The Supreme Court of India (“SC”), in the case of Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited [Criminal Appeal No. 172 of 2023], while deciding the ongoing proceedings under Negotiable Instruments Act, 1881 (“NI Act”) as well as the ongoing Corporate Insolvency Resolution Proceedings (“CIRP”) held that the scope of the proceedings under the NI Act and Insolvency and Bankruptcy Code, 2016 (“IBC”) are very different and would not conflict with one another.

Facts

Tourism Finance Corporation of India Limited (“Respondent”) granted a loan of INR 30 Crores to Rainbow Papers Limited (“Corporate Debtor”) and subsequently entered into a loan agreement dated March 27, 2012 (“Loan Agreement”). Mr. Ajay Kumar Radheyshyam Goenka (“Appellant”) was the promoter as well as the managing director of the Corporate Debtor.

The Corporate Debtor issued a post-dated cheque for the purpose of paying one of the instalments under the Loan Agreement which was rejected upon its presentation with the note ‘Account Closed’. A demand-cum-legal notice in accordance with Section 138 (Dishonour of cheque for insufficiency, etc., of funds in the account) of the NI Act was issued by the Respondent after the cheque was dishonoured, wherein the Respondent requested the Corporate Debtor as well as the Appellant to make the necessary payment of the debt that had been advanced. An acknowledgment was given on the part of the Corporate Debtor and the Appellant in respect to their responsibility to the obligation pertaining to the debt but no payments were made by them. Hence, the Respondent filed criminal proceedings under Section 190 (Cognizance of offences by Magistrate) of the Code of Criminal Procedure, 1973 (“CrPC”) read with Sections 138, 141(Offences by companies) and 142 (Cognizance of offences) of the NI Act.

The Corporate Debtor was admitted into CIRP while the proceedings under NI Act were pending before the metropolitan magistrate (“Magistrate”), by the virtue of an application filed under Section 9 (Application for initiation of corporate insolvency process by operational creditor) of the IBC before the National Company Law Tribunal, Ahmedabad (“NCLT”). The NCLT admitted the said application and accordingly, the moratorium in terms of Section 14 (Moratorium) of the IBC came into effect.

Further, the Appellant filed an application for discharge with the Magistrate in the proceedings under the NI Act. However, the Magistrate denied the said application by an order dated November 1, 2019. Further, the Appellant approached the Delhi High Court (“HC”) via a Criminal Revision Petition, which the HC dismissed. Thus, being aggrieved by the order of HC, the Appellant challenged the said order and preferred the present appeal before the SC.

Issue

Whether the proceedings under NI Act can continue during the pendency of the proceedings under IBC.

Arguments

Contentions of the Appellant:

As per the Appellant, the criminal proceedings under NI Act purports due to the failure of payment of debt. It was contended by the Appellant that basis of Section 138 proceedings stands eliminated in a situation wherein the debt itself gets vanished owing to the CIRP being admitted.

Additionally, the Appellant contended that the proceedings under Section 138 of NI Act’s is primarily compensatory in character, but it includes a punitive element for the sole purpose of enforcing the compensation provisions.

According to the Appellant, his liability arises from his position as a managing director and authorised signatory of the Corporate Debtor since the debt was taken by the Corporate Debtor as a corporate loan. Therefore, once the proceedings against the Corporate Debtor have gone into abeyance under Section 14 of IBC, the liability of the Appellant also stands discharged.

Contentions of the Respondent:

The Respondent put forth the contention that that there would be no instance of the offence being compounded retroactively under Section 138 of the NI Act resulting from the resolution plan as the commencement of the CIRP took place later than the commencement of the criminal proceedings under the NI Act.

Further, according to the Respondent the restrictions imposed under IBC do not prevent the moving forward of the criminal proceedings against the Corporate Debtor, its directors, or its officials. A Corporate Debtor’s criminal responsibility may be discharged if it is dissolved during the insolvency process but not its directors, or its officials.

Observations of the SC

The SC observed that Section 32A (Liability for prior offences, etc.) of IBC categorically discharges a Corporate Debtor of its pre-existing civil and criminal liabilities after the initiation of CIRP. However, it also states that the officials of Corporate Debtor having a direct or indirect role in commission of an offence prior to initiation of CIRP shall continue to be liable for prosecution for those offences. Consequently, the Appellant’s liability under section 138 of NI act would not be discharged.

SC also noted that the NI Act and IBC are two fundamentally different legislations in respect to their scope and nature. Further, SC held that the actions taken against signatories or directors under the NI Act are not subject to the moratorium provided under Section 14 of the IBC. Additionally, the termination of debts extinguished under Section 31 or Sections 38 to 41 of the IBC would imply that the criminal proceedings also stand terminated.

SC relied upon the Shah Brothers Ispat Private Limited v. P. Mohan Raj and Others [Company Appeal (AT) Insolvency No. 306 of 2018], and held that the actions which are brought under the Section 138 of the NI Act are of a penal nature as it calls for a fine and imprisonment rather than money recovery. The proceedings under NI Act are not comparable to suit procedures or recovery proceedings because the accused may be subject to imprisonment or fine, or both. Therefore, the said procedure of insolvency is not the same as a suit case. Hence, the liability of Appellant as per the Section 138 of the NI Act is not discharged merely by an initiation of CIRP under IBC.

In a nutshell, the Appellant’s participation in CIRP through the submission of its claim and membership in the committee of creditors for the purpose of approval of the resolution plan does not result in the compounding of the offence under Section 138 of the NI Act and hence, the Appellant is not discharged of his liability.

Decision of the SC

The SC held that the proceedings under IBC and NI Act would not intercede each other as they are quite different in their scope. The SC 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, SC 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 any criminal proceeding.

The SC held that the resolution plan must comply the laws which are in force and the laws in force cannot be controlled by the clauses contained in the resolution plan. For this, the SC referred to the Section 30(2)(e) of the IBC which requires that a resolution plan be approved only if it does not violate any provisions of the law for the time being in force. Therefore, the SC observed 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.”

VA View:

The present judgement settles the question of the impact of subsequent insolvency of the defaulting company upon the pending criminal proceedings under the NI Act as well as the extent and continuation of the liability of directors of the said defaulting company. SC has rightly highlighted the distinct nature of the proceedings under IBC and NI Act, as a result of which, the criminal proceedings under NI Act does not vanish due to the extinguishment of debt under a CIRP proceeding under IBC.

In a nutshell, the judgment is a milestone which has addressed the issue keeping in consideration the spirit as well as the nature of the IBC as it preserves the rights of the creditors and the financial institution with respect to the recovery of debt.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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