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From Solvency to Insolvency: Dishonored Cheque Dilemma


Last updated: 22 June 2023

Court :
Supreme Court of India

Brief :
Cheque issued at the time ,when company not became sick , but at the time of payment the company became sick and cheque had been dishonoured. The directors of the Company are liable and be prosecuted under provisions of Section 138 of the Negotiable Instruments Act, 1881.

Citation :
APPEAL (CRL.) 212-216 OF 2000

KUSUM INGOTS AND ALLOYS LTD VS.  PENNAR PETERSON SECURITIES LTD & ORS
APPEAL (CRL.) 212-216 OF 2000
SUPREME COURT OF INDIA

THE APEX COURT HELD THAT

Cheque issued at the time ,when company not became sick , but at the time of payment the company became sick and cheque had been dishonoured. The directors of the Company are liable and be prosecuted under provisions of Section 138 of the Negotiable Instruments Act, 1881.

SECTION 22(1) OF SICA,1985

Suspension of legal proceedings, contracts, etc.

(1) Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company] shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.

SECTION 22A  OF THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985

DIRECTION NOT TO DISPOSE OF ASSETS.—The Board may, if it is of opinion that any direction is necessary in the interest of the sick industrial company or creditors or shareholders or in the public interest, by order in writing direct the sick industrial company not to dispose of, except with the consent of the Board, any of its assets—

(a) during the period of preparation or consideration of the scheme under section 18; and
(b) during the period beginning with the recording of opinion by the Board for winding up of the company under sub-section (1) of section 20 and up to commencement of the proceedings relating to the winding up before the concerned High Court.

BRIEF FACTS

The common question that arose for consideration in these appeals was whether a company and its Directors could be proceeded against for having committed an offence under section 138 of the Negotiable Instruments Act, 1881 (for short ‘the NI Act’) after the company has been declared sick under the provisions of  the Sick Industrial Companies (Special Provisions) Act, 1985 (for short ‘SICA’) before the expiry of the period for payment of the cheque amount. 

The answer to the question depends on interpretation of section 138 of the NI Act and its interaction with the relevant provisions of SICA. Since the relevant facts involved in all the cases are similar and a common question of law arises in all the cases they were heard together and they are being disposed of by this judgment.

DECISION OF THE COURT

1.  In our considered view  section 22  SICA does not create any legal impediment for instituting and proceeding with a criminal case on the allegations of an offence under section 138  of the NI Act against a company or its Directors. 

2.  The section as we read it only creates an embargo against disposal of assets of the company for recovery of its debts. The purpose of such an embargo is to preserve the assets of the company from being attached or sold for realisation of dues of thecreditors. 

3.  The section does not bar payment of money by the company or its directors to other persons for satisfaction of their legally enforceable dues. The question that remains to be considered is whether section 22 A of SICA affects a criminal case for an offence under section 138 NI Act. 

4.  In the said section provision is made enabling the Board to make an order in writing to direct the sick industrial company not to dispose of, except with the consent of the Board, any of its assets –

(a) during the period of preparation or consideration of the scheme under  section 18; and 
(b) during the period beginning with the recording of opinion by the Board for winding up of the company under sub-section (1) of section 20 and up to commencement of the proceedings relating to the winding up before the concerned High Court. 

5. This exercise of the power by the Board is conditioned by the prescription that the Board is of the opinion that such a direction is necessary in the interest of the sick industrial company or its creditors or shareholders or in the public interest. In a case in which the BIFR has submitted its report declaring a company as ‘sick’ and has also issued a direction under section 22-A restraining the company or its directors not to dispose of any of its assets except with consent of the Board then the contention raised on behalf of the appellants that a criminal case for the alleged offence under  section 138 NI Act cannot be instituted during the period in which the restraint order passed by the BIFR remains operative cannot be rejected outright. 

6.  Whether the contention can be accepted or not will depend on the facts and circumstances of the case. Take for instance, before the date on which the cheque was drawn or before expiry of the statutory period of 15 days after notice, a restraint order of the BIFR under Section 22-A was passed against the company then it cannot be said that the offence under section 138 NI Act was completed. 

7.  In such a case it may reasonably be said that the dishonouring of the cheque by the bank and failure to make payment of the amount by the company and/or its Directors is for reasons beyond the control of the accused. It may also be contended that the amount claimed by the complainant is not recoverable from the assets of the company in view of the ban order passed by the BIFR. In such circumstances it would be unjust and unfair and against the intent and purpose of the statute to hold that the Directors should be compelled to face trial in a criminal case. 

8. Except in the circumstances noted above we do not find any good reason for accepting the contentions raised by the learned counsel for the appellants in favour of the prayer for quashing the criminal proceedings or for keeping the proceedings in abeyance. It will be open to the appellants to place relevant materials in this regard before the learned Magistrate before whom the cases are pending and the learned Magistrate will ex-amine the matter keeping in mind the discussions made in this judgment. 

9. We make it clear that we have not considered the question whether in the facts and circumstances of a particular case Section 138 NI Act is attracted or not, for that is a question to be considered by the Court at the appropriate stage of the case in the light evidence on record.

10. The appeals are disposed of on the terms aforesaid.

 
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