Madras High Court
Madras High Court
Litigation News

IBC does not bar continuation of criminal prosecution initiated against corporate debtor, its directors/officials: Madras HC

Meera Emmanuel

The Madras High Court recently clarified that the initiation of corporate insolvency resolution proceedings would not create a bar on the continuation of criminal proceedings initiated for cheque bouncing under Section 138 of the Negotiable Instruments (NI) Act.

This would be the position even if a moratorium on “suits or proceedings” is declared by the adjudicating authority under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016, the Court observed. As stated in the judgment passed earlier this month by Justice GR Swaminathan,

“… the question is whether by operation of the provisions of Insolvency and Bankruptcy Code, 2016, the criminal prosecution initiated under Section 138 r/w.141 of the Negotiable Instruments Act, 1881 r/w. 200 of Cr.Pc, can be terminated. The categorical answer is ‘No.’”

Madras High Court in Ajay Kumar Bishnoi vs. Tap Engineering

In other words,

“… no provision of the Insolvency and Bankruptcy Code bars the continuation of the criminal prosecution initiated against the corporate debtor or its directors and officials.”
Madras High Court

The petitioner before the Court was the former managing director of Tecpro Systems Limited. Tecpro had came under corporate insolvency resolution process while proceedings under Section 138 of the NI Act, for cheque bouncing were still pending before the Trial Court.

In view of the initiation of IBC proceedings, the petitioner had filed a petition under Section 482 of the Code of Criminal Procedure (CrPC) to quash the Section 138, NI Act proceedings.

What earlier rulings said

Justice Swaminathan relied on rulings of the Calcutta High Court. The ruling in Indorama Synthetics (I) Ltd. Nagpur v. State of Maharashtra and others and the Madras High Court ruling in M/S.Nag Leathers Pvt Ltd vs J.L.Sobhana, to reiterate that proceedings under Section 138 of Negotiable Instruments Act are not a civil proceedings.

Further, the Court also relied on a 2018 ruling by the National Company Law Tribunal in Shah Brothers Ispat Pvt. Ltd. v. P.Mohanraj & Ors.), which had held that Section 14 of the Insolvency and Bankruptcy Code, 2016 relating to moratorium, will not cover criminal.

Corporate insolvency resolution process does not bar criminal proceedings already initiated

Justice Swaminathan went on to explain the rationale behind adopting the position that the corporate insolvency resolution process would not bar criminal proceedings for cheque bouncing.

The High Court pointed out that a reference to criminal proceedings is conspicuously absent from the wording of Section 14 of the IBC, which talks about a bar on “suits and proceedings” on the declaration of a moratorium. As explained in the judgment,

Section 233 of Insolvency and Bankruptcy Code, 2016 which protects action taken in good faith under the Code or the Rules or Regulations made thereunder employs the expression “no suit, prosecution or other legal proceeding”. But, in Section 14 the expression “suits or proceedings” alone is found. The expression “prosecution” is conspicuously absent in Section 14.

When the legislature consciously included the expression “prosecution” elsewhere in the Code and omits it in Section 14 of the Code, I can only come to the conclusion that the omission is deliberate and intentional. The legislature did not intend to bar criminal prosecution even though moratorium has been declared.”

IBC cannot be used to provide succour for those who contributed to default of corporate debtor

The Court proceeded to also reject an additional contention put forward that the criminal proceedings cannot continue once the resolution plan has been approved by the Resolution Professional under Section 31 of the IBC.

The petitioner had contended that once the resolution plan has been approved, and binds the corporate debtor, the petitioner is crippled by the law from defending the criminal case against him for cheque bouncing. The petitioner had argued that he does not have access to company records any longer to present his case before the trial court.

Justice Swaminathan, however, disagreed, also observing that,

“The very object of the Insolvency and Bankruptcy Code, 2016 is to provide for Insolvency resolution in a time bound manner for maximization of value of assets. It has not been enacted to provide succor to those who by their misconduct contributed to defaults of the corporate debtor.”

Madras High Court

The High Court, further, pointed out that the Supreme Court ruling in JIK Industries Limited v. Amarlal V Jumani also lends support to this conclusion.

“In JIK Industries Limited vs. Amarlal V.Jumani (2012) 3 SCC 255, the Hon'ble Supreme Court held that sanction of a scheme under Section 391 of the Companies Act, 1956 will not lead to any automatic compounding of offence under Section 138 of the Act without the consent of the complainant. Neither Section 14 nor Section 31 of the Code can produce such a result."

The Court added,

"The binding effect contemplated by Section 31 of the Code is in respect of the assets and management of the corporate debtor. No clause in the Corporate Insolvency Resolution Plan even if accepted by the adjudicating authority/appellate Tribunal can take away the power and jurisdiction of the criminal court to conduct and dispose of the proceedings before it in accordance with the provisions of the Code of Criminal Procedure.”

Madras High Court

The Court proceeded to emphasise that the petitioner-director cannot evade the criminal proceedings under Section 138, NI Act, regardless of whether the company is ultimately dissolved following the IBC process.

The judge pointed out that if a new management takes over the company, it would be responsible for its liabilities. On the other hand, if the company is dissolved, the former directors can still be held personally liable in the criminal proceedings already initiated under Section 138, NIA Act.

“… where the proceedings under Section 138 of the Act had already commenced and during the pendency, the company gets dissolved, the directors and the other accused cannot escape 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 Negotiable Instruments Act, 1881...

... They will have to continue to face the prosecution in view the law laid down in Aneeta Hada case. Where the company continues to remain even at the end of the resolution process, the only consequence is that the erstwhile directors can no longer represent it.”

The Court added that the petitioner-director had erred in seeking to quash the prosecution under the NI Act in toto.

“This petition has been filed only by the erstwhile managing director. He cannot maintain a prayer for quashing the entire prosecution. At best, he can confine the relief to himself. But, as already held, the approval of the resolution plan is of no avail to the erstwhile director of the corporate debtor.

The kavacham fashioned by IBC is custom made. It will fit the corporate debtor alone. The protective shield will not fit the erstwhile director at all. It was never designed for him.”

No bar on applying for access to company records to defend oneself in criminal trial

Moreover, the Court also responded to the petitioner’s grievance that he would be unable to defend himself in the trial court for lack of access to company records by pointing out that,

“… it is always open to the petitioner to file an application for causing production of any document or examination of any witness. Merely because a new management has taken over the company which he earlier headed, the petitioner cannot be deprived of access to any relevant document that may bolster or reinforce his defence.”

In view of these observations, the High Court proceeded to dismiss the petition before it.

[Read the Judgment]

Ajay Kumar Bishnoi v Tap Engineering - Madras High Court.pdf
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