Insolvency Resolution Of Company Will Not Extinguish Director's Liability Under Section 138 NI Act : Supreme Court

The approval of resolution plan of a corporate debtor under the Insolvency and Bankruptcy Code 2016 will not extinguish the criminal liability of its erstwhile director under Section 138 of the Negotiable Instruments Act 1881, held the Supreme Court.

A bench comprising Justices Sanjay Kishan Kaul, Abhay S Oka and JB Pardiwala held that the company's director cannot seek  discharge from N.I. Act proceedings on the ground that creditor’s debt stood settled in the proceedings under IBC.

The bench dismissed an appeal filed by a person, who was the former MD of the corporate debtor, challenging the refusal of the trial court to discharge him from the NI Act case on the basis of the resolution of the corporate debt.

The short-judgment authored by Justice Kaul (on behalf of himself and Justice Oka) stated that IBC proceedings cannot bar Section 138 NI Act proceedings against the director.

"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", Justice Kaul's judgment stated.

"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", the judgment further stated while explaining NI Act proceedings are punitive in nature and not just compensatory.

Justice Pardiwala penned down a separate concurring judgment with the following conclusions:

• After passing of the Resolution Plan under Section 31 of IBC by the Adjudicating Authority and in the light of Section 32A of 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; and
• Proceedings under Section 138 of NI Act in relation to the signatories/directors who are liable/covered by the two provisos to Section 32A(1) will continue in accordance with law.

Justice Pardiwala noted that the second proviso appended to Section 32A(1) (b) of the IBC 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. 

"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", Justice Pardiwala wrote.

He further explained that the dissolution of the company will not dissolve the personal liability of its former directors:

"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 paragraph 53 of the judgment, Justice Pardiwala illustrated certain "absurd situations" which may arise 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 is accepted.

"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", he stated further (Para 74).

Case Title: Ajay Kumar Radheyshyam Goenka v Tourism Finance Corporation of India Ltd.

Citation: 2023 LiveLaw (SC) 195

Negotiable Instruments Act 1881 -Section 138- Approval of resolution plan of corporate debtor will not extinguish the liability of erstwhile director for dishnour of cheque- Para 17, 18 in judgment of Justice Kaul(for himself and Justice Oka) -Para 47,52 in concurring judgment of Justice Pardiwala

Insolvency and Bankruptcy Code 2016- Section 31-Process under the IBC whether under Section 31 or Sections 38 to 41 cannot extinguish criminal proceedings under Section 138 NI Act 1881 against former directors of the corporate debtor- Para 18 in judgment of Justice Kaul(for himself and Justice Oka)-After passing of the Resolution Plan under Section 31 of IBC by the Adjudicating Authority and in the light of Section 32A of 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- Para 86 in concurring judgment of Justice Pardiwala

Negotiable Instruments Act 1881 -Section 138- 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- Para 52 in Justice Pardiwala's judgment

Negotiable Instruments Act 1881 -Section 138-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 - Para 47

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