A Supreme Court Bench of Justice Sanjay Kishan Kaul, Justice Abhay S Oka and Justice JB Pardiwala has clarified that the extinguishment of debt under the IBC would not lead to the discharge of criminal proceedings under the Negotiable Instruments Act.

"...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 escape from their penal liability under Section 138 of the NI Act by citing its dissolution.", the bench held.

Counsel Nikhil Goel appeared for the Appellant, while Counsel Rajiv Ranjan Dwivedi appeared for the Respondent.

In this case, M/s Rainbow Papers Limited (Accused Company) sought loans from a public financial institution called Tourism Finance Corporation of India Limited (Respondents). To satisfy its obligations under the Agreement, the Accused company issued a post-dated cheque towards the payment of one of the instalments, but the cheque being presented to the bankers of the Respondent was returned for the reason “Account Closed”.

Subsequently, a demand-cum-legal notice under Section 138 of the Negotiable Instruments Act, 1881was issued calling upon the company to settle the debt. The amount was not paid, which led to the commencement of legal proceedings. There was a request of initiation of Corporate Insolvency Resolution Process against the company.

The issue for consideration before the Supreme Court was whether during the pendency of the proceedings under the IBC, the proceedings under the N.I. Act can continue simultaneously or not.

In light of the same, Justice Sanjay Kishan Kaul and Justice Abhay S Oka observed that the scope of nature of proceedings under the two Acts and quite different and would not intercede each other. In furtherance of the same, the Court observed that "We cannot lose sight of the fact that Section 138 of the N.I. Act are not recovery proceedings. They are penal in character. A person may face imprisonment or fine or both under Section 138 of the N.I. Act. It is not a recovery of the amount with interest as a debt recovery proceedings would be. They are not akin to suit proceedings."

In similar context, it was held that it could not 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. In that context, it was said that "No doubt in terms of the Scheme under the IBC there are sacrifices to be made by parties to settle the debts, the company being liquidated or revitalized. The Appellant before us has been roped in as a signatory of the cheque as well as the Promoter and Managing Director of the Accused company, which availed of the loan. The loan agreement was also signed by him on behalf of the company. What the Appellant seeks is escape out of criminal liability having defaulted in payment of the amount at a very early stage of the loan. In fact, the loan account itself was closed."

Further, it was observed that "We are unable to accept the plea that Section 138 of the N.I. Act proceedings are primarily compensatory in nature and that the punitive element is incorporated only at enforcing the compensatory proceedings. The criminal liability and the fines are built on the principle of not honouring a negotiable instrument, which affects trade. This is apart from the principle of financial liability per se. To say that under a scheme which may be approved, a part amount will be recovered or if there is no scheme a person may stand in a queue to recover debt would absolve the consequences under Section 138 of the N.I. Act, is unacceptable."

In his concurring Judgment, Justice JB Pardiwala additinally observed that the extinguishment of debt under Section 31 of the IBC would not lead to the discharge of signatory/director under Section 138 proceedings. As an extension of the same, he observed that "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 amount. If the guarantor does not get the benefit of extinguishment of debt under Section 31 of the IBC, then similarly for extinguishment of debt, the signatory/director cannot get any benefit".

It was further observed that "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 view of the law laid down in Aneeta Hada (supra). Where 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."

Therefore, the Court dismissed the appeal.

Cause Title: Ajay Kumar Radheshyam Goenka vs Tourism Finance Corporation of India Ltd.

Click here to read/download the Judgment