India: Completion Of CIRP Of Corporate Debtor Does Not Absolve Director's Liability In Cases Filed Under Section 138 Of Negotiable Instruments Act

Introduction:

The Supreme Court of India ("Supreme Court") in the recent judgment of Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd.¹, dismissed the appeals aimed to contest the proceedings filed by the lender under Section 138 of the Negotiable Instruments Act, 1881 ("NI Act"), against the signatories of the post-dated cheques on the premise that since the corporate insolvency resolution process ("CIRP") of the corporate debtor has come to an end, no liability can continue against the Directors of the corporate debtor.

Factual Matrix and Arguments:

Rainbow Papers Limited ("Corporate Debtor") borrowed loans amounting to INR 30 crores from Tourism Finance Corporation of India Limited ("Respondent") and to satisfy its obligations issued post-dated cheques to the Respondent.

Upon the cheque being dishonoured, on account of the underlying bank account being closed, the Respondent issued a demand-cum-legal notice under Section 138 of the NI Act calling upon the Corporate Debtor and the Appellant herein (Manging Director of the Corporate Debtor) to settle the debt advanced. The Corporate Debtor and the Appellant acknowledged their liability towards the debt, however failed to make any payments. The Respondent filed criminal proceedings under Section 190 of the Code of Criminal Procedure, 1973 read with Sections 138, 141 and 142 of the NI Act.

In the meanwhile, Corporate Debtor was admitted into CIRP in an application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC"). Respondent filed its claim with the interim resolution professional towards the debt owed by the Corporate Debtor and after verification of its claim, was termed as an unsecured financial creditor.

In the proceedings filed under the NI Act, the Appellant filed applications inter alia seeking exemption from personal appearance and seeking discharge from the criminal proceedings, both of which came to dismissed. Appeal filed by the Appellant also came to be dismissed with costs. Aggrieved by the decision of the appellate court, the Appellant has preferred the instant appeal before the Supreme Court.

The Appellant argued that the trigger of filing criminal proceedings under Section 138 of the NI Act is due to non-payment of a "legally enforceable debt", however once the debt itself is extinguished on account of the CIRP proceedings coming to an end by way of approval of a resolution plan, the basis of Section 138 proceedings disappears or does not stand. As per the Appellant, the proceeding under Section 138 of the NI Act is primarily compensatory in nature and the punitive element is incorporated at enforcing the compensatory provisions. Thus, once the recovery of the debt is made either partly or partly by way of waiver/ hair-cut under the procedure envisaged under the IBC, the proceedings filed under Section 138 of the NI Act should not be permitted to be continued².

Judgement:

The Supreme Court observed that the scope of the nature of proceedings under the IBC vis-à-vis the NI Act are quite different and could not be said to overlap.

Relying upon the judgment Shah Brothers Ispat Pvt. Ltd. v. P. Mohan Raj & Ors.³, it was observed that proceedings filed under Section 138 of the NI Act are of a penal character, wherein the accused may face imprisonment or fine or both and hence such proceedings are not akin to suit proceedings or recovery proceeding. Thereby, ruling out the possibility of such proceedings under the NI Act being hit by the 'moratorium' which comes into effect under Section 14 of IBC.

Further, the Supreme Court observed that the attempt being made by the Appellant to wriggle out of the criminal liability that has arisen due to the defaults in payment of loan cannot be accepted inter alia on the premise that CIRP proceedings against the Corporate Debtor has come to an end and no 'debt' continues to be in existence. The Supreme Court further made it clear that Section 138 proceedings under the NI Act are not compensatory in nature and that the criminal liability and fines have been included in the legislation as a principle of not honouring a negotiable instrument which directly goes to affect trade. Accordingly, the Supreme Court dismissed the appeals.

To conclude, the judgment settles a very important point pertaining to the interplay involved in recovery of debts vis-à-vis criminal proceedings filed for dishonour of negotiable instruments and the resultant effect of 'moratorium' on the proceedings filed under NI Act. The judgment would be a welcome move for banks and financial institutions and shall go a long way in assisting them in their process of recovery of dues.

Footnotes

1. Criminal Appeal No. 172 of 2023 with Crl. A. No. 170 of 2023 and Crl. A. No. 171 of 2023

2. P. Mohanraj and Others v. Shah Brothers Ispat Private Limited (2021 6 SCC 258)

3. Company Appeal (AT) Insolvency No. 306 of 2018

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