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Introduction

Ajay Kumar Radheysham Goenka (“Appellant“) filed an Appeal1 before the Hon’ble Supreme Court of India (“Supreme Court“) challenging the order dated November 01, 2019 passed by the Metropolitan Magistrate which was upheld by Additional Sessions Judge and Hon’ble Delhi High Court.

Facts

Tourism Finance Corporation of India Limited (“Respondent“) had advanced a sum of Rupees Thirty Crores as a Corporate Loan to the Rainbow Papers Limited (“Corporate Debtor“) under Loan Agreement dated March 27, 2012 (“Loan Agreement“). As per the Loan Agreement, the Corporate Debtor had issue post-dated cheques of Rs. 25,47,925. The Appellant was the Managing Director of the Corporate Debtor at the relevant time. In and around 2016, the dispute arose between parties and the Respondent presented the cheque to the bankers. However, the cheque was returned for the reason “Account Closed“.

Therefore, the Respondent issued a demand-cum-legal notice under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act“) to the Corporate Debtor to settle the balance amount. However, the amount was not paid by the Corporate Debtor. Subsequently, on May 16, 2016, a complaint was lodged before the Chief Metropolitan Magistrate Court, Delhi.

Meanwhile, the Corporate Debtor was admitted for Corporate Insolvency Resolution Process (“CIRP“) on September 12, 2017 under Insolvency and Bankruptcy Code, 2016 (“IBC“). The Respondent filed its claim before the Interim Resolution Professional. Subsequently, a Resolution Plan came to be approved by the Hon’ble National Company Law Tribunal on February 27, 2019. As the Resolution Plan was approved, the Appellant filed an application on July 20, 2019 before the trial court seeking discharge from the criminal proceedings on the grounds that the debt stood settled. However, the same was rejected vide an order dated November 01, 2019. The said order was challenged before the Additional Sessions Court which came to be rejected on November 23, 2019. The Appellant also filed a Civil Revision Petition before the Hon’ble High Court which was again dismissed. Thus, the Appellant filed an Appeal before the Hon’ble Supreme Court.

Appellants submissions –

  1. Section 138 of NI Act is triggered on non-payment of legally enforceable debt. However, once a Resolution Plan under Section 31 of the IBC is approved or Corporate Debtor goes under Liquidation process under Sections 38 to 41 and 54 of the IBC, the debt itself gets extinguished. Therefore, the basis under which complaint under Section 138 of NI Act is filed no longer remains.
  2. The Appellant referred to judgment of Supreme Court in the matter of Ajit Balse vs Ranga Karkere2 wherein it was observed that under Section 141 of the NI Act the director cannot be prosecuted without making the company as prosecution of natural is vicarious to the prosecution of the company.
  3. Another judgement of Supreme Court in the matter of P. Mohanraj and Ors. vs Shah Brothers Ispat Private Limited3 was referred by the Appellant, in which it was observed that as the nature of Section 138 of NI Act proceeding is compensatory in nature and punitive element comes only at the stage of enforcing compensatory provisions, therefore, once any recovery is made, the proceedings cannot be continued.

Respondent’s submissions –

  1. The criminal proceedings were initiated under NI Act much before the IBC proceeding was initiated. Therefore, the alleged offence by the Appellant would not be compounded for the reason that the offence was committed before to scheme of IBC came into place.
  2. In the scenario the company is dissolved as a result of resolution process, the criminal proceedings against the Corporate Debtor would stand terminated but the proceedings against the signatories or its erstwhile directors cannot take the same shelter as the company.
  3. As per Section 32A of the IBC, any complaint filed by the investigation authority shall continue against every person who is in default for conduct of Corporate Debtor’s business. Every such person shall be liable to be prosecuted and punished for such offence notwithstanding that the Corporate Debtor’s liability has ceased under the provision of Section 32A of the IBC.

Observation –

  1. The Hon’ble Court considered the judgment passed in the matter of Aneeta Hada vs Godfather Travels and Tours (P) Ltd.4, wherein it was held that moratorium under Section 14 of the IBC only applies to the Corporate Debtor and shall not apply to natural person mentioned in Section 141 of the NI Act. The accused cannot escape from their liabilities by taking recourse of dissolution of the company.
  2. The liability of such accused person in charge and responsible of the company for the conduct of its business is co-extensive i.e. as akin to a guarantor. Therefore, considering the view taken by the Hon’ble Supreme Court in Lalit Kumar Jain vs Union of India5 which held that the guarantor does not get the benefit of extinguishment of debt under Section 31 of the IBC, similarly, in the case in hand, the signatory /director i.e. Appellant also cannot get the same benefit.
  3. The Hon’ble Supreme Court in the matter of Manish Kumar vs Union of India an Anr.6 had held that the signatory / director who is the wrong doer, cannot go scot free after approval of the Resolution Plan as it would be contrary to the legislative intent of Section 32A of the IBC.

Conclusion –

In light of the aforesaid, the Hon’ble Supreme Court held that once the Resolution Plan is approved and if the same is taken over by new management, the criminal proceedings under Section 138 of NI Act against the Corporate Debtor/Company shall be terminated. However, the proceedings against the signatories / directors who are covered under Section 32A of the IBC, shall continue even though debt stands extinguished pursuant to the approval of the Resolution Plan. The court further clarified that under IBC, the nature of proceedings which have to be kept in abeyance do not include criminal proceedings and 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information, please contact:

Nihal Shaikh, Clasis Law

nihal.shaikh@clasislaw.com

Footnotes

1 Criminal Appeal No. 172 of 2023 with Criminal Appeal No. 170 of 2023 and Criminal Appeal No. 171 of 2023

2 (2015) 15 SCC 748

3 (2021) 6 SCC 258

4 (2012) 5 SCC 661

5 (2021) 9 SCC 321

6 (2021) 5 SCC 1

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