1998 (7) TMI 620 - HC - Companies Law

Summary

Issues Involved:
1. Whether separate proceedings against the director can continue if the company has been discharged.
2. Interpretation of Section 138 of the Negotiable Instruments Act in relation to company directors.
3. Applicability of Sections 446 and 391 of the Companies Act to criminal proceedings under Section 138 of the Negotiable Instruments Act.
4. Liability of directors when the company is in liquidation.
5. Interpretation of "legal proceedings" under Section 446 of the Companies Act.
6. The relevance of judicial precedents in interpreting the liability of directors under Section 138 of the Negotiable Instruments Act.

Issue-wise Detailed Analysis:

1. Separate Proceedings Against the Director:
The petitioner argued that since the company, Rama Fibres Ltd., had been discharged, separate proceedings against him, as a director, should be dropped. The court dismissed this plea, citing that criminal prosecution against directors could continue even if the company has gone into liquidation. The court referenced the ruling in *Sheoratan Agarwal v. State of M.P.*, which supports the continuation of proceedings against individuals even if the company is discharged.

2. Interpretation of Section 138 of the Negotiable Instruments Act:
Section 138 of the Negotiable Instruments Act was discussed in terms of its unique provisions to enforce financial liability against the issuer of a cheque. The court emphasized that the liability under Section 138 extends to individuals who signed the cheque on behalf of the company, making them personally liable. The court noted that the deeming provisions under Section 141 of the Act make all those responsible for the conduct of the company's business liable, even if the company itself is not prosecuted.

3. Applicability of Sections 446 and 391 of the Companies Act:
The petitioner sought protection under Sections 446 and 391 of the Companies Act, arguing that these sections should bar proceedings against him. Section 446 provides that no legal proceedings shall be commenced against a company in liquidation without the court's leave. However, the court clarified that this protection applies only to the company and not to its directors or officers. Section 391, dealing with compromises and arrangements with creditors, was deemed irrelevant to the petitioner's liability under Section 138.

4. Liability of Directors When the Company is in Liquidation:
The court held that the liquidation of the company does not absolve directors from their personal liability under Section 138. The directors, being the heart and soul of the company, cannot escape criminal or quasi-criminal liability. The court referenced *K.P. Devassy v. Official Liquidator*, which supports the view that criminal proceedings under Section 138 are personal actions against the signatories of the cheque and not against the company's assets.

5. Interpretation of "Legal Proceedings" Under Section 446 of the Companies Act:
The term "legal proceedings" in Section 446 was interpreted to mean proceedings related to the financial matters of the company, not extending to criminal proceedings against directors. The court cited *Gian Chand v. Amar Nath*, which held that Section 446 does not bar criminal proceedings against the company's employees for offences like cheating.

6. Relevance of Judicial Precedents:
The court discussed several judicial precedents, including *Sheoratan Agarwal v. State of M.P.* and *Harish C. Raskapoor v. Jaferbhai Mohmedbhai Chhatpar*, to reinforce that directors can be prosecuted independently of the company. The court concluded that the petitioner's liability under Section 138 is individual and cannot be negated by the company's discharge.

Conclusion:
The court found no merit in the petitioner's arguments and dismissed the revisions, allowing the criminal proceedings against the directors to continue. The court emphasized that the special provisions of the Negotiable Instruments Act take precedence over the Companies Act in matters of cheque dishonor, ensuring that individuals responsible for issuing cheques are held accountable.