No Escaping From Penal Liability By Citing Company’s Dissolution
LIVELAW NEWS NETWORK
31 March 2023 8:35 AM GMT
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On March 15, 2023, a three judge bench of the Supreme Court in the case of Ajay Kumar Radheyshyam Goenka vs Tourism Finance Corporation of India Limited[1] and other connected matters held that personal liability of a signatory/director of a company in a cheque dishonour case filed under the Negotiable Instruments Act, 1881 (“NI Act”) cannot be absolved pending corporate insolvency resolution proceedings (“CIRP”) against the company under the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
Facts
In this case, one M/s Rainbow Papers Limited (Accused Company) of which the Appellant herein was the Promoter and Managing Director, sought a term loan of Rs. 30 crores from a public financial institution (Respondent herein). In order to satisfy its obligations under the Loan Agreement dated March 27, 2012, the Accused Company issued a post-dated cheque towards payment of one of the instalments, but the cheque was returned for the reason “Account Closed”, upon presentation to the bankers of the Respondent.
On April 19, 2016, the Respondent issued a legal notice under Section 138 of the NI Act calling upon the Accused Company and the Appellant. Upon non-payment of the debt, the Respondent on May 16, 2016, filed a criminal complaint under Section 138, 141 and 142 of the NI Act read with Section 190 of the Code of Criminal Procedure, 1973 (“NIA Proceeding”). Sometime in 2017, one M/s Neeraj Paper Agencies Limited filed an application under Section 9 of the IBC for initiating a corporate insolvency resolution process against the Accused Company which was later admitted. Thereafter, the Resolution Applicant (Kushal Limited) filed a resolution plan dated May 26, 2018 which was approved by the National Company Law Tribunal, Ahmedabad Bench. During the course of the meeting of the Committee of Creditors, the Respondent was considered to be an unsecured financial creditor.
Thus, the Appellant filed an application for discharge of the NIA Proceeding on the basis that as the debt stood settled in the proceedings under the IBC, the NIA Proceedings would not survive, which was dismissed by the Magistrate Court. Subsequently, the Appellant filed a criminal revision petition which also met with a similar fate before the High Court. The Appellant thereafter filed the present appeal before the apex court.
Issue
Whether during the pendency of the proceedings under IBC which have been admitted, the NIA Proceeding can continue simultaneously or not.
Analysis
The bench noted that the scope of nature of proceedings under IBC and NI Act are quite different and would not intercede with each other. The court relying upon previous rulings[2] on the subject observed that the moratorium under Section 14 of the IBC does not apply to the proceedings initiated against signatories/directors under the NI Act. In the similar context, the court held that the extinguishment of debt under Section 31 or Sections 38 to 41 of the IBC would not ipso facto apply to the extinguishment of the criminal proceedings.
The court did not accept the Appellant’s argument that because the NIA Proceeding arose from a default in financial debt, the same should be considered as akin to civil proceedings rather than criminal. The court held that the NIA Proceeding are not in the nature of debt recovery proceedings and rather are penal in character. The accused may face imprisonment or fine or both and therefore, the NIA Proceeding is not akin to suit proceedings.
The court did not accept the Appellant’s plea that the NIA Proceeding is primarily compensatory in nature and that the punitive element is incorporated only at enforcing the compensatory proceedings and held that the criminal liability and fines are built on the principle of not honouring a negotiable instrument which directly affects trade, apart from the principle of financial liability per se.
In his concurring judgment, Justice Pardiwala relied upon P. Mohanraj and Ors vs Shah Brothers Ispat Private Limited[3] which was upheld in Narinder Garg and Ors vs Kotak Mahindra Bank Limited and Ors[4] and additionally opined that the NIA Proceeding had already commenced and cognizance upon the complaint was already taken and during the pendency, the Accused Company is facing CIRP, the directors/signatories cannot escape from their penal liability by citing its dissolution. Only the Accused Company is dissolved, not the personal penal liability of the signatory/director under Section 141 of the NI Act. He relied upon second proviso to section 32A (1) of the IBC and held that even though the Accused Company is dissolving and its liability has been ceased, the former signatory/director (Appellant herein) cannot be permitted to go scot-free after the approval of the resolution plan.
He further held that after passing of the resolution plan under Section 31 of the IBC and in light 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.
The judgment gives a sign of relief to many creditors who fear that nothing can be done or all is lost against the promoters of the defaulting company if the company is facing corporate insolvency proceeding under the provisions of the IBC.
Author: Aashna Jain, Associate at Pioneer Legal. Views are personal.