Recently, the Orissa High Court upheld ongoing criminal proceedings under the Negotiable Instruments Act against directors of a company despite insolvency proceedings, emphasizing that personal liability under Section 138 of the NI Act remains unaffected by corporate insolvency.
Brief Facts:
The case arose when M/s Dewy Developers Pvt. Ltd. filed a complaint under Section 138 of the Negotiable Instruments Act, 1881 against Zenith Mining Private Ltd., its Managing Director Syed Najam Ahmed, and an agent Bhimsen Apat. The complaint alleged that the company had failed to repay a friendly loan of Rs. 1 crore, and a subsequently issued cheque was dishonoured twice. Following non-payment, the complainant sought legal action for recovery and compensation under the NI Act.
The Petitioner, Zenith Mining Pvt. Ltd., contended that the company had been declared insolvent and a Resolution Professional appointed under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016. They argued that as per Section 32A of the IBC, criminal proceedings against the corporate debtor should be stayed, relying on the Apex Court’s judgment in Ajay Kumar Radheshyam Goenka vs. Tourism Finance Corporation of India Ltd. (2023) 10 SCC 545.
Contentions:
Senior counsel for the Petitioner reiterated that the NCLT’s insolvency order and the IBC framework shifted authority to the Resolution Professional, who alone could represent the corporate debtor. Conversely, counsel for the complainant argued that Section 138 proceedings are penal in nature, not civil recovery proceedings, and directors cannot escape personal criminal liability even if the company is under insolvency. Reference was made to prior Supreme Court rulings, including P. Mohanraj & Ors. vs. Shah Brothers Ispat Pvt. Ltd. and the concurring opinion in Goenka, which clarified that dissolution of the company does not extinguish the personal liability of signatories or directors under Section 141 of the NI Act.
Observations of the Court:
The Court closely examined the interplay between criminal liability under the Negotiable Instruments Act and insolvency proceedings under the Insolvency and Bankruptcy Code (IBC). The Court referred to the Supreme Court’s guidance in Ajay Kumar Radheshyam Goenka vs. Tourism Finance Corporation of India Ltd. and clarified that the two sets of proceedings are fundamentally different in nature. The Court emphasized, “We have no hesitation in coming to the conclusion that the scope and nature of proceedings under the two Acts are quite different and would not intercede each other. In fact, a bare reading of Section 14 of the IBC would make it clear that the nature of proceedings which have to be kept in abeyance do not include criminal proceedings, which is the nature of proceedings under Section 138 of the NI Act.”
The Court elaborated that Section 138 proceedings are penal, not civil or recovery proceedings, stating, “We are unable to appreciate the plea … that because Section 138 of the NI Act arises from a default in financial debt, the proceedings should be treated as akin to civil proceedings rather than criminal proceedings. Section 138 of the NI Act are not recovery proceedings. They are penal in character. A person may face imprisonment or fine or both under Section 138 of the NI Act. They are not akin to suit proceedings.”
Further, the Court examined Section 32A of the IBC and relevant case law, including P. Mohanraj & Ors. vs. Shah Brothers Ispat Pvt. Ltd. , noting that the IBC’s provisions protecting the corporate debtor do not absolve directors or individuals in management from criminal liability. As the judgment observed, “Every person who was a ‘designated partner’, or an ‘officer who is in default’ , shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor notwithstanding that the corporate debtor’s liability has ceased under this sub-section.”
The Court clarified that the Resolution Professional’s role under IBC is to manage the company’s assets and affairs, not to shield directors from criminal responsibility. Even if the company is dissolved or a resolution plan is approved, the personal penal liability of the directors continues, reinforcing accountability under the law, “Where the proceedings under Section 138 of the NI Act had already commenced with the Magistrate taking cognizance, and during the pendency, the company gets dissolved, the signatories/Directors cannot escape from their penal liability under Section 138 of the NI Act. What is dissolved is only the company, not the personal penal liability of the accused.”
This interpretation ensures that insolvency provisions cannot be misused to avoid penal consequences under statutory criminal law, maintaining the balance between corporate restructuring and accountability.
The decision of the Court:
The Court confirmed the order of the JMFC (LR), Bhubaneswar, rejecting the petitioner’s plea for discharge. The Court held that Section 138 proceedings against directors of Zenith Mining Pvt. Ltd. may continue notwithstanding corporate insolvency. Consequently, the Criminal Miscellaneous Petition was dismissed as devoid of merit, and the impugned order dated 18.03.2025 stands affirmed.
Case Title: Syed Najam Ahmed vs. State of Odisha and another
Case No.: CRL MP No. 837 of 2025
Coram: Justice Chittaranjan Dash
Advocate for Petitioner: Adv. Sidhartha Mishra
Advocate for Respondent: Advs. A. K. Apat (Addl. P. P.), S. S. Padhy
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