2020 (11) TMI 835 - HC - Indian Laws

Dishonor of Cheque - Vicarious liability of Director - dishonor of collateral security cheques which were issued in discharge of alleged outstanding of a term loan sanctioned by the bank - fundamental argument of learned counsel for the petitioner is that the petitioner cannot be prosecuted for dishonor of cheques, as the liability was that of Company and not of the petitioner as an individual - HELD THAT - There is merit in the contention of learned counsel for the petitioner. Given the facts of case read with allegations in the impugned Bombay High Court complaint, as an individual Director, petitioner seems to have been wrongly fastened with criminal liability of accused company M/s Supreme Tex Mart Ltd., particularly, after appointment of the Interim Resolution Professional and suspension of the directors under the IBC. It is though not stated in the impugned complaint but on a query of this court, it transpires that petitioner had signed the cheques in question on behalf of the accused company. However, following the appointment of IRP, the petitioner was forthwith suspended to act as Director of the accused company and he was/is thus not in a position to pay or settle on behalf of the company. The primary liability of cheque bouncing in this case is of the accused drawer Company. All accounts are currently since under the control of a Interim Resolution Professional, it would not be fair to impose liability on a suspended Director of the Company. Under the Insolvency and Bankruptcy Code-2016,once an insolvency petition is admitted , the resolution process gets initiated. The existing management automatically gets suspended. The Interim Resolution Professional takes over the operations of the company. Under Section 25 of IBC the Resolution Professional is under mandate to protect and preserve the assets of the corporate debtor company . Subsequent thereto, the committee of creditor is required to submit a resolution plan for approval of the committee of creditors . After such approval, the resolution plan is presented to the Adjudicating Authority - In the premise, due to insolvency proceedings against the accused company and imposition of moratorium, two consequences arise, namely, (a) option to compound a cheque bounce is not available to its directors (erstwhile) and; (b) claims of the creditors have to be submitted before a committee of creditors. The primary liability in a cheque bounce case where cheque has been issued on behalf of the company is upon the drawer-Company. Though the accounts of the drawer company herein are under the control of a Resolution Professional but sword of liability qua cheque issued on behalf of company has been vicariously imposed on the suspended director/petitioner. The impugned complaint and summoning order are set aside only qua the petitioner/director - the complaint proceedings shall continue further against the Company/accused No.1, in accordance with law - Application disposed off.

Summary

Issues:
Quashing of criminal complaint under Section 138 of Negotiable Instruments Act against a former director of a company.

Analysis:
The petitioner sought the quashing of a criminal complaint filed by a bank under Section 138 of the Negotiable Instruments Act, relating to the dishonor of two collateral security cheques issued by the company. The complaint alleged that the accused company's director was responsible for the debt, leading to the summoning of the accused. The petitioner argued that the liability was that of the company, not the individual director. The complaint lacked specific allegations against the director's personal liability for the company's debts.

The court examined the legal position based on a previous case and an Apex Court judgment, emphasizing that necessary averments must be made to fasten criminal liability on an individual connected with a company. The court agreed that the petitioner, as a director, was wrongly held criminally liable for the company's actions, especially after the appointment of an Interim Resolution Professional and suspension of directors under the Insolvency and Bankruptcy Code.

Furthermore, it was noted that insolvency proceedings had been initiated against the company, resulting in the suspension of the directors and the takeover of company operations by the Interim Resolution Professional. The primary liability for the cheque bouncing rested with the company, not the suspended director. The court highlighted the legal implications of insolvency proceedings on the liability of directors in such cases.

Considering the circumstances, the court set aside the complaint and summoning order only concerning the petitioner/director, allowing the proceedings to continue against the company/accused No.1. The court's decision was based on the lack of personal liability established against the director and the impact of insolvency proceedings on the company's liabilities and management.

In conclusion, the court's judgment focused on the legal principles governing the liability of directors in cases of cheque bouncing, emphasizing the need for specific averments to establish individual responsibility. The court's decision provided clarity on the director's liability in the context of insolvency proceedings and the primary liability of the company in cheque bounce cases.