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2023 (3) TMI 686 - SC - Indian LawsDishonor of Cheque - CIRP - dissolution of company as per resolution plan - Liability of Director / Managing Director - non-payment of legally enforceable debt - submission of appellant is that once recovery is made partly by the receipt of money and partly by waiver, Section 138 of the NI Act should not be permitted to be continued - It was lastly urged that if the debt of the company is resolved then the payment would be governed under the Resolution Plan - HELD THAT - The scope of nature of proceedings under the two Acts (IBC Act and NI Act) and quite different and would not intercede each other. In fact, a bare reading of Section 14 of the IBC would make it clear that the nature of proceedings which have to be kept in abeyance do not include criminal proceedings, which is the nature of proceedings under Section 138 of the N.I. Act. We are unable to appreciate the plea of the learned counsel for the Appellant that because Section 138 of the N.I. Act proceedings arise from a default in financial debt, the proceedings under Section 138 should be taken as akin to civil proceedings rather than criminal proceedings - It cannot be said that the process under the IBC whether under Section 31 or Sections 38 to 41 which can extinguish the debt would ipso facto apply to the extinguishment of the criminal proceedings. No doubt in terms of the Scheme under the IBC there are sacrifices to be made by parties to settle the debts, the company being liquidated or revitalized. We are unable to accept the plea that if proceedings against the company come to an end then the Appellant as the Managing Director cannot be proceeded against. We are unable to accept the plea that Section 138 of the N.I. Act proceedings are primarily compensatory in nature and that the punitive element is incorporated only at enforcing the compensatory proceedings. The criminal liability and the fines are built on the principle of not honouring a negotiable instrument, which affects trade. This is apart from the principle of financial liability per se. To say that under a scheme which may be approved, a part amount will be recovered or if there is no scheme a person may stand in a queue to recover debt would absolve the consequences under Section 138 of the N.I. Act, is unacceptable. The impugned order takes the correct view in law. Rejection of application filed by the appellant herein seeking discharge from the criminal proceedings instituted by the respondent-complainant under Section 138 of the NI Act - complainant having participated in the proceedings under the IBC, 2016 by putting forward its claim and consenting to accept some share as a creditor - approval of the resolution plan under Section 31 of the IBC, 2016 - signatory/director in charge of the day-to-day affairs would stand discharged/relieved from the penal liability under Section 138 of the NI Act or not - HELD THAT - The creditor has no option but to join the process under the IBC. Once the plan is approved, it would bind everyone under the sun. The making of a claim and accepting whatever share is allotted could be termed as an Involuntary Act on behalf of the creditor. The making of a claim under the IBC and accepting the same and not making any claim, will not make any difference in light of Section 31 of the IBC. Both the situations will lead to Section 31 and the finality and binding value of the resolution plan - it could be said that from the cheque amount under Section 138 of the NI Act, the amount received under the resolution plan may be deducted. It is equally true that once the corporate debtor comes under the resolution process, its erstwhile managing director(s) cannot continue to represent the company. Section 305(2) of the CrPC states that where a corporation is the accused person or one of the accused persons in an inquiry or trial, it may appoint a representative for the purpose of the inquiry or trial and such appointment need not be under the seal of the corporation. Therefore, it is only the Resolution Professional who can represent the accused company during the pendency of the proceedings under IBC. After the proceedings are over, either the corporate entity may be dissolved or it can be taken over by a new management in which event the company will continue to exist. When a new management takes over, it will have to make arrangements for representing the company. If the company is dissolved as a result of the resolution process, obviously proceedings against it will have to be terminated - where the proceedings under Section 138 of the NI Act had already commenced and during the pendency the plan is approved or the company gets dissolved, the directors and the other accused cannot escape from their liability 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 NI Act. Thus, where the proceedings under Section 138 of the NI Act had already commenced with the Magistrate taking cognizance upon the complaint and during the pendency, the company gets dissolved, the signatories/directors cannot escape from their penal liability under Section 138 of the NI Act 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 NI Act. After passing of the resolution plan under Section 31 of the IBC by the adjudicating authority in the light of the provisions of Section 32A of the IBC, the criminal proceedings under Section 138 of the NI Act will stand terminated only in relation to the corporate debtor if the same is taken over by a new management - Section 138 proceedings in relation to the signatories/directors who are liable/covered by the two provisos to Section 32A(1) will continue in accordance with law. Appeal dismissed.
Issues Involved:
1. Whether the proceedings under Section 138 of the NI Act can continue during the pendency of proceedings under the IBC. 2. Whether the status of the respondent as a Secured or Unsecured Financial Creditor affects the proceedings under the NI Act. 3. Whether the approval of a resolution plan under the IBC extinguishes the criminal liability under Section 138 of the NI Act. Summary of Judgment: 1. Continuation of Section 138 NI Act Proceedings During IBC Proceedings: The Supreme Court concluded that the nature of proceedings under the NI Act and the IBC are distinct and do not intercede each other. Section 14 of the IBC, which imposes a moratorium on certain proceedings, does not extend to criminal proceedings under Section 138 of the NI Act. The Court emphasized that Section 138 proceedings are penal in nature and not akin to recovery proceedings, thus they can continue simultaneously with IBC proceedings. 2. Status of Respondent as Secured or Unsecured Financial Creditor: The Court noted that the issue of whether the respondent is a Secured or Unsecured Financial Creditor is a matter for the proceedings under the IBC and any appeals therefrom. This status does not affect the continuation of the Section 138 proceedings under the NI Act. 3. Impact of Resolution Plan Approval on Criminal Liability: The Court held that the approval of a resolution plan under Section 31 of the IBC does not extinguish the criminal liability under Section 138 of the NI Act. The Court rejected the argument that the resolution plan, which resolves the debt, should lead to the termination of Section 138 proceedings. The Court clarified that Section 138 proceedings are not merely compensatory but also punitive, aimed at penalizing the dishonor of a negotiable instrument, which is crucial for maintaining trade integrity. Separate Judgment by J. B. Pardiwala: Justice J. B. Pardiwala, while agreeing with the main judgment, provided additional reasoning emphasizing that the criminal liability under Section 138 of the NI Act continues against the natural persons (directors/signatories) even after the approval of the resolution plan under the IBC. He highlighted that Section 32A of the IBC, which provides immunity to the corporate debtor, does not extend to the directors or persons responsible for the conduct of the business of the corporate debtor. Conclusion: The appeals were dismissed, affirming that the criminal proceedings under Section 138 of the NI Act can continue against the natural persons involved, despite the resolution of the corporate debtor's insolvency under the IBC.
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