The case of Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd.i, presented a complex legal question involving the intersection of the Negotiable Instruments Act, 1881 (“NI Act”) and the Insolvency and Bankruptcy Code, 2016 (“IBC”) before the Hon’ble Supreme Court. The central issue was whether criminal proceedings under the NI Act could continue concurrently with corporate insolvency resolution proceedings (“CIRP”) under the IBC.
M/s Rainbow Papers Limited (“Company”) borrowed a rupee term loan aggregating to INR 30,00,00,000 (Rupees Thirty Crores Only) (“Loan”) from Tourism Finance Corporation of India Limited (“Respondent”) on the terms conditioned as mentioned in the loan agreement executed in March 2012. As terms of the loan agreement and in fulfilment of their financial obligations towards the Respondent, the Company issued a post-dated cheque in February 2016. However, this cheque bounced due to the reason- “account closed”.
Subsequently, the Respondent issued a legal notice under Section 138 of the NI Act in April 2016, demanding repayment of the Loan. The Company acknowledged the debt but failed to make the payment. Consequently, a criminal complaint was filed in May 2016 under Section 138 of the NI Act.
Simultaneously in 2017, another entity, M/s Neeraj Paper Agencies Limited, initiated CIRP proceedings against the Company under Section 9 of the IBC. During the CIRP, the Respondent filed its claim related to the debt and their status transitioned from a secured financial creditor to an unsecured financial creditor under the IBC, which triggered objections and legal disputes.
Amidst these developments, the Metropolitan Magistrate issued an interim order in November 2018, asserting that the proceedings under Section 138 of the NI Act were distinct from IBC proceedings and thus could proceed simultaneously.
The Company represented by its promoter and managing director, Mr. Ajay Kumar Radheyshyam Goenka (“Appellant”), sought the discharge of the criminal case which was dismissed by the Metropolitan Magistrate in November 2019. A subsequent criminal revision petition before the High Court also met with failure, leading to the appeal before the Supreme Court.
Whether the criminal proceeding initiated under Section 138 of the NI Act could continue concurrently with CIRP under IBC.
Appellant's submissions: The Appellant contended that the trigger for Section 138 of the NI Act is the non-payment of a legally enforceable debt, and when this debt is extinguished, whether through Section 31 of the IBC or other relevant provisions found in Chapter III of the IBC (i.e, Sections 38 to 41 and 54 of the IBC), the basis for Section 138 of the NI Act no longer exists. The term “debt” in the context of Section 138 of NI Act should be understood as a “legally enforceable debt”, and this interpretation should be considered in conjunction with Sections 2(6) and 2(8) of the IBC. Furthermore, it was argued that Section 138 proceedings primarily aim to secure compensation, with the punitive aspect being incorporated to enforce the compensatory provisions. Therefore, if recovery is achieved through a combination of money receipts and debt waiver, Section 138 of the NI Act should not persist. The submission also stressed that if a company's debts are resolved, the payment process would be governed by the resolution plan, whereas if the debts remain unresolved, the distribution of the company's assets would follow the provisions laid out in Section 53 of the IBC.
Respondents’ submissions:The Respondent asserted that a cheque was issued as a repayment of the Loan, with the Company committing to 2 (two) instalments that is of; INR 10,00,00,000 (Rupees Ten Crores Only) due on March 31, 2015, and INR 20,00,00,000 (Rupees Twenty Crores Only) due on March 31, 2016. Additionally, it was agreed that the Company would pay 15% (fifteen percent) annual interest on the principal amount, with monthly interest payments scheduled for the 15th (fifteenth) day of each month, aligning with the cheque issuance dates. Further, the Respondent alleged that the Company, including the Appellant, had intentionally and maliciously issued the cheque with the deceptive intent to mislead the Respondent. Subsequently, they closed the associated bank account, effectively retaining the Loan. The Respondent alleged that the Appellant, in his capacity as the signatory, bore direct liability for these actions. Furthermore, signature on the loan agreement clearly shows active involvement of the Appellant in the everyday management of the company.
In summary, the Respondent's arguments centred on the Appellant's role as a signatory and active participant in the Company's affairs, asserting that he was responsible for issuing the cheque with fraudulent intent to defraud the Respondent and ultimately retain the Loan.
The Supreme Court clarified upon several key legal points. It highlighted the significant difference in the nature of proceedings between the NI Act and the IBC, emphasizing that the former involves criminal and penal proceedings while the latter pertains to corporate insolvency. For this, reliance was placed on the judgment of P. Mohanraj & Others v. Shah Brothers Ispat Private Ltdii . The court firmly rejected the notion that NI Act proceedings should be considered civil. It emphasised that NI Act proceedings are inherently penal, not primarily compensatory, with potential consequences like imprisonment or fines, and such proceedings have a direct impact on trade. Furthermore, the court held that the IBC's provisions, including those related to debt resolution, do not automatically extinguish criminal proceedings under Section 138 of the NI Act, and the moratorium under Section 14 of the IBC does not apply to proceedings against signatories or directors under the NI Act. Further, the Supreme Court observed that as per the provisions of Section 32A of the IBC even if a company's debts are resolved through the IBC, personal penal liability of signatories or directors under Section 138 of the NI Act does not ceaseiii. Reliance was also placed in the judgment of Goa State Cooperative Bank Limited v. Krishna Nath A. and Othersiv wherein the Supreme Court observed that “It is apparent that on the termination of the liquidation proceedings, liability of the members for the debts taken by them does not come to an end. There is no such provision in the Act providing once winding-up period is over, the liability of the members for loans obtained by them which is in their hands, and for which recovery proceedings are pending shall come to an end. No automatic termination of recovery proceedings against the members is contemplated…”JUDGMENT
The Supreme Court held that personal liability of signatories or directors in cheque dishonour cases under the NI Act cannot be absolved during CIRP under IBC. The court clarified that these 2 (two) sets of proceedings, although related to financial matters, serve different purposes, and can run concurrently.
The Supreme Court's verdict has provided critical legal clarity at the intersection of the NI Act and IBC. The ruling firmly establishes that criminal proceedings initiated under Section 138 of the NI Act, concerning cheque dishonour cases, can indeed continue concurrently with CIRP under the IBC. This decision hinges on the recognition that these 2 (two) sets of proceedings, despite their financial underpinnings, serve distinct purposes: the NI Act proceedings being punitive and the IBC proceedings focusing on debt resolution and corporate insolvency. Therefore, personal liability of signatories or directors in NI Act cases persists throughout CIRP, unless specifically taken over by new management, reaffirming the separation of these parallel legal avenues.
i(2023) SCC OnLine SC 266; Crl.A.No.172 of 2023.
ii(2021) 6 SCC 258.
iiiManish Kumar v. Union of India and Another reported in (2021) 5 SCC 1; Lalit Kumar Jain v. Union of India and Others, (2021) 9 SCC 321.
iv(2019) 20 SCC 38.