2024 (11) TMI 45 - HC - Indian Laws

Dishonour of Cheque - sustainability of criminal prosecution against adjudicated insolvency - HELD THAT - The Hon'ble Supreme Court in various judgments, had discussed the issue in detail and had protected only the corporate debtors namely, the company and not the Directors. The individual liability of the Directors of the company which faced bankruptcy proceedings are not immune from prosecution and not protected under Section 32A(1) of IBC Code. As regarding the individual debtors, the Hon'ble Supreme Court has clarified that the insolvency proceedings against the individuals will not protect them from proceedings under Section 138 N.I.Act. Even prior to the enactment of IBC. This Court through Justice M.Karpagavinayagam (as he was then) in Bharath N.Mehtha and another case 1999 (2) TMI 733 - MADRAS HIGH COURT had considered the consequence of issuing cheques after adjudication as insolvent and had explained the expressions that suit or other legal proceedings found in Section 72 of the Presidency Town Insolvency Act that ' The wordings any suit or other legal proceedings would mean the suit or other legal proceedings relating to the property of the insolvent and not with reference to the personal act committed by the accused constituting the offence liable to be proceeded in Criminal Court.' Thus, finally the Court has held that there is no bar in any of the provisions of insolvency Act or in the Negotiable Instruments Act, restricting the complainant to resort Section 138 of N.I.Act, after adjudication proceedings under Insolvency Act and it is open to the petitioner/accused to establish the fact regarding the alleged enforceable liability and the factum of impossibility to pay in the light of the insolvency before the trial Court. This Court is not inclined to record any opinion on the facts and leave it open for the petitioner/accused to canvas those points before the trial Court - this Criminal Original Petition is disposed of.

Summary

Issues:
1. Quashing of criminal proceedings under Section 138 of Negotiable Instruments Act based on insolvency petition.
2. Legal issue of sustainability of criminal prosecution against adjudicated insolvency.
3. Protection of corporate debtors and individual liability of directors in bankruptcy proceedings.
4. Clarification on insolvency proceedings against individuals and proceedings under Section 138 N.I. Act.
5. Interpretation of Section 72 of the Presidency Town Insolvency Act in relation to criminal proceedings.
6. Comparison of insolvency proceedings with proceedings under Section 138 of N.I. Act.

Analysis:
The petitioner, an accused in a case under Section 138 of the Negotiable Instruments Act, sought to quash the proceedings citing insolvency. The petitioner and her husband were declared insolvent before the date of the cheque in question. The petitioner argued that the criminal proceedings post-insolvency were not sustainable. Additionally, the petitioner claimed the cheque was issued as security and misused by the complainant, raising issues of enforceable liability. The court noted that factual issues must be determined by the trial court, except for the legal issue of sustainability against adjudicated insolvency. Previous judgments, including those by the High Court and the Supreme Court, were cited to address this legal issue.

The Supreme Court rulings highlighted that only corporate debtors, not directors, are protected in bankruptcy proceedings. Individual debtors are not shielded from proceedings under Section 138 of the N.I. Act, even before the enactment of the Insolvency and Bankruptcy Code. The court referred to past cases to explain the consequences of issuing cheques post-insolvency. It was clarified that insolvency proceedings do not bar criminal proceedings for dishonor of cheques. The court emphasized that Section 138 proceedings are distinct from insolvency proceedings and can continue independently.

The court concluded that there is no legal restriction preventing the complainant from pursuing Section 138 proceedings after insolvency adjudication. The petitioner can present arguments regarding enforceable liability and inability to pay due to insolvency before the trial court. The judgment refrained from expressing opinions on the facts, leaving it to be addressed during trial proceedings. Consequently, the Criminal Original Petition was disposed of, and the connected Criminal Miscellaneous Petition was closed.