Summary
The managing director of a paper company prosecuted under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 for dishonour of loan repayment cheques sought discharge after a resolution plan for the company was approved under Section 31 of the Insolvency and Bankruptcy Code, 2016, contending that the debt stood extinguished; the Magistrate and the Sessions Court refused. The Supreme Court dismissed the appeals: Section 138 proceedings are penal and not recovery proceedings, and extinguishment of the company's debt under the Code does not extinguish the criminal liability of its signatory and managing director. Pardiwala J., concurring, held that under Section 32A only a corporate debtor taken over by new management is freed of liability, while the second proviso preserves prosecution of persons in charge, just as a guarantor is not discharged by the plan.
Issues
- Whether approval of a resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016, in which the complainant participated and accepted a share, discharges the signatory and managing director of the corporate debtor from prosecution under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881.
Provisions considered
- Sections 138 and 141, Negotiable Instruments Act, 1881The offence is complete on failure to pay within fifteen days of the statutory notice and the complaint seeks penal action, not recovery; liability of persons in charge under Section 141 is co-extensive with the company's and continues even where the company is dissolved or taken over. (¶¶ Kaul J. 16, Kaul J. 18, Pardiwala J. 33, Pardiwala J. 52, Pardiwala J. 75)
- Sections 14 and 31, Insolvency and Bankruptcy Code, 2016The moratorium does not extend to criminal proceedings under Section 138 against natural persons, as held in P. Mohanraj; the binding effect of an approved plan under Section 31 concerns the assets and management of the corporate debtor and cannot oust the criminal court's jurisdiction, and no clause of a plan can protect signatories or directors. (¶¶ Kaul J. 16, Kaul J. 17, Pardiwala J. 41, Pardiwala J. 45, Pardiwala J. 48, Pardiwala J. 65, Pardiwala J. 68)
- Section 32A(1) and its provisos, Insolvency and Bankruptcy Code, 2016The corporate debtor's liability for prior offences ceases on approval of a plan transferring control to unconnected new management, but under the second proviso every officer in default or person in charge of its business directly or indirectly involved in the offence remains liable to be prosecuted; Manish Kumar upheld the provision on the footing that wrongdoers do not get away. (¶¶ Pardiwala J. 43, Pardiwala J. 44, Pardiwala J. 45, Pardiwala J. 46, Pardiwala J. 86)
Held
- Per Kaul J.: The scope and nature of proceedings under the two Acts are different and do not intercede; Section 138 proceedings are penal and may result in imprisonment, not akin to a suit, and the appellant, signatory of the cheques and managing director who signed the loan agreement, cannot escape criminal liability because a scheme may recover part of the debt or because proceedings against the company come to an end. (¶¶ Kaul J. 15, Kaul J. 16, Kaul J. 17, Kaul J. 18, Kaul J. 19)
- Per Pardiwala J.: Participation in the resolution process is an involuntary act of the creditor and at best the amount received under the plan may be deducted from the cheque amount; following Lalit Kumar Jain, a discharge the principal debtor secures by operation of law does not absolve a guarantor, and the same principle applies to signatories and directors. A plan clause cannot control the statute under Section 30(2)(e), the complainant's acceptance under the plan is not compounding under Section 147 and Section 320 CrPC, and following Aneeta Hada the maxim lex non cogit ad impossibilia prevents directors from exploiting the company's dissolution; holding otherwise would produce absurd results and offend Article 14. (¶¶ Pardiwala J. 41, Pardiwala J. 42, Pardiwala J. 50, Pardiwala J. 51, Pardiwala J. 53, Pardiwala J. 54, Pardiwala J. 57, Pardiwala J. 59, Pardiwala J. 65, Pardiwala J. 71, Pardiwala J. 74)
Result
Appeals dismissed without costs; orders of the Metropolitan Magistrate dated 01.11.2019 and the Additional Sessions Judge, Saket dated 23.11.2019 refusing discharge upheld; held that after approval of a resolution plan Section 138 proceedings terminate only against a corporate debtor taken over by new management and continue against signatories and directors covered by the provisos to Section 32A(1).