. Thus, I am of the view that by operation of the provisions of the IBC, the criminal

prosecution initiated against the natural persons under Section 138 read with 141 of the

NI Act read with Section 200 of the CrPC would not stand terminated.

48. In JIK Industries Limited and Others v. Amarlal V. Jumani and Another

reported in (2012) 3 SCC 255, this Court held that the sanction of a scheme under Section

391 of the Companies Act, 1956 will not lead to any automatic compounding of offence

under Section 138 of the NI Act without the consent of the complainant. Neither Section

14 nor Section 31 of the IBC can produce such a result. The binding effect contemplated

by Section 31 of the IBC is in respect of the assets and management of the corporate

debtor. No clause in the resolution plan even if accepted by the adjudicating

authority/appellate tribunal can take away the power and jurisdiction of the criminal court

to conduct and dispose of the proceedings before it in accordance with the provisions of

the CrPC.

49. It is true that by virtue of Section 238 of the IBC, the provisions of the CrPC shall

have effect notwithstanding anything inconsistent therewith contained in any other law

for the time being in force or any instrument having effect by virtue of any such law. But,

no provision of the IBC bars the continuation of the criminal prosecution initiated against

the directors and officials.

50. It is equally true that once the corporate debtor comes under the resolution

process, its erstwhile managing director(s) cannot continue to represent the company.

Section 305(2) of the CrPC states that where a corporation is the accused person or one

of the accused persons in an inquiry or trial, it may appoint a representative for the

purpose of the inquiry or trial and such appointment need not be under the seal of the

corporation. Therefore, it is only the Resolution Professional who can represent the

accused company during the pendency of the proceedings under IBC. After the

proceedings are over, either the corporate entity may be dissolved or it can be taken over

by a new management in which event the company will continue to exist. When a new

management takes over, it will have to make arrangements for representing the company.

If the company is dissolved as a result of the resolution process, obviously proceedings

against it will have to be terminated. But even then, its erstwhile directors may not be

able to take advantage of the situation. This is because, this Court in Aneeta

Hada (supra), even while overruling its decision in Anil Hada v. Indian Acrylic Ltd.

reported in (2000) 1 SCC 1, as not laying down the correct law in so far as Anil Hada

(supra) states that the director or any other officer can be prosecuted without

impleadment of the company, proceeded to hold that the matter would stand on a

different footing where there is some legal impediment as the doctrine of lex non cogit

ad impossibilia gets attracted. It was specifically observed that the decision in Anil

Hada (supra) is overruled with the qualifier as stated in para 51. Considering the same,

the ratio of the decision of this Court in Ajit Balse (supra) upon which strong reliance is

placed on behalf of the appellant is of no avail.

51. What follows from the aforesaid is that for difficulty in prosecuting the corporate

debtor under Section 138 of the NI Act after the approval of the resolution plan under the

IBC, we need not let the natural persons i.e., the signatories to the cheques/directors of

the corporate debtor escape prosecution. How can one allow the natural persons to escape

liability on such specious plea? In such a situation the Latin maxim Lex Non Cogit Ad

Impossibilia is attracted which means law does not compel a man to do which he cannot

possibly perform. Broom's "Legal Maxims" contains several illustrative cases in support

of the maxim. This maxim has been referred to with approval by this Court in State of

Rajasthan v. Shamsher Singh reported in 1985 supp SCC 416.

52. Thus, where the proceedings under Section 138 of the NI Act had already

commenced and during the pendency the plan is approved or the company gets

dissolved, the directors and the other accused cannot escape from their liability by citing

its dissolution. What is dissolved is only the company, not the personal penal liability of

the accused covered under Section 141 of the NI Act. They will have to continue to face

the prosecution in view of the law laid down in Aneeta Hada (supra). Where the

company continues to remain even at the end of the resolution process, the only

consequence is that the erstwhile directors can no longer represent it.

FEW OF THE ABSURD SITUATIONS THAT MAY ARISE IF SECTION 138

PROCEEDINGS IN RELATION TO THE SIGNATORIES/DIRECTORS ARE

HELD TO BE NOT MAINTAINABLE AFTER THE RESOLUTION PLAN IS

APPROVED

53. If the argument that the signatories/directors are not liable to be proceeded under

Section 138/141 of the NI Act once the resolution plan is approved, the same may lead to

the following absurd situations:

i. If during the lifetime of the Section 14 moratorium order, some of the accused are convicted under Section 138 of the NI Act, they will have to be released in appeal once the resolution plan is approved. Thus, then, no purpose

would be served by proceeding further against the co-accused under Section

138 during the moratorium.

ii. If the resolution plan is not approved and the corporate debtor goes under liquidation in such circumstances under Section 35(1)(k) of the IBC the liquidator can represent the corporate debtor. Thus, the prosecution under Section

138/141 continues. This may lead to absurd situations in working of the IBC

and its impact on Section 138 proceedings.

iii. At the end of the liquidation, the distribution will take place under Section 53

of the IBC. Therein everyone, including the creditors will get their share as per

the waterfall mechanism statutorily decided and the same would be binding

and mandatory. Thereafter, the corporate debtor is dissolved under Section 54

of the IBC after selling of the assets under liquidation. Now during the said

period, the prosecution might have been completed and appeals would be

pending. Then it would be argued that because under the liquidation the

amount is accepted, the prosecution against the signatory/director cannot continue after the dissolution of the corporate debtor.

54. Thus, while interpreting Sections 14, 31 & 32A resply of the IBC vis-a-vis Sections

138 and 141 resply of the NI Act, the principle of harmonious construction should be applied and followed. By permitting to proceed against the signatories/directors even after

the approval of the plan, what is achieved is uniformity in the functioning of the law by

removing the anomalous and absurd situations, thereby, making it compliant with Article

14 of the Constitution. The said interpretation shields the relevant provisions from attack

of being manifestly arbitrary.

55. The distinction between a strict construction and a more free one has disappeared

in the modern times and now mostly the question is, “what is the true construction of the

statute?” A passage in Craies on Statue Law 7th Edn. reads to the following effect:-

“The distinction between a strict and a liberal construction has almost

disappeared with regard to all classes of statutes, so that all statutes,

whether penal or not, are now construed by substantially the same rules.

'All modern Acts are framed with regard to equitable as well as legal

principles.' "A hundred years ago", said the court in Lyons' case, "statutes

were required to be perfectly precise and resort was not had to a

reasonable construction of the Act, and thereby criminals were often

allowed to escape. This is not the present mode of construing Acts of

Parliament. They are construed now with reference to the true meaning and

real intention of the legislature.”

56. At page-532 of the same book, observations of Sedgwick are quoted as under:

“The more correct version of the doctrine appears to be that statutes of this

class are to be fairly construed and faithfully applied according to the

intent of the legislature without unwarrantable severity on the one hand or

unjustifiable lenity on the other, in cases of doubt the courts inclining to

mercy.”

ARGUMENT THAT AS THE DEBT STOOD EXTINGUISHED BY VIRTUE OF

SECTION 31 OF THE CODE, THE CRIMINAL PROCEEDINGS U/S. 138 OF

THE NI ACT CANNOT CONTINUE AS REGARDS THE DIRECTOR/SIGNATORY.

57. The argument that as the debt stood extinguished by virtue of Section 31 of the

IBC, the proceedings under Section 138 of the NI Act cannot continue as regards the director/signatory, would run contrary to the line of reasoning assigned by this Court that

the “Involuntary Act” of the principal debtor would not absolve the guarantors.

58. This Court in Lalit Kumar Jain v. Union of India and Others reported in (2021)

9 SCC 321 has held that the approval of the resolution plan per se does not operate as a

discharge of guarantors’ liability. That is because:

a. an involuntary act of the principal debtor leading to loss of security,

would not absolve a guarantor of its liability.

b. a discharge which the principal debtor may secure by operation of

law in bankruptcy (or in liquidation proceedings in the case of a company) does not absolve the surety of his liability.

59. The same principle is applicable to the signatory/director in the case of Section

138/141 proceedings. The signatory/director cannot take benefit of discharge obtained

by the corporate debtor by operation of law under the IBC.

60. If the argument that extinguishment of debt under Section 31 of the IBC leads to

the discharge of signatory/director under Section 138 proceedings is accepted, the

same will lead to conflict in law as laid down compared to the guarantor’s liability

wherein in spite of the plan being approved, the guarantor is held separately liable for the

remaining amount. If the guarantor does not get the benefit of extinguishment of debt

under Section 31 of the IBC, then similarly for extinguishment of debt, the signatory/director cannot get any benefit. If accepted, this may lead to uncertainty in the first

Principles of law on interpretation of extinguishment of debt. In Lalit Kumar Jain

(supra) this Court held as under:

“122. It is therefore, clear that the sanction of a resolution plan and finality

imparted to it by Section 31 does not per se operate as a discharge of

the guarantor's liability. As to the nature and extent of the liability, much

would depend on the terms of the guarantee itself. However, this Court has

indicated, time and again, that an involuntary act of the principal debtor

leading to loss of security, would not absolve a guarantor of its liability. In

Maharashtra SEB [Maharashtra SEB v. Official Liquidator, (1982) 3 SCC

358] the liability of the guarantor (in a case where liability of the principal

debtor was discharged under the Insolvency law or the Company law), was

considered. It was held that in view of the unequivocal guarantee,

such liability of the guarantor continues and the creditor can realise the

same from the guarantor in view of the language of Section 128 of the Contract Act, 1872 as there is no discharge under Section 134 of that Act. This

Court observed as follows: (SCC pp. 362-63, para 7)

“7. Under the bank guarantee in question the Bank has undertaken

to pay the Electricity Board any sum up to Rs 50,000 and in order to realise it all that the Electricity Board has to do is to make a demand.

Within forty-eight hours of such demand the Bank has to pay the amount

to the Electricity Board which is not under any obligation to prove any default on the part of the Company in liquidation before the amount demanded is paid. The Bank cannot raise the plea that it is liable only to the

extent of any loss that may have been sustained by the Electricity Board

owing to any default on the part of the supplier of goods i.e. the Company in liquidation. The liability is absolute and unconditional. The fact

that the Company in liquidation i.e. the principal debtor has gone into liquidation also would not have any effect on the liability of the Bank i.e. the

guarantor. Under Section 128 of the Contract Act, 1872, the liability of

the surety is coextensive with that of the principal debtor unless it is

otherwise provided by the contract. A surety is no doubt discharged un-

der Section 134 of the Contract Act, 1872 by any contract between the

creditor and the principal debtor by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of

which is the discharge of the principal debtor. But a discharge which the

principal debtor may secure by operation of law in bankruptcy (or in liquidation proceedings in the case of a company) does not absolve the surety

of his liability (see Jagannath Ganeshram Agarwale v. Shivnarayan

Bhagirath [1939 SCC OnLine Bom 65 : AIR 1940 Bom 247] ; see also

Fitzgeorge, In re [Fitzgeorge, In re, (1905) 1 KB 462]).””

(Emphasis supplied)

LITIGANT CANNOT TAKE ADVANTAGE OF ITS OWN WRONG

(NULLUS COMMODUM CAPERE POTEST DE INJURIA SUA PROPRIA)

61. This Court while upholding the validity of Section 32A, IBC (Manish Kumar’s

case) has held that “The provision is carefully thought out. It is not as if the wrongdoers are allowed to get away.” That is a very important object and the same should not be

permitted to be defeated by accepting the argument that permits the Signatory/Director to enjoy the fruits of their own wrong.

62. In an interesting case titled Goa State Cooperative Bank Limited v. Krishna

Nath A. and Others reported in (2019) 20 SCC 38, the facts were that the liquidation

proceedings were required to be completed within a fixed number of years, but failed.

Thereafter the borrowers claimed in the recovery suit that now no recovery could be

made. This Court held that the defaulters cannot take benefit of their own action. The

disbursement of loan in an arbitrary manner and failure to recover was the very fulcrum

on the basis of which the winding up of the Society was ordered. I quote the relevant observations as under:-

“21. It is apparent that on the termination of the liquidation proceedings,

liability of the members for the debts taken by them does not come to

an end. There is no such provision in the Act providing once winding-up

period is over, the liability of the members for loans obtained by them

which is in their hands, and for which recovery proceedings are pending

shall come to an end. No automatic termination of recovery proceedings

against the members is contemplated. On the other hand, on completion of

the period fixed to liquidate the Society, final report has to be submitted

as to the amount standing to the credit of the Society in liquidation after

paying off its liabilities including the share or interest of members. Thus,

even in the case of liquidation the accountability remains towards surplus

and liabilities do not come to an end. Even if the period fixed for liquidation

of Society is over, that does not terminate the proceedings for recovery

which have been initiated and appeals are pending.

Xxx xxx xxx

24. The concept of restitution is a common law principle and it is a remedy against unjust enrichment or unjust benefit. The court cannot be

used as a tool by a litigant to perpetuate illegality. A person who is on the

right side of the law, should not have a feeling that in case he is dragged

in litigation, and wins, he would turn out to be a loser and wrongdoer as a real gainer, after 20 or 30 years. Thus, the members who have

obtained stay in appeal or on recovery proceedings or the case is pending,

cannot take advantage of the fact that the period fixed for the Liquidator

under the Act is over.

25. Once a report has been submitted, the Registrar has to take action

in terms of the report and in such circumstances when the proceedings for

recovery are pending against the members and the Society has taken loan

from the banks for its member, the actual money has to go to the creditor

i.e. to the bank who is going to be benefitted by recovery of public money in

the hands of members. In such cases it would be appropriate for the Registrar to send notice of the proceedings to a person who is to be benefitted from the recovery. In the instant case, the Bank itself is a prime lendercum- liquidator. The proceedings cannot come to the end. Thus, in our considered opinion, it is open to the bank to continue with the recovery proceedings and make recoveries from the defaulting members. Merely on the

liquidation of the Society, or the factum that the period fixed for liquidation is over, liability of the members for the loans cannot be said to

have been wiped off. The disbursement of loan in an arbitrary

manner and failure to recover was the very fulcrum on the basis of

which winding up of the Society was ordered.”

(Emphasis supplied)

TERMS OF THE RESOLUTION PLAN CANNOT CONTROL THE

ENACTMENT/RULES

63. Before I proceed to comment on the aforesaid, it is necessary to look into the relevant clauses of the resolution plan upon which strong reliance is sought to be placed on

behalf of the appellant. The relevant clauses read thus:

“Part K: Extinguishment of Claims/Rights

1. Save and except specifically dealt with under this Resolution Plan, no

other payments or settlements (of any kind) shall be made to any other Person in respect of claims filed under the CIRP (including, for the avoidance of

doubt, any unverified portion of their claim) and all claims against the Corporate Debtor along with any related legal proceedings, including criminal

proceedings, and other penal proceedings, shall stand irrevocably and un-

conditionally abated, settled and extinguished in perpetuity on the Effective

Date, and with effect from the Appointed Date.

2. The payment to Persons contemplated in this Resolution Plan shall be

the Corporate Debtors and Resolution Applicant's full and final performance

and satisfaction of all its obligations to such Persons and all Claims (including, for the avoidance of doubt, any unverified portion of their Claims) of

such Persons against the Corporate Debtor shall stand irrevocably and unconditionally settled and extinguished in perpetuity on the Effective Date and

with effect from the Appointed Date.

3. …Accordingly, the Resolution Applicant and the Corporate Debtor

shall have no responsibility or liability in respect of any claims against the

Corporate Debtor attributable to the period prior to the Effective Date other

than any payments to be made under this Resolution Plan and all claims

along with any related legal proceedings, including criminal proceedings

and other penal proceedings, shall stand irrevocably and unconditionally

abated, settled and extinguished in perpetuity.

Xxx xxx xxx

6. On the Effective Date and with effect from the Appointed Date, all the

outstanding negotiable instruments issued by Director/promoter or Corporate Debtor or by any Person on behalf of the Corporate Debtor for any

dues of Corporate Debtor including demand promissory notes, post-dated

cheques and letters of credit, shall stand terminated and the Corporate

Debtor's liability under such instruments shall stand extinguished.”

(Emphasis supplied)

64. I have referred to Section 31 of the IBC and Ebix Singapore (supra) to explain

that the resolution plan is binding on the creditors who have not consented to it. This is

a very important factor, which indicates that the complainant under Section 138 NI Act

is bound by the approved resolution plan, even though he may not have consented to it

(if he is part of the CoC) or likes it. If he is not a part of the CoC, then also it is binding on him.

65. Section 30(2)(e) of the IBC requires the resolution professional to approve

the resolution plan, only if the same does not violate any of the provisions of the

law for the time being in force. Thus, the clauses of the resolution plan cannot control the Enactment/Rules in force. It is the resolution plan which has to comply with the

laws in force. In the case on hand, any clause giving any effect to the corporate debtor

under Section 138 NI Act proceedings, cannot be used to protect the signatories/direc-

tors under Section 138/141 NI Act.

66. Section 61 (3)(i) of the IBC provides for an appeal against an order approving a

resolution plan if it contravenes any provision of law.

“61. Appeals and Appellate Authority.—

xxx xxx xxx

(3) An appeal against an order approving a resolution plan under Section 31 may be filed on the following grounds, namely:

(i) the approved resolution plan isin contravention of

the provisions of any law for the time being in force;….”

67. The complainant-creditor of Section 138 NI Act proceedings may or may not

have any role to play in the approval of the resolution plan and majority of Section 138

creditors may be small players unlike big financial creditors.

68. The terms of the resolution plan cannot run contrary to the enactment i.e. the IBC

or any other plenary law or rules.

69. Thus, the said clauses of the resolution plan have no role to play in answering

the neat question of law, which is dependent on the interpretation of various provisions of the IBC and NI Act.

70. It was also sought to be argued on behalf of the appellant that the plain reading of

the clauses of the resolution plan referred to above, would indicate that the respondent

(complainant) could be said to have compounded the offence punishable under Section

138 of the NI Act.

71. ‘Compounding’ and ‘quashing’ are not synonymous terms. In law, they have

different meanings and consequences. They arise from different situations and operate

in different fields and stages. There is no apparent legal interdependence or interlink to

the extent that one could exist only if the conditions of the other were satisfied or viceversa. Quashing is one of the facets of inherent powers, while compounding of an

offence being a statutory expression contained under Section 320 the CrPC is entirely a

different concept.

72. The expressions 'compromise' and 'compounding' are not synonyms in criminal

jurisprudence even though these expressions are usually used without any distinction.

Any dispute can be compromised between the parties if the terms are not illegal. But

only a compoundable offence allowed by law can be compounded. A dispute relating to

a crime can be compromised even before the case is registered, and in that case, victim

of the crime may refuse to file a complaint. But if in spite of compromise, if he files a

complaint and court finds that what is compromised is a compoundable offence,

depending upon the facts and circumstances of each case Magistrate can refuse to take

cognizance, or acquit the accused as offence was compounded or the complaint can be

quashed in proceedings under Section 482 of the CrPC.

73. In a compromise, consensus between the parties to give and take is more

important and in a compounding, decision of the victim of the offence not to prosecute

and not to continue with prosecution is more important.

74. I am of the view that the clauses as contained in the resolution plan referred to

above, only extinguishes the liability of the corporate debtor and not the natural persons.

75. As per Section 138 of the NI Act, when the cheque was dishonoured and a statutory notice demanding the cheque amount was issued, the accused shall pay the cheque

amount within 15 days from the date of receipt of the said notice. The moment the said

15 days expired, the cause of action arises. In other words, the offence under Section

138 of the NI Act is complete. Once the cause of action arose for the offence committed, the complainant has to approach the criminal court within one month to take penal

action under Section 138 of the NI Act. To put it clearly, the complainant approaches the

criminal court not for recovery of the legally enforceable debt, but for taking penal action under Section 138 of the NI Act for the offence already committed by the accused

by not making the payment of the cheque amount despite the receipt of the statutory notice. The only question before the criminal court is whether the cheque issued by the accused towards the discharge of his liability was dishonoured and despite the service of

demand notice, whether he had not paid the amount. There is no bar contained in any of

the provisions of the IBC, and the NI Act from approaching the criminal court to seek

penal action under Section 138 of the NI Act.

FEW RELEVANT DECISIONS ON THE SUBJECT

76. In State Bank of India v. V. Ramakrishnan and Another reported in (2018) 17

SCC 394, this Court held that:-

“31. The Insolvency Law Committee, appointed by the Ministry of

Corporate Affairs, by its Report dated 26-3-2018, made certain key

recommendations…..

32. The Committee insofar as the moratorium under Section 14 is

concerned, went on to find:…

“5.11. Further, since many guarantees for loans of corporates are given

by its promoters in the form of personal guarantees, if there is a stay on

actions against their assets during a CIRP, such promoters (who are also

corporate applicants) may file frivolous applications to merely take

advantage of the stay and guard their assets. In the judgments analysed

in this relation, many have been filed by the corporate applicant under

Section 10 of the Code and this may corroborate the above apprehension

of abuse of the moratorium provision. The Committee concluded that

Section 14 does not intend to bar actions against assets of guarantors to

the debts of the corporate debtor and recommended that an explanation

to clarify this may be inserted in Section 14 of the Code. The scope of the

moratorium may be restricted to the assets of the corporate debtor only.”

Xxx xxx xxx

25. Section 31 of the Act was also strongly relied upon by the respondents.

This section only states that once a resolution plan, as approved by the

Committee of Creditors, takes effect, it shall be binding on the corporate

debtor as well as the guarantor. This is for the reason that otherwise,

under Section 133 of the Contract Act, 1872, any change made to the debt

owed by the corporate debtor, without the surety's consent, would relieve

the guarantor from payment. Section 31(1), in fact, makes it clear that the

guarantor cannot escape payment as the resolution plan, which has been

approved, may well include provisions as to payments to be made by such

guarantor. This is perhaps the reason that Annexure VI(e) to Form 6

contained in the Rules and Regulation 36(2) referred to above, require

information as to personal guarantees that have been given in relation to

the debts of the corporate debtor. Far from supporting the stand of the

respondents, it is clear that in point of fact, Section 31 is one more factor

in favour of a personal guarantor having to pay for debts due without any

moratorium applying to save him.

Xxx xxx xxx

26.1. Section 14 refers only to debts due by corporate debtors, who are

limited liability companies, and it is clear that in the vast majority of cases,

personal guarantees are given by Directors who are in management of the

companies. The object of the Code is not to allow such guarantors to

escape from an independent and co-extensive liability to pay off the entire

outstanding debt, which is why Section 14 is not applied to them. …”

(Emphasis supplied)

77. In Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta

and Others reported in (2020) 8 SCC 531, this Court held that:

“106. Following this judgment in V. Ramakrishnan case (2018) 17 SCC

394, it is difficult to accept Shri Rohatgi's argument that that part of the

resolution plan which states that the claims of the guarantor on account of

subrogation shall be extinguished, cannot be applied to the guarantees

furnished by the erstwhile Directors of the corporate debtor. So far as the

present case is concerned, we hasten to add that we are saying nothing

which may affect the pending litigation on account of invocation of these

guarantees. However, NCLAT judgment being contrary to Section 31(1) of

the Code and this Court's judgment in V. Ramakrishnan case (2018) 17

SCC 394, is set aside.”

(Emphasis supplied)

78. In Vijay Kumar Jain v. Standard Chartered Bank reported in (2019) 20 SCC

455, this Court held that:

“19.3… we find that Section 31(1) of the Code would make it clear that

such members of the erstwhile Board of Directors, who are often

guarantors, are vitally interested in a resolution plan as such resolution

plan then binds them. Such plan may scale down the debt of the principal

debtor, resulting in scaling down the debt of the guarantor as well, or it

may not. The resolution plan may also scale down certain debts and not

others, leaving guarantors of the latter kind of debts exposed for the entire

amount of the debt.

19.4. The regulations also make it clear that these persons are vitally

interested in resolution plans as they affect them.” (Emphasis

supplied)

79. In Lalit Kumar Jain (supra), this Court held that:

“122. It is therefore, clear that the sanction of a resolution plan and

finality imparted to it by Section 31 does not per se operate as a discharge

of the guarantor's liability. As to the nature and extent of the liability,

much would depend on the terms of the guarantee itself. However, this

Court has indicated, time and again, that an involuntary act of the

principal debtor leading to loss of security, would not absolve a guarantor

of its liability…..”

(Emphasis supplied)

80. In JIK Industries Limited and Others v. Amarlal V. Jumani and Another

reported in (2012) 3 SCC 255, this Court held that:

“19. In the instant appeal in most of the cases the offence under the NI Act

has been committed prior to the scheme. Therefore, the offence which has

already been committed prior to the scheme does not get automatically

compounded only as a result of the said scheme. Therefore, even by relying

on the ratio of the aforesaid judgment in J.K. (Bombay) (P) Ltd. [J.K.

(Bombay) (P) Ltd. v. New Kaiser-I-Hind Spg. And Wvg. Co. Ltd., AIR 1970

SC 1041], this Court cannot accept the appellant's contention that the

scheme under Section 391 of the Companies Act will have the effect of

automatically compounding the offence under the NI Act.

Xxx xxx xxx

27. The compounding of an offence is always controlled by statutory

provision. There are various features in the compounding of an offence and

those features must be satisfied before it can be claimed by the offender that

the offence has been compounded. Thus, compounding of an offence

cannot be achieved indirectly by the sanctioning of a scheme by the

Company Court.

Xxx xxx xxx

70. In the instant case no special procedure has been prescribed under the

NI Act relating to compounding of an offence. In the absence of special

procedure relating to compounding, the procedure relating to

compounding under Section 320 shall automatically apply in view of

clear mandate of sub-section (2) of Section 4 of the Code.

Xxx xxx xxx

83. For the reasons aforesaid, this Court is unable to accept the contentions

of the learned counsel for the appellant(s) that as a result of sanction of a

scheme under Section 391 of the Companies Act there is an automatic

compounding of offences under Section 138 of the NI Act even without the

consent of the complainant.” (Emphasis supplied)

81. In Indorama Synthetics (I) Ltd., Nagpur v. State of Maharashtra and others

reported in 2016 SCC OnLine Bom 2611, the question that arose before the Bombay

High Court was whether the expression “suit or other proceedings” mentioned in

Section 446(1) of the Companies Act, 1956 would include criminal proceedings under

Section 138 NI Act. It was held that:-

“17. Thus, the main object of section 138 of N.I. Act, which can be inferred,

is to safeguard the credibility of commercial transactions and to prevent

bouncing of cheques by providing a personal criminal liability against the

drawer of the cheque in public interest. No civil liability or any liability

against the assets of the drawer of the cheque is contemplated under

section 138 of the N.I. Act. Hence, it follows that the provisions of section

446(1) of the Companies Act can have apparently and in essence no

application to the proceedings under section 138 of Negotiable Instruments

Act, as it is not a suit or proceeding having direct bearing on the

proceedings for winding-up or the assets of the Company.

xxx xxx xxx

24. Thus, the sum and substance of all these judicial decisions is that the

provisions of section 446(1) of the Companies Act are to be invoked

judiciously only when it has got any concern with either the winding-up

proceedings or with the assets of the Company. The expression “suit or

other proceedings”, therefore, as used in section 446(1) of the Companies

Act, has to be construed accordingly and not to be interpreted so liberally

and widely so as to include each and every proceeding of whatsoever

nature initiated against the Company, including even the criminal

proceedings like for the offence under section 138 of N.I. Act, which has

got no bearing on the winding-up proceedings of the Company and are

not concerned with, directly with the assets of the Company, but are

mainly dealing with the penal and personal liability of the Directors of

the Company.

25. The conflict involved in the case can also be looked into from another

aspect ‘as to whether the provisions of section 138 of N.I. Act can

override the provisions of Companies Act, as it is a very special provision

incorporated in the Negotiable Instruments Act, though the Companies Act

contains certain special provisions in order to safeguard the rights of the

Company under liquidation?’

Xxx xxx xxx

28. If one considers the provisions of section 138 of the N.I. Act, which are

introduced subsequently by way of amendment in the said Act, in the year

1988, it being a subsequent Statute, it will necessarily override the

provisions of General Statute, like, the Companies Act.

Xxx xxx xxx

30. Thus, there is a long line of decisions making the position clear that

the expression ‘suit or legal proceedings’, used in section 446(1) of the

Companies Act, can mean only those proceedings which can have a

bearing on the assets of the companies in winding-up or have some

relation with the issue in winding-up. It does not mean each and every

civil proceedings, which has no bearing on the winding-up proceedings,

or criminal offences where the Director of the Company is presently

liable for penal action.”

(Emphasis supplied)

82. In Manish Kumar (supra), this Court upheld Section 32A of the IBC and stated

thus:

“318. The first proviso in sub-section (1) declares that if there is approval

of a resolution plan under Section 31 and a prosecution has been instituted

during the CIRP against the corporate debtor, the corporate debtor will

stand discharged. This is, however, subject to the condition that the

requirements in sub-section (1), which have been elaborated by us, have

been fulfilled. In other words, if under the approved resolution plan, there is

a change in the management and control of the corporate debtor, to a

person, who is not a promoter, or in the management and control of the

corporate debtor, or a related party of the corporate debtor, or the person

who acquires control or management of the corporate debtor, has neither

abetted nor conspired in the commission of the offence, then, the

prosecution, if it is instituted after the commencement of the CIRP and

during its pendency, will stand discharged against the corporate debtor.

Under the second proviso to sub-section (1), however, the designated

partner in respect of the liability partnership or the officer in default, as

defined under Section 2(60) of the Companies Act, 2013, or every person,

who was, in any manner, in charge or responsible to the corporate debtor

for the conduct of its business, will continue to be liable to be prosecuted

and punished for the offence committed by the corporate debtor. This is

despite the extinguishment of the criminal liability of the corporate debtor

under sub-section (1). Still further, every person, who was associated with

the corporate debtor in any manner, and, who was directly or indirectly

involved in the commission of such offence, in terms of the report

submitted and report filed by the investigating authority, will continue to

be liable to be prosecuted and punished for the offence committed by the

corporate debtor.

319. Thus, the combined reading of the various limbs of sub-section (1)

would show that while, on the one hand, the corporate debtor is freed from

the liability for any offence committed before the commencement of the

CIRP, the statutory immunity from the consequences of the commission of

the offence by the corporate debtor is not available and the criminal

liability will continue to haunt the persons, who were in charge of the

assets of the corporate debtor, or who were responsible for the conduct of

its business or those who were associated with the corporate debtor in any

manner, and who were directly or indirectly involved in the commission

of the offence, and they will continue to be liable.

Xxx xxx xxx

326. We are of the clear view that no case whatsoever is made out to seek

invalidation of Section 32-A. The boundaries of this Court's jurisdiction

are clear. The wisdom of the legislation is not open to judicial review.

Having regard to the object of the Code, the experience of the working of

the Code, the interests of all stakeholders including most importantly the

imperative need to attract resolution applicants who would not shy away

from offering reasonable and fair value as part of the resolution plan if the

legislature thought that immunity be granted to the corporate debtor as

also its property, it hardly furnishes a ground for this Court to interfere.

The provision is carefully thought out. It is not as if the wrongdoers are

allowed to get away. They remain liable. The extinguishment of the

criminal liability of the corporate debtor is apparently important to the

new management to make a clean break with the past and start on a

clean slate. We must also not overlook the principle that the impugned

provision is part of an economic measure. The reverence courts justifiably

hold such laws in cannot but be applicable in the instant case as well. The

provision deals with reference to offences committed prior to the

commencement of the CIRP. With the admission of the application the

management of the corporate debtor passes into the hands of the interim

resolution professional and thereafter into the hands of the resolution

professional subject undoubtedly to the control by the Committee of

Creditors. As far as protection afforded to the property is concerned there is

clearly a rationale behind it. Having regard to the object of the statute we

hardly see any manifest arbitrariness in the provision.

327…..Significantly every person who was associated with the corporate

debtor in any manner and who was directly or indirectly involved in the

commission of the offence in terms of the report submitted continues to

be liable to be prosecuted and punished for the offence committed by the

corporate debtor.”

(Emphasis supplied)

83. In P. Mohanraj (supra) Full Bench of this Court held thus:

“41. Section 32-A cannot possibly be said to throw any light on the true

interpretation of Section 14(1)(a) as the reason for introducing Section 32-

A had nothing whatsoever to do with any moratorium provision. At the

heart of the section is the extinguishment of criminal liability of the

corporate debtor, from the date the resolution plan has been approved by

the adjudicating authority, so that the new management may make a clean

break with the past and start on a clean slate. A moratorium provision, on

the other hand, does not extinguish any liability, civil or criminal, but only

casts a shadow on proceedings already initiated and on proceedings to be

initiated, which shadow is lifted when the moratorium period comes to an

end. Also, Section 32-A(1) operates only after the moratorium comes to

an end. At the heart of Section 32-A is the IBC's goal of value

maximisation and the need to obviate lower recoveries to creditors as a

result of the corporate debtor continuing to be exposed to criminal

liability.

42. Unfortunately, Section 32-A is inelegantly drafted. The second proviso

to Section 32-A(1) speaks of persons who are in any manner in charge of,

or responsible to the corporate debtor for the conduct of its business or

associated with the corporate debtor and who are, directly or indirectly,

involved in the commission of “such offence” i.e. the offence referred to in

sub-section (1), “as per the report submitted or complaint filed by the

investigating authority …”. The report submitted here refers to a police

report under Section 173 CrPC, and complaints filed by investigating

authorities under special Acts, as opposed to private complaints. If the

language of the second proviso is taken to interpret the language of Section

32-A(1) in that the “offence committed” under Section 32-A(1) would not

include offences based upon complaints under Section 2(d) CrPC, the width

of the language would be cut down and the object of Section 32-A(1) would

not be achieved as all prosecutions emanating from private complaints

would be excluded. Obviously, Section 32-A(1) cannot be read in this

fashion and clearly incudes the liability of the corporate debtor for all

offences committed prior to the commencement of the corporate

insolvency resolution process. Doubtless, a Section 138 proceeding would

be included, and would, after the moratorium period comes to an end

with a resolution plan by a new management being approved by the

adjudicating authority, cease to be an offence qua the corporate debtor.

43….the expression “prosecution” in the first proviso of Section 32-A(1)

refers to criminal proceedings properly so-called either through the

medium of a first information report or complaint filed by an investigating

authority or complaint and not to quasi-criminal proceedings that are

instituted under Sections 138/141 of the Negotiable Instruments Act against

the corporate debtor, the object of Section 14(1) IBC gets subserved, as

does the object of Section 32-A, which does away with criminal

prosecutions in all cases against the corporate debtor, thus absolving the

corporate debtor from the same after a new management comes in.

Xxx xxx xxx

45. Section 138 contains within it the ingredients of the offence made out.

The deeming provision is important in that the legislature is cognizant of

the fact that what is otherwise a civil liability is now also deemed to be an

offence, since this liability is made punishable by law. It is important to

note that the transaction spoken of is a commercial transaction between

two parties which involves payment of money for a debt or liability. The

Explanation to Section 138 makes it clear that such debt or other liability

means a legally enforceable debt or other liability. Thus, a debt or other

liability barred by the law of limitation would be outside the scope of

Section 138. This, coupled with fine that may extend to twice the amount of

the cheque that is payable as compensation to the aggrieved party to cover

both the amount of the cheque and the interest and costs thereupon, would

show that it is really a hybrid provision to enforce payment under a

bounced cheque if it is otherwise enforceable in civil law. Further, though

the ingredients of the offence are contained in the first part of Section 138

when the cheque is returned by the bank unpaid for the reasons given in the

section, the proviso gives an opportunity to the drawer of the cheque,

stating that the drawer must fail to make payment of the amount within 15

days of the receipt of a notice, again making it clear that the real object of

the provision is not to penalise the wrongdoer for an offence that is already

made out, but to compensate the victim.”

(Emphasis supplied)

84. In Narinder Garg and Others v. Kotak Mahindra Bank Ltd. and Others

reported in (2022) SCC OnLine SC 517, this Court held that:

“3. In P. Mohanraj v. Shah Brothers Ispat Private Limited, (2021) 6 SCC

258, a Bench of three-Judges of this Court considered the matter whether a

corporate entity in respect of which moratorium had become effective

could be proceeded against in terms of Sections 138 and 141 of the

Negotiable Instruments Act, 1881 (“the Act” for short).

4. A subsidiary issue was also about the liability of natural persons like a

Director of the Company. In paragraph 77 of its judgment, this Court

observed that the moratorium provisions contained in Section 14 of the

Insolvency and Bankruptcy Code, 2016 would apply only to the corporate

debtor and that the natural persons mentioned in Section 141 of the Act

would continue to be statutorily liable under the provisions of the Act.

5. It is submitted by Mr. Gopal Sankaranarayanan, learned Senior

Advocate that the resolution plan having been accepted in which the dues

of the original complainant also figure, the effect of such acceptance

would be to obliterate any pending trial under Sections 138 and 141 of

the Act.

6. The decision rendered in P. Mohanraj is quite clear on the point and,

as such, no interference in this petition is called for.”

(Emphasis supplied)

85. Thus, the upshot of all the decisions referred to above is where the proceedings

under Section 138 of the NI Act had already commenced with the Magistrate taking

cognizance upon the complaint and during the pendency, the company gets dissolved,

the signatories/directors cannot escape from their penal liability under Section 138 of

the NI Act by citing its dissolution. What is dissolved, is only the company, not the personal penal liability of the accused covered under Section 141 of the NI Act.

86. I may draw my final conclusions as under:

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

criminal proceedings under Section 138 of the NI Act will stand terminated

only in relation to the corporate debtor if the same is taken over by a new management.

(b) Section 138 proceedings in relation to the signatories/directors who are

liable/covered by the two provisos to Section 32A(1) will continue in

accordance with law.

87. In view of the aforesaid discussion, the appeal fails and is hereby dismissed.

88. The connected appeals also fail and are hereby dismissed.

89. Pending application(s), if any, shall stand disposed of.

………………………………………..J.

(J.B. PARDIWALA)

NEW DELHI;

MARCH 15, 2023.

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