2024 (3) TMI 1397 - HC - Indian Laws

Declination of an application of petitioner for stay of proceedings under Section 138 of the Negotiable Instruments Act, 1881 - application was moved for stay of proceedings in terms of Section 96 of the Insolvency and Bankruptcy Code, 2016 - nature of proceedings u/s 138 of NI Act - penal in nature or not - HELD THAT - It is quite evident that petitioners are facing proceedings under Section 138 of the NI Act being Managing Director Director, respectively of the Company and both were stated to be incharge of and responsible to the Company i.e. Ms. Kudos Chemie Pvt. Ltd. for the conduct of its business - there remains no doubt that Signatories/Directors cannot escape their penal liability under Section 138/141 of the NI Act. A fortiori, Section 96 of the IBC, inter alia, envisages that during the interim moratorium period, any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed. Since, proceedings in the present case under the NI Act are not in respect of any debt; rather penal in nature and can invite imprisonment for a term which may extend to two years or fine which may extend to twice the cheque amount or with both. It cannot be countenanced that continuation of the proceedings under NI Act, against both the petitioners being Managing Director/Director of the company, deserve to be stayed or that Section 96 of the IBC would be treated as a bar to that effect, in any manner. The complaint under Section 138 of the NI Act is pending for the last 09 years; Hon ble the Supreme Court has repeatedly issued directions to expedite the proceedings under the NI Act. In the case in hand, notice of accusation was issued way back on 25.05.2016; cross-examination of the complainant was conducted on 04.06.2018, but the petitioners are delaying the proceedings on one pretext or the other. In such a scenario, this Court is of the considered opinion that present petition is complete misuse of the process of Court; hence, entertaining such a petition would not be in the interest of justice; rather it shall frustrate the same. Conclusion - Section 138 proceedings are penal and can continue independently of insolvency proceedings. Directors cannot evade liability under Section 138 due to the company's insolvency. Petition dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) should be stayed due to the moratorium provisions under Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC).
• Whether the proceedings under Section 138 of the NI Act are penal in nature and can continue despite the moratorium under the IBC.
• Whether the petitioners, as Managing Director and Director of the company, can escape liability under Section 138 of the NI Act due to the insolvency proceedings against the company.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of Section 96 of the IBC to proceedings under Section 138 of the NI Act

• Relevant legal framework and precedents: Section 96 of the IBC provides for an interim moratorium on legal actions concerning debts during insolvency proceedings. Section 138 of the NI Act deals with penalties for cheque dishonor.
• Court's interpretation and reasoning: The court noted that proceedings under Section 138 of the NI Act are penal in nature and not civil recovery proceedings. Therefore, they are not covered by the moratorium provisions of the IBC.
• Key evidence and findings: The court relied on the Supreme Court's decision in P. Mohanraj & Ors Vs. M/s Shah Brothers Ispat Pvt. Ltd. and Ajay Kumar Radheshyam Goenka Vs. Tourism Finance Corporation of India Ltd. which clarified that the moratorium under the IBC does not extend to criminal proceedings.
• Application of law to facts: The court applied the legal principles to conclude that the moratorium under Section 96 of the IBC does not stay the proceedings under Section 138 of the NI Act.
• Treatment of competing arguments: The court dismissed the petitioners' argument that the moratorium should apply, emphasizing the penal nature of Section 138 proceedings.
• Conclusions: The court concluded that the proceedings under Section 138 of the NI Act should not be stayed due to the moratorium under the IBC.

Issue 2: Nature of proceedings under Section 138 of the NI Act

• Relevant legal framework and precedents: Section 138 of the NI Act imposes penalties for cheque dishonor, including imprisonment and fines.
• Court's interpretation and reasoning: The court emphasized that Section 138 proceedings are penal and not merely compensatory or civil in nature.
• Key evidence and findings: The court referred to the Supreme Court's judgment in Goenka's case, which stated that Section 138 proceedings are criminal and not akin to civil recovery actions.
• Application of law to facts: The court applied these principles to determine that the proceedings should continue despite the insolvency proceedings.
• Treatment of competing arguments: The court rejected the petitioners' argument that Section 138 proceedings should be viewed as civil due to their financial nature.
• Conclusions: The court concluded that Section 138 proceedings are criminal and can proceed independently of the insolvency process.

Issue 3: Liability of petitioners under Section 138 of the NI Act

• Relevant legal framework and precedents: Section 141 of the NI Act holds company directors and officers liable for offenses committed by the company.
• Court's interpretation and reasoning: The court held that directors cannot escape liability under Section 138 due to the company's insolvency proceedings.
• Key evidence and findings: The court noted the petitioners' roles as Managing Director and Director, responsible for the company's conduct.
• Application of law to facts: The court found that the petitioners were liable under Section 138 as they were responsible for the company's actions.
• Treatment of competing arguments: The court dismissed the petitioners' claims of immunity due to the company's insolvency, citing established legal principles.
• Conclusions: The court concluded that the petitioners remain liable under Section 138 despite the company's insolvency proceedings.

3. SIGNIFICANT HOLDINGS

• Verbatim quotes of crucial legal reasoning: "We cannot lose sight of the fact that Section 138 of the N.I. Act are not recovery proceedings. They are penal in character."
• Core principles established: The court reaffirmed that Section 138 proceedings are penal and can continue independently of insolvency proceedings. Directors cannot evade liability under Section 138 due to the company's insolvency.
• Final determinations on each issue: The court dismissed the petition, allowing the Section 138 proceedings to continue, and rejected the application of the IBC moratorium to these proceedings.