The Madras High Court has delivered a significant ruling recently and has held that acceptance of the Corporate Insolvency Resolution Plan under Section 31 of the Insolvency and Bankruptcy Code, 2016 cannot be a ground for quashing the prosecution initiated under Section 138 of the Negotiable Instruments Act, 1881 against the corporate debtor and its officials.

The verdict came out in case titled as Ajay Kumar Bishnoi v. M/s Tap Engineering

The Court held:

"No clause in the Corporate Insolvency Resolution Plan even if accepted by the adjudicating authority/appellate Tribunal can take away the power and jurisdiction of the criminal court to conduct and dispose of the proceedings before it in accordance with the provisions of the Code of Criminal Procedure."

CASE BACKGROUND

The observations have been made in an application filed under Section 482 of CrPC, seeking to quash Section 138 proceedings as non-est in the eyes of law and to direct the Complainant-Respondent to pursue their remedies under IBC.

The Petitioner-company had undergone the Corporate Insolvency Resolution Process under Section 31 of the Code and moratorium in terms of Section 14 of the Code was declared, during the pendency of complaints about the dishonor of cheque.

The petitioner argued in Court that since the Resolution Professional had taken over the entire management of the company coupled with its assets and liabilities, he didn't have access to any of the company records and thus, couldn't conduct the case.

He submitted that the IBC was a self-contained enactment having an overriding effect over other laws. Therefore, a continuation of the impugned prosecution would only amount to an abuse of legal process.

In the submission, he further pointed out that the resolution plan clearly stipulates that all the outstanding negotiable instruments issued by the company prior to the insolvency commencement date shall stand terminated and the liability of the company and its current employees under such instruments shall stand extinguished and all the legal proceedings relating thereto shall stand irrevocably and unconditionally abated.

The Court held that the main object of Section 138 of the NI Act is to safeguard the credibility of commercial transactions and to prevent bouncing of cheques by providing a personal criminal liability against the drawer of the cheque in public interest. Therefore, even if the resolution plan was approved and made binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders under Section 31 of the Code, criminal proceedings under Section 138 will not abate.

In proving its point, the Court placed reliance on JIK Industries Limited v. Amarlal V Jumani, (2012) 3 SCC 255.

However, the Court clarified that once the corporate debtor comes under the resolution process, its erstwhile managing director or directors cannot continue to represent the company.

"Therefore, it is only the Resolution Professional who can represent the accused company during the pendency of the proceedings under Insolvency and Bankruptcy Code."

It too was held that after the proceedings under the Code are over, if the corporate debtor is not dissolved, while the erstwhile directors and officials can no longer represent the company in the criminal trial, the new management will have to make arrangements to represent it.

It said:

"After the proceedings are over, either the corporate entity may be dissolved or it can be taken over by new management in which event the company will continue to exist. When new management takes over, it will have to make arrangements for representing the company." 

It was further held that the company will be dissolved but the proceedings under the NI Act will be terminated.

However, the erstwhile directors and officials will not be permitted to take shelter behind the same. Reliance was placed on Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661, to hold,

"If the company is dissolved as a result of the resolution process, obviously proceedings against it will have to be terminated. But even then, its erstwhile directors may not be able to take advantage of the situation…where the proceedings under Section 138 of the Act had already commenced and during the pendency, the company gets dissolved, the directors and the other accused cannot escape by citing its dissolution. What is dissolved is only the company, not the personal penal liability of the accused covered under Section 141 of the Negotiable Instruments Act, 1881."

 The judgement was delivered by a single-judge bench of Justice GR Swaminathan on 09-01-2020.

Read Judgement Here:

 

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