IBC and Criminal Liability – Not Negotiable

Recently, the Supreme Court in the case of Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation India Ltd. (“Judgment”) was posed the question whether pendency of proceedings under the Insolvency and Bankruptcy Code, 2016 (‘IBC’)  permits proceedings under Section 138 of the Negotiable Instruments Act, 1881 ('NI Act’) to continue simultaneously.

Proceedings under Section 190 of the Code of Criminal Procedure, 1973 (‘CrPC’) read with Sections 138, 141 and 142 of the NI Act were initiated against the Appellant (as a co-accused) based on the Appellant being the signatory of the dishonored cheques, as well as being the promoter and Managing Director of the Accused Company (M/s Rainbow Papers Limited), which had procured a term loan to the tune of Rs. 30 Crores from the Respondent. The loan agreement was signed by the Appellant on behalf of the Accused Company and the Appellant was also in charge of the Accused Company at the time the Accused Company defaulted in paying the amount to the Respondent. During the pendency of the proceedings under the NI Act before the Metropolitan Magistrate (‘MM’), insolvency proceedings under Section 9 of the IBC were also initiated by a third party against the Accused Company. The National Company Law Tribunal (NCLT) admitted the Section 9 Petition and accordingly, the moratorium in terms of Section 14 of the IBC came into effect.

The Appellant thus filed an application for discharge before the MM in the NI Act proceedings, which was dismissed by the MM vide order dated 01.11.2019. Being aggrieved by the said order, a Criminal Revision Petition was preferred by the Appellant before the High Court which was also dismissed by the High Court. The appellant filed the present appeal before the Hon’ble Supreme Court challenging the order passed by the High Court.

After hearing the arguments of the parties, the Court was of the opinion that the nature of the proceedings under the two Acts (i.e the IBC and the NI Act) were quite different and would not intercede each other. Reliance was further placed on Section 14 of the IBC, wherein the Court highlighted the aspect that the nature of proceedings which have to be kept in abeyance do not include criminal proceedings. The Court opined that proceedings under Section 138 of the NI Act arise from a default in financial debt and are penal in character and not in the nature of recovery proceedings. The accused under such proceedings may face imprisonment or fine or both in terms of Section 138 of the NI Act and thus such proceedings are not akin to civil/ suit proceedings.

The court observed that the process under Section 31 or Sections 38 to 41 of the IBC which can extinguish the debt would not ipso facto apply to the extinguishment of the criminal proceedings. It was held that where proceedings under Section 138 of the NI Act had already commenced before the MM 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.

Moratorium is a mechanism provided under Section 14 of the IBC in order to ensure that once the corporate insolvency resolution process has commenced, the assets of the corporate debtor are secured in order to ensure that the Corporate Debtor continues as a ‘going-concern’ and moreover the interest of the new management over the Corporate Debtor is protected. Thus, the moratorium seeks to protect the assets of the Corporate Debtor until the Corporate Debtor can be revived or the assets be liquidated.

Moratorium is not provided as an aid to a  drawer of a cheque to escape criminal liability on account of dishonour of cheques. Although stemming from a civil liability, dishonour of cheques carry a penal liability vis-à-vis the natural persons who are associated with the commission of the offence, which can extend to imprisonment of up to 2 years. The intent is to encourage fair trade in the realm of Negotiable Instruments and to deter fraudulent or dishonest endeavours in said trade. Resolution proceedings under the IBC are aimed at ensuring the survival/ revival of the Corporate Debtor. Thus, the aspect of criminal liabilities of directors of a Corporate Debtor cannot, and must not, become a bone of contention whilst undergoing a resolution process. The two must be segregated and dealt with in accordance with law.

It is reassuring that the Hon’ble Courts are painstakingly endeavouring to streamline the resolution process by settling the various legal nuances faced from time to time.  

Shiv Sapra is a Partner and Ruchika Darira is a Principal Associate at DSK Legal.