2025 (7) TMI 207 - HC - Indian Laws

Dishonour of Cheque - security cheques - misuse of cheque - Commencement of IBC Proceedings - filing of complaint when CIRP had already been commenced and moratorium was imposed. Cheques were Security Cheques - HELD THAT - The Security Cheques are only given to be utilised if subsequently during the business transactions certain liabilities exist which are not fulfilled by the Petitioners. In the present case as well the entire objective of giving the security cheques was to secure any liability which may accrue in future and is not met by the Petitioners. The Complainants have specifically alleged about their being existing debt/liability on 08.05.2017 when the cheques were presented to the Bank - This contention of S.138 NI Act not attracted in respect of Security Cheques in the facts of present case is absolutely not tenable. Blank Cheques being Misused - HELD THAT - Admittedly the signed cheques were given by the Petitioner Company Innoventive Industries Limited to the Complainant Company IFCI Factors Limited. Therefore for the Petitioners to claim that the cheques have been subsequently manipulated is absolutely incorrect - Moreover the three months period for presentation of the cheque arises from the date mentioned on the cheque and to assert that the cheques have been presented way beyond three months from 2009 when they were issued is again absolutely fallacious and contrary to the very concept of Security Cheques. The three-month period for the validity of the cheque would commence from the date on the cheque. This contention raised on behalf of the Petitioners therefore do not merit any consideration. Commencement of IBC Proceedings - case of Petitioners is that the Complaint Case under Section 138 of N.I. Act could not have been filed in August 2017 once CIRP had already been commenced on 17.01.2017 and moratorium was imposed - HELD THAT - Pertinently the IBC proceedings got commenced in January 2017 and subsequently the powers of Board of Directors of the Company Innoventive Industries Limited got suspended in terms of Section 17 IBC. The Management of the Affairs of the Petitioner Company got vested in the erstwhile RP and thereafter the Liquidator. The intimation had been duly sent to the Banks especially IDBI Bank Pune by the RP - The Complainant after six months of initiation of CIRP proceedings issued Legal Notice on 01.07.2017 for initiation of Complaint under Section 138 of N.I. Act. Having done so the question arises whether there existed any cause of action for initiation of proceedings under Section 138 of N.I. Act in August 2017 when the Company is already undergoing CIRP. In the present case the IBC proceedings had already got commenced in January 2017 i.e. almost six months prior to the proceedings under S.138 NI Act. At the time when the Legal Notice dated 02.07.2017 was issued by the Complainant the entire powers of Board of Directors had come to be vested in the RP. Therefore they were no powers either with the Company or that the Board of Directors and they had no managerial authority to pass any Board Resolution for repayment of the amounts under the impugned cheques - no vicarious liability can be attributed to the Directors in the absence of the Company who are entitled to be discharged. Dishonour of Cheque due to Insufficiency of Funds . The Summoning Order dated 09.04.2018 is hereby set-aside against the three Petitioners who are discharged. The aforesaid three Petitions are accordingly allowed.

Summary

The core legal questions considered in this judgment are:

1. Whether the complaint under Section 138 of the Negotiable Instruments Act, 1881 (N.I. Act) can be initiated or continued against a corporate debtor undergoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC), particularly during the moratorium period imposed under Section 14 IBC.

2. Whether the directors of the corporate debtor can be held liable and summoned under Section 138 N.I. Act when the company is under CIRP and the management powers have been suspended and vested in the Resolution Professional (RP) or Liquidator.

3. Whether security cheques issued years prior to the dishonour and presentation can attract the penal provisions of Section 138 N.I. Act, especially when the cheques were undated or blank and subsequently filled in.

4. Whether the presentation of cheques with altered dates and amounts beyond the prescribed three-month period from the date of issue is valid under Section 138 N.I. Act.

5. Whether the reason for dishonour being "Drawers signature differs" as opposed to "Insufficiency of funds" affects the maintainability of proceedings under Section 138 N.I. Act.

6. The applicability and interpretation of statutory provisions, including Sections 14, 17, 33, 35, and 238 of the IBC, and Sections 138, 141, 142, and 20 of the N.I. Act, in the context of insolvency proceedings and criminal liability.

Issue-wise Detailed Analysis:

1. Maintainability of Section 138 N.I. Act proceedings against a corporate debtor undergoing CIRP:

The legal framework includes Section 14 IBC which imposes a moratorium prohibiting institution or continuation of suits or proceedings against the corporate debtor during CIRP. Section 33 IBC allows for liquidation if no resolution plan is approved. Section 238 IBC provides for overriding effect over other laws.

The Court noted the admission of CIRP against the petitioner company on 17.01.2017 and imposition of moratorium. It was established that the management and control of the company's affairs were suspended and vested in the RP, later the Liquidator. The RP had informed the banks and the complainant about the moratorium and the status of the company.

Reliance was placed on the Supreme Court decision in P. Mohanraj & Ors. vs. Shah Brothers Ispat Pvt. Ltd., which held that while proceedings under Section 138 N.I. Act cannot be initiated or continued against the corporate debtor during CIRP, the natural persons (directors) may still be prosecuted. The Court observed that the complaint under Section 138 was filed after the CIRP had commenced and moratorium was in place, thus no cause of action existed against the company.

The Court held that the moratorium under Section 14 IBC bars initiation or continuation of proceedings under Section 138 N.I. Act against the corporate debtor, and the complaint filed by the complainant was barred.

2. Liability of Directors under Section 138 N.I. Act during CIRP:

Section 141 N.I. Act provides for vicarious liability of directors or persons in charge of the company for offences committed by the company. The Court examined the principles laid down in Aneeta Handa v. Godfather Travels & Tours (P) Ltd. and Sunil Bharti Mittal v. CBI, which emphasize that vicarious liability arises only when the company is found liable. The directors can be prosecuted only if there is evidence of their active role and criminal intent.

The Court noted that after CIRP commencement, the directors ceased to have control over the company's affairs, which were vested in the RP/Liquidator. The directors had no authority to issue cheques or manage the company's bank accounts. The Court also relied on Vishnoo Mittal v. Shakti Trading Co., where proceedings against directors were quashed when demand was raised after moratorium.

Therefore, the Court concluded that since the company itself could not be proceeded against due to moratorium, no vicarious liability could be imposed on the directors, and the summoning order against them was not maintainable.

3. Applicability of Section 138 N.I. Act to security cheques issued years earlier:

The petitioners contended that the cheques were security cheques issued in 2009, undated or blank, and thus could not attract Section 138 N.I. Act as no debt or liability existed at the time of issuance, and the cheques were presented beyond three months from the date of issue.

The Court referred to the Apex Court decision in Sripati Singh v. State of Jharkhand, which clarified that security cheques are given to secure future liabilities and can be presented when a liability arises. The three-month period for presentation runs from the date on the cheque, not the date of issuance.

Further, Section 20 N.I. Act was cited, which holds the drawer liable for signed blank cheques subsequently filled in by the holder. The Court also referred to Bir Singh v. Mukesh Kumar, which affirmed that signed blank cheques attract the presumption under Section 139 N.I. Act unless rebutted by cogent evidence.

Since the cheques were signed by authorised persons of the company and the complainant alleged existing debt on the date of presentation, the Court rejected the contention that Section 138 N.I. Act was not attracted.

4. Validity of presentation of cheques beyond three months from date of issue:

The Court clarified that the limitation period of three months for presenting cheques under Section 138 N.I. Act runs from the date mentioned on the cheque, not from the date of issuance. Since the cheques were presented within three months of the date filled in (08.05.2017), the presentation was valid.

5. Effect of dishonour reason "Drawers signature differs" on maintainability:

The return memo indicated dishonour due to "Drawers signature differs" rather than "Insufficiency of funds." The Court noted that Section 138 N.I. Act requires dishonour due to insufficiency of funds or amount exceeding arrangement. Since dishonour was on signature mismatch, the complaint was not maintainable on this ground as well.

6. Treatment of reliance on Companies Act, 1956 and other precedents:

The Court rejected reliance on the decision under Companies Act, 1956, noting that the IBC has replaced earlier company laws and has overriding effect. The Court emphasized that the moratorium and suspension of management under IBC must be respected, and criminal proceedings against the company during CIRP are barred.

Conclusions:

The Court set aside the summoning order dated 09.04.2018 against the petitioner company and its directors, discharging them from the complaint under Section 138 N.I. Act. The Court held that:

• Proceedings under Section 138 N.I. Act cannot be initiated or continued against a corporate debtor undergoing CIRP during moratorium.
• Directors cannot be held vicariously liable under Section 141 N.I. Act in the absence of company's liability and when they have no control due to moratorium.
• Security cheques issued as security for future liabilities attract Section 138 N.I. Act if dishonoured upon presentation within three months of date on cheque.
• Presentation of cheques beyond three months from date of issuance but within three months from date on cheque is valid.
• Dishonour on grounds other than insufficiency of funds does not sustain a complaint under Section 138 N.I. Act.

The petitions were allowed and the accused were discharged.

Significant Holdings:

"A cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance. 'Security' in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment... if the loan amount is not repaid in any other form before the due date... the cheque which is issued as security would mature for presentation and the drawee of the cheque would be entitled to present the same. On such presentation, if the same is dishonoured, the consequences contemplated under Section 138 and the other provisions of the NI Act would flow." (Para 29)

"Section 20 NI Act therefore, holds the drawer responsible if subsequently the Blank cheque given by the Drawer is used by the drawee to whom it was given, and he cannot per se deny his liability in respect of such cheque." (Para 34)

"Once the proceedings have been commenced under IBC, no proceedings under Section 138 of N.I. Act, can be commenced or continued against the Corporate debtor/Company. The second aspect is that the proceedings under Section 138 N.I. Act, may be continued against the natural persons mentioned in Section 141 N.I. Act." (Para 43)

"Applying the doctrine of strict construction, we are of the considered opinion that commission of offence by the company is an express condition precedent to attract the vicarious liability of others... One cannot be oblivious of the fact that the company is a juristic person and it has its own respectability." (Para 46)

"When the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect... an individual who has perpetrated the commission of an offence on behalf of a company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent." (Para 47)

"The bare reading of the above provision shows that the appellant did not have the capacity to fulfil the demand raised by the respondent by way of the notice issued under clause (c) of the proviso to Section 138 NI Act. When the notice was issued to the appellant, he was not in charge of the corporate debtor as he was suspended from his position as the director of the corporate debtor as soon as IRP was appointed... All the bank accounts of the corporate debtor were operating under the instructions of the IRP, hence, it was not possible for the appellant to repay the amount in light of section 17 of the IBC." (Para 52)