Ajay Gupta Vs Can Bank Factors Limited (Punjab and Haryana High Court)
The Punjab and Haryana High Court considered a petition under Section 482 Cr.P.C. seeking quashing of Criminal Complaint No. 6614 dated 29.09.2015, the summoning order dated 31.05.2016, and all consequential proceedings initiated under Section 138 of the Negotiable Instruments Act, 1881. The complaint had been filed by M/s Can Bank Factors Limited against M/s Supreme Tex Mart Limited and its Directors/persons in charge of its affairs.
According to the complaint, the respondent company had extended a factoring credit facility of ₹5 crore to the accused company. After availing the facility, the accused company allegedly defaulted in repayment, resulting in its account being classified as a Non-Performing Asset. Towards discharge of the outstanding liability, the accused company issued eight cheques of various amounts. Upon presentation within their validity period, all the cheques were dishonoured with the remark “Exceeds Arrangement.” A statutory demand notice dated 21.07.2015 was issued, but payment was not made, leading to the filing of the complaint under Section 138 read with Section 420 IPC. After recording preliminary evidence, the Magistrate summoned the accused to face trial under Section 138 of the Negotiable Instruments Act.
The petitioners contended that the complaint and summoning order had become unsustainable because insolvency proceedings had subsequently been initiated against the company under the Insolvency and Bankruptcy Code, 2016. They submitted that the National Company Law Tribunal admitted a petition under Section 7 of the IBC on 29.09.2017, imposed a moratorium under Section 14, appointed an Interim Resolution Professional, and later, on 08.08.2018, ordered liquidation of the company. According to the petitioners, the Board of Directors ceased to exercise control over the company, all powers vested in the Liquidator, and continuation of proceedings under Section 138 of the Negotiable Instruments Act became impermissible. They further argued that the respondent itself was participating in the insolvency proceedings and had also initiated proceedings under Section 94 of the IBC against the petitioners concerning the same liability. They submitted that parallel continuation of insolvency proceedings and criminal prosecution could result in conflicting decisions and prejudice.
The respondent opposed the petition by submitting that the offence under Section 138 of the Negotiable Instruments Act had already been completed in 2015 when the cheques were dishonoured and payment was not made after the statutory notice. It argued that insolvency proceedings commenced only in 2017 and therefore could not erase the criminal liability that had already arisen. It was further contended that the moratorium under Section 14 of the IBC was intended to protect the corporate debtor and did not extend to criminal proceedings against Directors or persons responsible for the affairs of the company. The respondent also maintained that liquidation merely divested the petitioners of management and did not absolve them of criminal liability for acts committed while they were managing the company.
After considering the rival submissions, the High Court rejected the petitioners’ principal contention. The Court observed that the cheques had been issued and dishonoured in 2015, the statutory notice had been served, and the complaint was instituted on 29.09.2015, while the petitioners had been summoned on 31.05.2016. The corporate insolvency resolution process commenced only on 29.09.2017. Therefore, the offence under Section 138 of the Negotiable Instruments Act had already stood completed before the commencement of insolvency proceedings, and subsequent initiation of proceedings under the IBC could not efface or obliterate the criminal liability already incurred.
The Court referred to the decisions of the Supreme Court in P. Mohanraj and others v. Shah Brothers Ispat Private Limited and Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Limited, observing that the moratorium under Section 14 of the IBC operates in favour of the corporate debtor, whereas the statutory liability of natural persons covered under Section 141 of the Negotiable Instruments Act continues unaffected. The Court also observed that the liability under Section 141 is to be examined with reference to the status of the accused at the time when the offence was committed, namely when the cheques were issued and dishonoured. According to the Court, subsequent appointment of an Interim Resolution Professional or a Liquidator and the resulting cessation of managerial powers could not erase criminal liability that had already crystallised. The Court also referred to several decisions of the Punjab and Haryana High Court taking the same view.
The Court further rejected the argument that invocation of IBC proceedings in respect of the same liability rendered continuation of the prosecution impermissible. It observed that proceedings under Section 138 of the Negotiable Instruments Act are predominantly criminal in nature and that the moratorium provisions under Part III of the IBC do not operate to stall or terminate such criminal prosecution. According to the Court, the object of the moratorium is to postpone civil debt enforcement and not to shield an accused from criminal accountability arising out of dishonour of cheques.
The High Court held that the petitioners had sought quashing solely on the basis of subsequent insolvency proceedings, which was impermissible in view of the settled legal position. It observed that questions regarding whether the petitioners were in charge of and responsible for the conduct of the company’s business at the relevant time and whether the ingredients of Sections 138 and 141 of the Negotiable Instruments Act were established were matters to be decided by the trial Court after evidence was led. Finding no illegality or perversity in the complaint or the summoning order warranting interference under Section 482 Cr.P.C., the Court dismissed the petition while clarifying that its observations would not affect the merits of the trial pending before the Magistrate.
Cases Discussed
- Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Limited (Supreme Court), (2023) 10 SCC 545
- P. Mohanraj and others v. Shah Brothers Ispat Private Limited (Supreme Court), (2021) 6 SCC 258
- Sangeeta Kumar v. State of Punjab, 2024(1) PLR 471
- M/s Shiva Shakti Grains (India) Pvt. Ltd. and another v. M/s Kaur Chand Munish Kumar, 2024(1) PLR 626
- Ram Kisho Arora @ R. K. Arora v. Anubhav Kapoor, 2023 NCPHHC 106397
- Charanbir Singh Sethi v. Pooja Sharma and others, 2023 (3) RCR (Criminal) 809
- Vishnoo Mittal v. M/s Shakti Trading Company, 2022 (3) RCR (Criminal) 926
FULL TEXT OF THE JUDGMENT/ORDER OF PUNJAB AND HARYANA HIGH COURT
1. Prayer in the present petition has been made under Section 482 Cr.P.C. for quashing of Criminal Complaint No. 6614 dated 29.09.2015 (Annexure P-1), titled M/s Can Bank Factors Limited v. M/s Supreme Tex Mart Limited and another, pending before the Court of learned Judicial Magistrate First Class, Ludhiana, along with all consequential proceedings arising therefrom, including the summoning order dated 31.05.2016 (Annexure P-2), whereby the petitioners have been summoned to face trial under Section 138 of the Negotiable Instruments Act, 1881 (for short ‘N. I. Act’).
2. Brief facts of the case relevant for the purpose of disposal of this petition are that the aforementioned complaint has been filed by the respondent-complainant M/s Can Bank Factors Limited alleging therein that it is a company engaged in providing trade finance facilities. The accused-company, M/s Supreme Tex Mart Limited, had availed a factoring credit facility of Rs.5 crore from the complainant under a factoring agreement for discounting its invoices. The petitioners were the persons in-charge of and responsible for the affairs of the accused-company at the relevant time. According to the complaint, after availing the aforesaid financial facility, the accused-company failed to maintain financial discipline and defaulted in repayment, as a result of which its account became irregular and was classified as a Non-Performing Asset (NPA). Towards discharge of its legally enforceable liability, the accused-company issued the following cheques drawn on its account maintained with the State Bank of India:
- Cheque No. 582873 dated 05.06.2015 for Rs.45,00,000/-;
- Cheque No. 582874 dated 05.06.2015 for Rs.45,00,000/-;
- Cheque No. 582875 dated 05.06.2015 for Rs.11,81,748/-;
- Cheque No. 582876 dated 16.06.2015 for Rs.50,00,000/-;
- Cheque No. 582877 dated 16.06.2015 for Rs.42,38,692/-;
- Cheque No. 582878 dated 24.06.2015 for Rs.12,00,000/-;
- Cheque No. 922622 dated 08.06.2015 for Rs.50,05,903/-; and
- Cheque No. 922638 dated 08.06.2015 for Rs.1,50,36,320/-.
3. The complainant presented the aforesaid cheques for encashment within their validity period. However, the same were dishonoured by the banker of the accused-company vide retusrning memos dated 08.08.2015 with the remarks ‘Exceeds Arrangement”. Thereafter, the complainant served the statutory demand notice dated 21.07.2015 upon the accused calling upon them to make payment of the cheque amounts within the prescribed period. Despite service of notice, the accused failed to liquidate the outstanding liability, thereby compelling the complainant to institute the present complaint under Section 138 read with Section 420 of the IPC against the company as well as its Directors/persons in-charge of its affairs.
4. After presentation of the complaint, preliminary evidence of the complainant was recorded and finding a prima facie case for commission of offence punishable under Section 138 of the N. I. Act against the accused, the Magistrate concerned the petitioners and co-accused to face trial for the alleged offence.
5. It is argued by learned counsel for the petitioners that the impugned complaint as well as the summoning order is not maintainable in the eyes of law in view of the subsequent initiation of insolvency proceedings against the accused-company under the Insolvency and Bankruptcy Code, 2016 (for short ‘IBC’). It is submitted that the National Company Law Tribunal, Chandigarh Bench, vide order dated 29.09.2017, admitted the petition under Section 7 of the IBC and declared a moratorium under Section 14 of the Code, thereby prohibiting the institution or continuation of proceedings against the corporate debtor. Thereafter, vide order dated 11.10.2017, an Interim Resolution Professional was appointed and the powers of the Board of Directors stood suspended.
6. It is further argued that after failure of the corporate insolvency resolution process, the NCLT, vide order dated 08.08.2018, directed liquidation of the company and appointed a Liquidator. In terms of the liquidation order, all powers of the Board of Directors ceased to exist and vested in the Liquidator, while the officers and employees of the corporate debtor were deemed to stand discharged from the affairs of the company. Consequently, the petitioners ceased to have any control over or responsibility for the affairs of the company. It is further argued that once insolvency proceedings commenced and the statutory moratorium came into operation, continuation of proceedings under Section 138 of the N. I. Act against the petitioners became legally impermissible. The respondent itself is a member of the Committee of Creditors and its claim forms part of the insolvency proceedings. Therefore, allowing simultaneous prosecution under the Negotiable Instruments Act would amount to permitting parallel recovery proceedings in respect of the same debt, which is contrary to the scheme and object of the IBC. Section 238 of the IBC gives the provisions of the Code an overriding effect over all inconsistent laws. Since the IBC has an overriding effect, its provisions would prevail over the proceedings under Section 138 of the N. I. Act in case of any inconsistency. Moreso, the respondent has now itself invoked the provisions of the IBC against both the petitioners in respect of the very same liability by filing separate petitions under Section 94 of the IBC before the NCLT. It is argued that simultaneous continuation of the insolvency proceedings and the present criminal prosecution arising out of the same transaction may lead to conflicting decisions and cause serious prejudice to the petitioners. With these broad submissions, it is urged that the impugned complaint, the summoning order dated 31.05.2016 and all consequential proceedings deserve to be quashed qua the petitioners.
7. Reply has been filed by the respondent/complainant. It is argued by learned counsel for the respondent that the accused-company had availed factoring facilities to the tune of Rs.5 crore from the respondent and, towards discharge of its outstanding liability, issued the cheques in question, which were dishonoured due to insufficiency of funds. Consequently, the complaint under Section 138 of the N. Act was filed on 29.09.2015 and the petitioners were summoned on 31.05.2016. The insolvency proceedings before the National Company Law Tribunal commenced much later, as the petition under the Insolvency and Bankruptcy Code was admitted only on 29.09.2017. Therefore, the subsequent declaration of moratorium under Section 14 of the IBC or the eventual order of liquidation cannot wipe out or affect the criminal liability that had already arisen upon dishonour of the cheques in the year 2015. The offence under Section 138 of the N. I. Act stood complete on the date of dishonour of the cheques and subsequent insolvency proceedings have no bearing on the criminal prosecution. The moratorium under Section 14 of the IBC is intended to protect the corporate debtor during the insolvency resolution process and does not extend to criminal proceedings against the Directors or signatories of the dishonoured cheques. The petitioners, being the persons in-charge of and responsible for the affairs of the company at the relevant time are independently liable for the offence committed by the company. The liquidation order merely divested the petitioners of the management of the company and did not absolve them of criminal liability for acts committed while they were managing its affairs. It is, therefore, urged that the petition is liable to be dismissed.
8. This Court has heard the rival submissions.
9. The principal contention raised on behalf of the petitioners is that once the corporate insolvency resolution process was initiated against the accused-company and thereafter an order of liquidation came to be passed by the National Company Law Tribunal, the continuation of the proceedings under Section 138 of the N. I. Act against the petitioners has become legally impermissible. This contention, in the considered opinion of this Court, cannot be accepted. It is not in dispute that the cheques in question were issued in June, 2015, were dishonoured on presentation and after issuance of the statutory demand notice and failure of the accused to make payment within the prescribed period, the complaint under Section 138 of the N.I. Act came to be instituted on 29.09.2015. The petitioners were summoned on 31.05.2016. Thus, the offence under Section 138 of the N.I. Act had already stood completed much prior to the commencement of the corporate insolvency resolution process on 29.09.2017. Subsequent initiation of insolvency proceedings cannot efface or obliterate the criminal liability already incurred on account of dishonour of the cheques.
10. The legal position is no longer res integra. The Hon’ble Supreme Court in P. Mohanraj and others v. Shah Brothers Ispat Private Limited, (2021) 6 SCC 258 has held that while the moratorium under Section 14 of the IBC operates in favour of the corporate debtor, the statutory liability of the natural persons covered under Section 141 of the N.I. Act continues unaffected and proceedings against such persons can validly continue. The said principle has subsequently been reaffirmed in Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Limited, (2023) 10 SCC 545, wherein it has been held that discharge or resolution of the corporate debtor under the IBC does not absolve the Directors or persons in charge of the affairs of the company from their independent criminal liability under Sections 138 and 141 of the N.I. Act. The contention that after appointment of the Interim Resolution Professional and subsequently the Liquidator, the petitioners ceased to be in control of the affairs of the company and, therefore, cannot be prosecuted, is equally devoid of merit. The liability under Section 141 of the N.I. Act is to be examined with reference to the status of the accused at the time when the offence was committed, i.e., when the cheques were issued and dishonoured. The subsequent divesting of managerial powers by operation of the provisions of the IBC cannot erase the criminal liability which had already crystallized on the date of commission of the offence. Similar view has been taken by this Court in Vishnoo Mittal v. M/s Shakti Trading Company, 2022 (3) RCR (Criminal) 926, Charanbir Singh Sethi v. Pooja Sharma and others, 2023 (3) RCR (Criminal) 809, Ram Kisho Arora @ R. K. Arora v. Anubhav Kapoor, 2023 NCPHHC 106397, Sangeeta Kumar v. State of Punjab, 2024(1) PLR 471 and M/s Shiva Shakti Grains (India) Pvt. Ltd. and another v. M/s Kaur Chand Munish Kumar, 2024(1) PLR 626.
11. Much emphasis has also been laid by learned counsel for the petitioners upon the fact that the respondent has invoked proceedings under the IBC in respect of the same liability and, therefore, continuation of the present prosecution would amount to permitting parallel proceedings. The said submission also deserves rejection as the proceedings under Section 138 of the N.I. Act are predominantly criminal in nature and the moratorium provisions under Part III of the IBC do not operate to stall or terminate the criminal prosecution. The object of the moratorium is merely to postpone civil debt enforcement and not to shield an accused from criminal accountability arising out of dishonour of cheques.
12. In the present case, the petitioners seek quashing of the complaint itself and the summoning order solely on account of the subsequent insolvency proceedings. Such a course is clearly impermissible in view of the settled legal position noticed hereinabove. Whether the petitioners were in charge of and responsible for the conduct of the business of the company at the relevant time and whether the ingredients of Sections 138 and 141 of the N.I. Act stand established are matters to be adjudicated by the trial Court on the basis of the evidence led by the parties. No ground is made out for exercise of the inherent jurisdiction of this Court to quash the criminal proceedings at the threshold. Consequently, finding no illegality or perversity in the impugned complaint or the summoning order warranting interference in exercise of the inherent powers of this Court, the present petition is dismissed.
13. However, it is made clear that the observations made herein shall not be construed as an expression on the merits of the case pending before the trial Court.
