Directors Can't Escape Liability For Cheque Dishonour Merely Because Company Is Declared Insolvent: Orissa High Court

The Orissa High Court has held that Directors can't escape liability for cheque dishonour under Section 138 of the Negotiable Instruments Act, 1881, merely because the company was declared insolvent and a Resolution Professional was appointed under the Insolvency and Bankruptcy Code, 2016.

The Court was considering an Application seeking issuance of summons to the Resolution Professional to represent one accused and to discharge another.

The Bench of Justice Chittaranjan Dash observed, "In view of the above position of law, there remains no ambiguity with respect to the principle propounded by the Hon’ble Supreme Court, namely, that the matter lying before the Resolution Professional pursuant to the order dated 08.11.2024 of the NCLT would in no manner affect the proceedings arising out of the offence under Section 138 of the N.I. Act. Consequently, such proceedings cannot be stalled vis-à-vis the Petitioner..."

The Applicant was represented by Advocate Sidhartha Mishra, while the Respondent was represented by Additional Public Prosecutor A. K. Apat.

The facts of the case are that M/s. Dewy Developers Pvt. Ltd. filed a complaint under Section 138 of the Negotiable Instruments Act, 1881. In the said Complaint, a prayer was made to summon the present Petitioner, its Managing Director, and its Agent and to direct recovery of ₹1 crore from the said Accused persons in terms of the provisions of the N.I. Act, and further to pay double the cheque amount as compensation. 

The case of the Complainant was that the Petitioner, through its Managing Director, keeping in view their cordial relationship, persuaded to extend a friendly loan of ₹1 crore to the Petitioner-Company. The said amount was duly credited to the Petitioner’s Bank Account with an assurance that it would be repaid within one year. 

Since the Petitioner-Company failed to return the loan amount, the Complainant approached the Managing Director who, for himself and on behalf of the accused-Company, issued Cheque for ₹1 crore, drawn on IndusInd Bank, in favour of the complainant. The Complainant presented the said cheque with its banker and on the very same day but it got dishonoured with the endorsement “refer to drawer.” The Complainant was intimated as to of the dishonour by its Banker. As the Petitioner failed to comply with the said demand, the Complainant instituted the Complaint before the Competent Court U/s 138 of the Negotiable Instruments Act.

In response, the Petitioner filed an Application before the Trial Court seeking discharge from the prosecution on the ground that the Petitioner-Company had already been declared insolvent and a Resolution Professional had been appointed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

According to the Petitioner, in view of Section 32A of the IBC, 2016 and the law laid down by the Supreme Court in Ajay Kumar Radheshyam Goenka vs. Tourism Finance Corporation of India Ltd. (2023), the Complainant ought to have approached the Resolution Professional, who alone was competent to represent the accused Company.

The Court held that insolvency cannot absolve the Company's Director of the liability for cheque dishonour under Section 138 of the Negotiable Instruments Act, 1881.

The Petition was accordingly dismissed.

Cause Title: Syed Najam Ahmed v. State of Odisha and Another

Appearances:

Applicant- Advocate Sidhartha Mishra 

Respondent- Additional Public Prosecutor A. K. Apat, Advocate S. S. Padhy

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