Supreme Court settles liability of Directors under Section 138 NI Act post IBC Resolution: Ajay Kumar Goenka vs. Tourism Finance Corporation of India Ltd. (2023)

Date of the Judgment: March 15, 2023

Citation: (2023) INSC 218

Judges: Sanjay Kishan Kaul, J. and Abhay S. Oka, J. (Majority Opinion by Sanjay Kishan Kaul, J., Concurring Opinion by J.B. Pardiwala, J.)

Can a director of a company be held liable under Section 138 of the Negotiable Instruments Act, 1881, when the company’s debt is resolved under the Insolvency and Bankruptcy Code, 2016? The Supreme Court recently addressed this critical question in a case involving a loan default and subsequent insolvency proceedings. The court clarified that while the company might get relief, the directors remain liable for cheque bounce cases.

Case Background

M/s Rainbow Papers Limited, with Ajay Kumar Radheyshyam Goenka as its Promoter and Managing Director, took a loan of Rs. 30.00 crores from Tourism Finance Corporation of India Limited (TFCI). A loan agreement was signed on March 27, 2012. To fulfill its obligations, the company issued a post-dated cheque of Rs. 25,47,945, dated February 15, 2016. This cheque was dishonored on April 7, 2016, due to “Account Closed”.

TFCI issued a demand notice on April 19, 2016, under Section 138 of the Negotiable Instruments Act, 1881, to the company and Mr. Goenka. Despite acknowledging their liability on April 28, 2016, the payment wasn’t made. Consequently, a criminal complaint was filed on May 16, 2016, under Section 138, Section 141, and Section 142 of the NI Act.

In 2017, M/s Neeraj Paper Agencies Limited initiated Corporate Insolvency Resolution Process (CIRP) against Rainbow Papers under the Insolvency and Bankruptcy Code, 2016 (IBC), which was admitted on September 12, 2017. TFCI filed its claim on October 13, 2017. The Resolution Plan, dated May 26, 2018, was approved, classifying TFCI as an Unsecured Financial Creditor.

Timeline

Legal Framework

The case revolves around the interpretation of several key legal provisions:

• Section 138 of the Negotiable Instruments Act, 1881: This section deals with the dishonor of cheques for insufficiency of funds. It states that if a cheque is returned unpaid, the drawer is deemed to have committed an offense and can be punished with imprisonment or fine or both. The explanation to the section clarifies that “debt or other liability” means a legally enforceable debt or liability. “Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid…such person shall be deemed to have committed an offence…”
• Section 141 of the Negotiable Instruments Act, 1881: This section addresses offenses by companies, stating that if a company commits an offense under Section 138, every person in charge of and responsible for the company’s business, along with the company, is deemed guilty. “If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence…”
• Section 142 of the Negotiable Instruments Act, 1881: This section deals with the cognizance of offenses, specifying that a court can only take cognizance of an offense under Section 138 upon a written complaint by the payee within one month of the cause of action. “no court shall take cognizance of any offence punishable under section 138 except upon a complaint, in writing, made by the payee…”
• Section 147 of the Negotiable Instruments Act, 1881: This section provides that every offense punishable under this Act shall be compoundable. “every offence punishable under this Act shall be compoundable.”
• Section 14 of the Insolvency and Bankruptcy Code, 2016: This section deals with the moratorium period, which prohibits the institution or continuation of suits or legal proceedings against the corporate debtor.
• Section 31 of the Insolvency and Bankruptcy Code, 2016: This section deals with the approval of the resolution plan, which is binding on all stakeholders.
• Section 32A of the Insolvency and Bankruptcy Code, 2016: This section provides that the liability of a corporate debtor for an offense committed prior to the commencement of the CIRP shall cease under certain conditions. However, it also states that persons in charge of the company’s business remain liable for such offenses. “the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease…Provided further that every person who was a “designated partner”…or an “officer who is in default”…or was in any manner incharge of, or responsible to the corporate debtor for the conduct of its business…shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor…”

Arguments

Appellant’s Arguments:

• The primary trigger for Section 138 of the NI Act is the non-payment of a legally enforceable debt. If the debt is extinguished under the IBC, the basis for Section 138 disappears.
• Proceedings under Section 138 are primarily compensatory, with a punitive element to enforce compensation. Once recovery is made, the proceedings should not continue.
• If the company’s debt is resolved, payments are governed by the Resolution Plan or Section 53 of the IBC. Allowing parallel proceedings defeats the IBC’s purpose.
• The appellant relied on the judgment in P. Mohanraj and Others v. Shah Brothers Ispat Private Limited [(2021) 6 SCC 258], arguing that while the corporate debtor is protected during the moratorium, natural persons are not, but this case is beyond the moratorium period.
• The appellant contended that the debt stood settled in the proceedings under the IBC, and therefore, the criminal proceedings would not survive.

Respondent’s Arguments:

• The cheque was deliberately issued with mala fide intent to defraud TFCI. The Appellant was actively involved in the company’s affairs.
• The criminal proceedings under the NI Act were initiated before the IBC proceedings. The offense committed before the scheme would not be automatically compounded by the scheme.
• None of the IBC provisions bar the continuation of criminal prosecution against the corporate debtor or its directors.
• The respondent highlighted Section 32A of the IBC, which states that individuals responsible for the company’s conduct remain liable for offenses, even if the company’s liability ceases.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the signatory/director in charge of the day-to-day affairs would stand discharged/relieved from the penal liability under Section 138 of the NI Act, given that the complainant participated in the IBC proceedings, accepted a share as a creditor, and the resolution plan was approved under Section 31 of the IBC, 2016?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court followed the ratio in P. Mohanraj and Others v. Shah Brothers Ispat Private Limited [(2021) 6 SCC 258]* to clarify that the moratorium under Section 14 of IBC applies to the corporate debtor but not to natural persons mentioned under Section 141 of the NI Act.
• The Supreme Court relied on Aneeta Hada v. Godfather Travels & Tours (P) Ltd. [(2012) 5 SCC 661]* to establish that the director or any other officer can be prosecuted without impleadment of the company, except in cases of legal impediment.
• The Supreme Court distinguished the case of Ajit Balse v. Ranga Karkere [(2015) 15 SCC 748]*, stating that while a director cannot be prosecuted without making the company an accused, the present case is different.
• The Supreme Court cited Kaushalya Devi Massand v. Roopkishore Khore [(2011) 4 SCC 593]* and Meters & Instruments (P) Ltd. v. Kanchan Mehta [(2018) 1 SCC 560]* to emphasize that Section 138 proceedings are a “civil sheep” in a “criminal wolf’s” clothing.
• The Supreme Court referred to Swiss Ribbons Private Limited and Another v. Union of India and Others [(2019) 4 SCC 17]* to clarify that the resolution professional has administrative powers, not adjudicatory powers.
• The Supreme Court considered Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others [(2020) 8 SCC 531]* to explain the process of submitting and approving resolution plans under the IBC.
• The Supreme Court relied on Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. [(2021) 9 SCC 657]* to accept the “Clean Slate Theory” under the IBC.
• The Supreme Court used Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another [(2022) 2 SCC 401]* to highlight that the resolution plan binds even those who have not consented to it.
• The Supreme Court referred to Manish Kumar v. Union of India and Another [(2021) 5 SCC 1]* to uphold the constitutional validity of Section 32A of the IBC.
• The Supreme Court followed Lalit Kumar Jain v. Union of India and Others [(2021) 9 SCC 321]* to hold that the approval of a resolution plan does not discharge the liability of guarantors.
• The Supreme Court cited JIK Industries Limited and Others v. Amarlal V. Jumani and Another [(2012) 3 SCC 255]* to hold that the sanction of a scheme under the Companies Act does not automatically compound offenses under Section 138 of the NI Act.
• The Supreme Court referred to Goa State Cooperative Bank Limited v. Krishna Nath A. and Others [(2019) 20 SCC 38]* to hold that defaulters cannot take benefit of their own actions.
• The Supreme Court relied on State Bank of India v. V. Ramakrishnan and Another [(2018) 17 SCC 394]* to hold that the moratorium under Section 14 of the IBC does not apply to personal guarantors.
• The Supreme Court followed Vijay Kumar Jain v. Standard Chartered Bank [(2019) 20 SCC 455]* to hold that members of the erstwhile Board of Directors, who are often guarantors, are vitally interested in a resolution plan.
• The Supreme Court referred to Indorama Synthetics (I) Ltd., Nagpur v. State of Maharashtra and others [2016 SCC OnLine Bom 2611]* to hold that Section 446(1) of the Companies Act does not apply to proceedings under Section 138 of the NI Act.
• The Supreme Court followed Narinder Garg and Others v. Kotak Mahindra Bank Ltd. and Others [(2022) SCC OnLine SC 517]* to reiterate that the moratorium under Section 14 of the IBC does not apply to natural persons mentioned in Section 141 of the NI Act.

What weighed in the mind of the Court?

The Supreme Court’s reasoning was primarily driven by the need to uphold the penal nature of Section 138 of the NI Act and to ensure that individuals responsible for financial misconduct are not absolved of their liabilities. The court emphasized that Section 32A of the IBC was carefully designed to protect the corporate debtor while maintaining the liability of those who were in charge of its affairs. The Court also considered the legislative intent behind Section 138 of the NI Act, which is to maintain the credibility of commercial transactions and prevent cheque bouncing. The court’s reasoning was also influenced by the principle that a litigant cannot take advantage of their own wrong.

Fact:Law Ratio

Logical Reasoning

The court reasoned that while the IBC aims to resolve corporate insolvency, it does not intend to shield individuals responsible for financial misconduct. The court emphasized that Section 32A of the IBC was carefully crafted to protect the corporate debtor while maintaining the liability of those who were in charge of its affairs. The court also highlighted that Section 138 of the NI Act serves a different purpose, which is to maintain the integrity of commercial transactions and prevent the misuse of cheques.

The court considered the argument that the debt stood extinguished by virtue of Section 31 of the IBC. However, it rejected this argument by relying on the principle that the “Involuntary Act” of the principal debtor would not absolve the guarantors. The court extended this principle to the signatory/director in the case of Section 138/141 proceedings.

The court also analyzed the terms of the resolution plan, which sought to extinguish all claims, including criminal proceedings. The court held that the terms of the resolution plan cannot override the provisions of the law, and any clause giving 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.

The court stated that “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.” The court also noted that “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.”

Further, the court quoted, “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. So much for the bona fides of the Appellant.”

The court concluded that the impugned order took the correct view in law and could not be assailed.

Key Takeaways

• Directors of companies remain liable under Section 138 of the Negotiable Instruments Act, 1881, even if the company’s debt is resolved under the Insolvency and Bankruptcy Code, 2016.
• The moratorium under Section 14 of the IBC applies only to the corporate debtor and not to the directors.
• Section 32A of the IBC protects the corporate debtor but not the individuals responsible for the company’s conduct.
• The resolution plan under the IBC does not automatically extinguish the criminal liability of directors under Section 138 of the NI Act.
• Proceedings under Section 138 of the NI Act are penal in nature and are intended to maintain the integrity of commercial transactions.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The Supreme Court’s decision reinforces the principle that individuals responsible for financial misconduct cannot evade liability by hiding behind corporate structures or insolvency proceedings. The ratio decidendi of the case is that the liability under Section 138 of the NI Act is personal and cannot be extinguished by the resolution process under the IBC for the directors. This ruling clarifies the interplay between the IBC and the NI Act, ensuring that the penal provisions of the NI Act are not undermined by the insolvency process. There is no change in the previous positions of law, but this judgment clarifies the positions of law.

Conclusion

The Supreme Court dismissed the appeals, upholding the High Court’s decision. The court clarified that the directors of a company remain liable under Section 138 of the Negotiable Instruments Act, 1881, even if the company’s debt is resolved under the Insolvency and Bankruptcy Code, 2016. This judgment reinforces the principle that individuals responsible for financial misconduct cannot evade liability through corporate insolvency proceedings.

Category

• Insolvency and Bankruptcy Code, 2016
• Negotiable Instruments Act, 1881
• Corporate Law
• Criminal Law