2025 (7) TMI 278 - HC - Indian Laws

Dishonour of Cheque - discharge of liability or not - vicarious liability of liability who resigned from the post of director - maintainability of criminal proceedings after moratorium is declared and initiation of all proceedings and continuation or any suits or proceedings against the accused company is prohibited in view of order passed by the NCLT Mumbai - HELD THAT - What is required under Section 141 is that the persons who are sought to be made criminally liable under Section 141 should be at the time the offence was committed in charge of and responsible to the company for the conduct of the business of the company. Every person connected with the company shall not fall within the ambit of the provision. It is only those persons who were in charge of and responsible for the conduct of business of the company at the time of commission of an offence who will be liable for criminal action - Section 141 of the NIA provides for constructive liability to launch a prosecution therefore against the alleged Directors there must be a specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegation as to how the Directors are in-charge and responsible for the conduct of the business of the company. There is no dispute that there was business transaction between the accused company and the non-applicant company since 2015. As per allegations 16 cheques were issued against the outstanding amount of Rs.7, 04, 10, 101/-. The said cheques bear various dates mentioned in the complaints. The cheques were issued admittedly on various dates in the year 2022. Undisputedly prior to issuance of alleged cheques in the year 2015 i.e. on 21.5.2015 applicant No. 4 tendered his resignation. Thus he ceased to be Director since 21.5.2015. The resignation letter and Form No.DIR-11 is at Annexure-II. Similarly applicant No. 2 Neha also tendered her resignation on 10.6.2017. Her resignation letter and DIR Form No. 11 are also below Annexure-II. The order passed by the NCLT Mumbai on 22.4.2019 discloses that the company petition is filed by accused company under Section 10 of the IBC 2016 read with Rule 7 of the IBC (application to adjudicating authority) and Rules 2016 for initiation of CIRP. The NCLT Mumbai on perusal of the petition and documents came to conclusion that there are debts and corporate applicant has committed default in repayment of debts and passed the order - contention of the non-applicant company that cheques were issued for the period 27.10.2022 to 2.11.2022 by applicant No. 1 appears to be incorrect as steps taken by Resolution Professional show that on 9.5.2019 itself the non-applicant company was intimated not to deposit cheques. Therefore allegation of issuance of cheques on the above said dates is falsified by the said document. Perusal of the provisions of Section 138 of the NIA reveals that cause of action arises only when amount remains unpaid even after expiry of 15 days from the date of receipt of the notice - In the present case notices are issued on 25.10.2022 i.e. after the application under Section 33 of the IBC 2016 was decided by the NCLT Mumbai. There is substance in the submission that once the moratorium was imposed and liquidation proceeding has been completed and powers of the Directors in view of the order of the NCLT Mumbai are assigned to the Resolution Professional appointed subsequently as liquidator and applicant Nos. 1 and 3 ceased to be Directors and powers vested with the Board of Directors were to be exercised by the liquidator/Resolution Professional in accordance with the provisions of the IBC. All transactions of the corporate debtor to be carried out by the Resolution Professional hence applicant Nos. 1 and 3 were not the person incharge of the company and was not having any authority to sign the cheques and therefore cheques in question which are subject matter of the complaints were not valid cheques. On the contrary documents substantiate the contentions of the applicants that cheques were issued in 2018 as a security and while taking steps after moratorium was declared on 9.5.2019 Resolution Professional intimated the non-applicant not to deposit the cheques. The orders impugned passed by learned Additional Chief Judicial Magistrate and Special Judge under Section 138 of the NIA summoning orders of the present applicants are set aside - applications allowed.

Summary

The core legal questions considered by the Court are:

1. Whether criminal proceedings under Sections 138 and 141 of the Negotiable Instruments Act (NIA) can be initiated or continued against directors of a corporate debtor after the declaration of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), and during the Corporate Insolvency Resolution Process (CIRP) or liquidation proceedings.

2. Whether the applicants, who were directors of the accused company, can be held liable under Section 141 of the NIA for dishonour of cheques allegedly issued by the company after the moratorium and liquidation orders, given that they had ceased to be in charge of and responsible for the conduct of the company's business.

3. The validity and effect of cheques allegedly issued during the period when the company was under moratorium and liquidation, and whether such cheques can constitute an offence under Section 138 of the NIA.

4. The interpretation and application of relevant provisions of the IBC, including Sections 14 (moratorium), 17 (management during CIRP), 32A (liability for prior offences), and 33 (initiation of liquidation), in relation to criminal liability under the NIA.

5. The scope of liability under Section 141 of the NIA, specifically the requirement that the accused persons must have been in charge of and responsible for the conduct of the company's business at the time the offence was committed.

Issue-wise Detailed Analysis

Issue 1: Maintainability of Criminal Proceedings under Sections 138 and 141 of the NIA after Moratorium under IBC

Legal Framework and Precedents: Section 14(1) of the IBC imposes a moratorium prohibiting the institution or continuation of suits or proceedings against the corporate debtor from the insolvency commencement date. The Hon'ble Supreme Court in the case of P. Mohanraj vs. M/s. Shah Ispat Private Limited clarified that the moratorium under Section 14(1)(a) is wide and includes all suits and proceedings, including criminal proceedings under Section 138 of the NIA, against the corporate debtor. However, the moratorium applies only to the corporate debtor and not to natural persons such as directors who may be liable under Section 141 of the NIA.

Court's Interpretation and Reasoning: The Court noted that the moratorium declared by the NCLT Mumbai on 22.4.2019 prohibited initiation or continuation of any suits or proceedings against the accused company. The cheques in question were allegedly issued in 2022, well after the moratorium and liquidation orders. The Court relied on the Supreme Court's interpretation that criminal proceedings under Section 138 of the NIA are proceedings before a court of law and thus fall within the moratorium's ambit when directed against the corporate debtor.

Application of Law to Facts: Since the moratorium was declared prior to the alleged issuance and presentation of the cheques, the criminal complaints against the company itself were barred. The Court further observed that the Resolution Professional had taken over management and had informed the non-applicant company not to deposit the cheques, indicating that the company was not in control of the directors at the relevant time.

Conclusion: Criminal proceedings under Section 138 of the NIA against the corporate debtor during moratorium and liquidation are barred. However, liability of natural persons under Section 141 is a separate question addressed below.

Issue 2: Liability of Applicants under Section 141 of the NIA as Directors of the Corporate Debtor

Legal Framework and Precedents: Section 141(1) of the NIA imposes liability on persons who, at the time the offence was committed, were in charge of and responsible for the conduct of the company's business. The liability is constructive and arises only if the person was in charge and responsible at the relevant time. Mere designation as director is insufficient if the person had ceased to be in charge or had resigned. The Court referred to various precedents emphasizing that liability depends on actual control and responsibility, not mere titular status.

Court's Interpretation and Reasoning: The Court examined the resignation letters and DIR-11 forms filed for applicant Nos. 2 and 4, confirming their resignation well before the issuance of the cheques in 2022. For applicant Nos. 1 and 3, the Court noted that upon initiation of CIRP and subsequent liquidation, the management and powers of the Board of Directors ceased and vested with the Resolution Professional and liquidator. Thus, these applicants ceased to be in charge or responsible for the company's affairs at the relevant time.

Key Evidence and Findings: The NCLT Mumbai orders dated 22.4.2019 (moratorium) and 9.6.2022 (liquidation) were pivotal. The orders explicitly stated that all powers of the Board of Directors and key managerial personnel ceased and vested with the Resolution Professional/liquidator. The Resolution Professional's communication to the non-applicant company not to deposit cheques further corroborated the applicants' lack of authority.

Treatment of Competing Arguments: The non-applicant company argued that the applicants were liable as directors responsible for the company's affairs, relying on Section 141 and relevant case law. However, the Court distinguished these cases on facts, noting that in those cases moratorium was declared after the cause of action arose, unlike the present case where moratorium preceded the alleged offences.

Conclusion: The applicants were not in charge of and responsible for the company's business at the time the alleged offences occurred and therefore cannot be held liable under Section 141 of the NIA.

Issue 3: Validity of Cheques Allegedly Issued During Moratorium and Liquidation Period

Legal Framework: Section 138 of the NIA requires that a cheque be drawn and presented for discharge of a debt or liability. The validity of cheques depends on the authority of the drawer to issue and sign them.

Court's Interpretation and Reasoning: The Court found that the cheques were issued as security in 2018, prior to the moratorium. However, the presentation and dishonour occurred post moratorium and liquidation. Since the applicants had no authority to issue or sign cheques after moratorium and liquidation, the cheques presented were invalid. Furthermore, the Resolution Professional had explicitly instructed the non-applicant company not to deposit these cheques.

Application of Law to Facts: The Court concluded that the cheques could not constitute valid instruments for discharge of liability after the moratorium and liquidation orders. Hence, the offence under Section 138 could not be made out against the applicants.

Conclusion: The cheques were not validly issued or authorized at the relevant time, negating the foundation for criminal liability under Section 138.

Issue 4: Application of Relevant IBC Provisions and Their Effect on Criminal Liability

Legal Framework: Sections 14, 17, 32A, and 33 of the IBC govern moratorium, management during CIRP, liability for prior offences, and liquidation respectively. Section 14 imposes a moratorium on suits and proceedings against the corporate debtor. Section 17 vests management powers in the interim resolution professional. Section 32A limits prosecution of the corporate debtor for prior offences upon approval of a resolution plan. Section 33 governs initiation of liquidation and cessation of powers of directors.

Court's Interpretation and Reasoning: The Court held that from the date of moratorium, the applicants ceased to have authority over the company. The management was vested in the Resolution Professional, who later became the liquidator. The liquidation order further extinguished powers of directors. Thus, the applicants had no capacity to issue cheques or discharge liabilities on behalf of the company. Section 32A was noted but not directly applicable as the resolution plan was not approved and liquidation ensued.

Application of Law to Facts: The moratorium and liquidation orders effectively insulated the company from proceedings and transferred all managerial powers to the Resolution Professional/liquidator. The applicants' liability was negated by these provisions.

Conclusion: The IBC provisions preclude criminal proceedings against the company and its erstwhile directors for acts post moratorium and liquidation, unless the directors were in charge and responsible at the relevant time, which was not the case here.

Issue 5: Requirement of Specific Allegations under Section 141 of the NIA

Legal Framework: Liability under Section 141 requires clear and unambiguous allegations that the accused persons were in charge of and responsible for the conduct of company's business at the time of offence.

Court's Reasoning: The Court emphasized that mere designation as director does not suffice. The complaint must specify the role played by the directors in the transaction leading to dishonour of cheques.

Application of Law to Facts: The applicants produced resignation letters and evidence of cessation of directorial powers. The complaint lacked specific allegations that the applicants were in charge at the relevant time.

Conclusion: The complaint failed to establish the necessary ingredient of liability under Section 141 against the applicants.

Significant Holdings

"The liability arises from being in charge of and responsible for the conduct of business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company."

"The moratorium declared by the NCLT under Section 14(1) of the IBC prohibits institution or continuation of suits or proceedings against the corporate debtor, including criminal proceedings under Section 138 of the NIA."

"Once the moratorium was imposed and liquidation proceeding has been completed, the powers of the Directors in view of the order of the NCLT Mumbai are assigned to the Resolution Professional appointed subsequently as liquidator and applicant Nos. 1 and 3 ceased to be Directors and powers vested with the Board of Directors were to be exercised by the liquidator/Resolution Professional."

"The cheques in question which are subject matter of the complaints were not valid cheques as the applicants were not in charge or responsible for the company at the time of their alleged issuance."

"Criminal proceedings under Section 138 and 141 of the NIA against the corporate debtor during moratorium and liquidation are barred, and liability of natural persons under Section 141 can only be fastened if they were in charge and responsible at the relevant time."

Final determinations:

- The criminal complaints filed under Sections 138 and 141 of the NIA against the applicants are quashed and set aside.

- The applicants were not in charge of and responsible for the conduct of the company's business at the time of the alleged offences.

- The moratorium and liquidation orders under the IBC preclude continuation or initiation of proceedings against the corporate debtor and vest management powers in the Resolution Professional/liquidator.

- The cheques allegedly issued post moratorium are invalid and do not constitute an offence under Section 138 of the NIA.