AJAY KUMAR RADHEYSHYAM GOENKA v. TOURISM FINANCE CORPORATION OF INDIA LTD.

A 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.

52Copy pinpoint52. Thus, where the proceedings under Section 138 of the NI Act B 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 C 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continues to remain even at the end of the resolution process, the only consequence is that the erstwhile directors can no longer represent it.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 D SIGNATORIES/DIRECTORS ARE HELD TO BE NOT MAINTAINABLE AFTER THE RESOLUTION PLAN IS APPROVED

53Copy pinpoint53. 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. H

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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. C

54Copy pinpoint54. 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 D 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. E

55Copy pinpoint55. 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.” H

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56Copy pinpoint56. 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 B 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 C CANNOT CONTINUE AS REGARDS THE DIRECTOR/ SIGNATORY.

57Copy pinpoint57. 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 D the line of reasoning assigned by this Court that the “Involuntary Act” of the principal debtor would not absolve the guarantors.

58Copy pinpoint58. 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 E 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.

59Copy pinpoint59. 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.

60Copy pinpoint60. 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

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amount. If the guarantor does not get the benefit of extinguishment of A 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: B “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 C 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 D 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. E 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 H

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A 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 under 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]).”” D (Emphasis supplied) LITIGANT CANNOT TAKE ADVANTAGE OF ITS OWN WRONG (NULLUS COMMODUM CAPERE POTEST DE INJURIA SUA PROPRIA)

61Copy pinpoint61. This Court while upholding the validity of Section 32A, IBC E (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.

62Copy pinpoint62. 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 G 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 H

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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. C 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 lender-cum- liquidator. The proceedings cannot come to the end. Thus, in our considered opinion, it is open to the bank to continue with H

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A 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 B basis of which winding up of the Society was ordered.” (Emphasis supplied) TERMS OF THE RESOLUTION PLAN CANNOT CONTROL THE ENACTMENT/RULES

63Copy pinpoint63. 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 D

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 E Debtor along with any related legal proceedings, including criminal proceedings, and other penal proceedings, shall stand irrevocably and unconditionally abated, settled and extinguished in perpetuity on the Effective Date, and with effect from the Appointed Date.

F 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 G 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 H

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any claims against the Corporate Debtor attributable to the A 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. B 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 C 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) D

64Copy pinpoint64. 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.

65Copy pinpoint65. 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/directors under Section 138/141 NI Act. G

66Copy pinpoint66. 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 H

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A (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 is in contravention of the provisions of any law for the time being in force;….” B

67Copy pinpoint67. 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.

68Copy pinpoint68. The terms of the resolution plan cannot run contrary to the enactment i.e. the IBC or any other plenary law or rules.

69Copy pinpoint69. 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.

70Copy pinpoint70. 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.

71Copy pinpoint71. ‘Compounding’ and ‘quashing’ are not synonymous terms. In E 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 vice- versa. 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.

72Copy pinpoint72. 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 H

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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.

73Copy pinpoint73. 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.

74Copy pinpoint74. 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.

75Copy pinpoint75. 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

76Copy pinpoint76. In State Bank of India v. V. Ramakrishnan and Another reported in (2018) 17 SCC 394, this Court held that:- G “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:… H

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A “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

D 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 E 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

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vast majority of cases, personal guarantees are given by A 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. …” B (Emphasis supplied)

77Copy pinpoint77. 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) C 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 D 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.” E (Emphasis supplied)

78Copy pinpoint78. 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, F 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 G 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) H

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79Copy pinpoint79. 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 B 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)

80Copy pinpoint80. 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. G 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 H compounding, the procedure relating to compounding under

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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)

81Copy pinpoint81. In Indorama Synthetics (I) Ltd., Nagpur v. State of C 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:- D “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 G 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 H

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A 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 B 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 C Instruments Act, though the Companies Act contains certain special provisions in order to safeguard the rights of the Company under liquidation?’ Xxx xxx xxx

D 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.

E 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 F 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) G

82Copy pinpoint82. 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 H prosecution has been instituted during the CIRP against the

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corporate debtor, the corporate debtor will stand discharged. A 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. F

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 G 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 H

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A 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. D 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. G 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.” H (Emphasis supplied)

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FINANCE CORP. OF INDIA LTD. [J. B. PARDIWALA, J.]

83Copy pinpoint83. In P. Mohanraj (supra) Full Bench of this Court held thus: A “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 F 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 G 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 H

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A 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. B 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 C 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. D 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

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FINANCE CORP. OF INDIA LTD. [J. B. PARDIWALA, J.]

drawer must fail to make payment of the amount within 15 A 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) B

84Copy pinpoint84. 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 C 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 D 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 E 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 F 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.” G (Emphasis supplied)

85Copy pinpoint85. 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 H

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A 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.

86Copy pinpoint86. I may draw my final conclusions as under: B (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.

87Copy pinpoint87. In view of the aforesaid discussion, the appeal fails and is hereby dismissed.

88Copy pinpoint88. The connected appeals also fail and are hereby dismissed.

89Copy pinpoint89. Pending application(s), if any, shall stand disposed of.

E Ankit Gyan Appeals dismissed. (Assisted by : Adityaraj Patodia and Mahendra Yadav, LCRAs)