AJAY KUMAR RADHEYSHYAM GOENKA versus TOURISM FINANCE CORPORATION OF INDIA LTD.

[2023] 4 S.C.R.

AAJAY KUMAR RADHEYSHYAM GOENKA

TOURISM FINANCE CORPORATION OF INDIA LTD.

(Criminal Appeal No. 172 of 2023)

MARCH 15, 2023

[SANJAY KISHAN KAUL, ABHAY S. OKA ANDJ. B. PARDIWALA, JJ.]

Insolvency and Bankruptcy Code 2016 – ss. 1(3), 7, 8, 9, 13,C14, 15, 29, 30, 31, 32A, 53, 61, 238 – Insolvency and Bankruptcy(Application to Adjudicating Authority) Rules, 2016 – Rule 6 –Negotiable Instruments Act, 1881 – ss. 138, 139, 141, 142, 147 –Code of Criminal Procedure, 1973 – ss. 190, 200, 256, 257, 305,482 – demand-cum-legal notice u/s. 138 of the NI Act was issuedon behalf of the respondent calling upon the company as accusedDno.1 and appellant herein as accused no.2 to settle the debt advancedby way of corporate loan – Amount was not paid – Criminalcomplaint was filed u/s.190 Cr.P.C. r/w. ss.138, 141 and 142 of theNI Act – One company, styling itself as ‘operational creditor’, filedan application u/s. 9 of 2016 Code r/w. r. 6 of IB Rules, 2016 withEthe request to initiate CIRP against the accused company, treatingit as the corporate debtor – Insolvency application was admitted –Application filed for discharge of complaint case by appellant wasdismissed – Criminal revision was also dismissed – On appeal, held:Per Sanjay Kishan Kaul, J. (For himself and Abhay S. Oka,J. ): Abare reading of s.14 of the IBC would make it clear that the natureFof proceedings which have to be kept in abeyance do not includecriminal proceedings, which is the nature of proceedings u/s. 138of the N.I. Act – It cannot be said that the process under the IBCwhether u/s. 31 or ss. 38 to 41 which can extinguish the debt wouldipso facto apply to the extinguishment of the criminal proceedingsG– The Court cannot accept the plea that if proceedings against thecompany come to an end then the appellant as the ManagingDirector cannot be proceeded against – Per J.B. Pardiwala, J.(Concurring): Where the proceedings u/s. 138 of the NI Act hadalready commenced with the Magistrate taking cognizance uponthe complaint and during the pendency, the company gets dissolved,H

the signatories/directors cannot escape from their penal liability u/s. 138 of the NI Act by citing its dissolution – What is dissolved, isonly the company, not the personal penal liability of the accusedcovered u/s. 141 of the NI Act – After passing of the resolution planu/s. 31 of the IBC by the adjudicating authority & in the light of theprovisions of s.32A of the IBC, the criminal proceedings u/s. 138 ofthe NI Act will stand terminated only in relation to the corporatedebtor if the same is taken over by new management – s.138proceedings in relation to the signatories/directors who are liable/covered by the two provisos to s. 32A(1) will continue in accordancewith law.

Dismissing the appeals, the Court

Per SANJAY KISHAN KAUL, J. (For himself and ABHAYS. OKA, J.)

HELD: 1. bare reading of Section 14 of the IBC wouldmake it clear that the nature of proceedings which have to bekept in abeyance do not include criminal proceedings, which isthe nature of proceedings under Section 138 of the N.I. Act. Itcannot be said that the process under the IBC whether underSection 31 or Sections 38 to 41 which can extinguish the debtwould ipso facto apply to the extinguishment of the criminalproceedings. No doubt in terms of the Scheme under the IBCthere are sacrifices to be made by parties to settle the debts, thecompany being liquidated or revitalized. The Appellant has beenroped in as signatory of the cheque as well as the Promoter andManaging Director of the Accused company, which availed of theloan. The loan agreement was also signed by him on behalf of thecompany. What the Appellant seeks is escape out of criminalliability having defaulted in payment of the amount at very earlystage of the loan. In fact, the loan account itself was closed. Somuch for the bona fides of the Appellant. [Paras 16 and 17][997-D-E, G-H; 998-A-B]

Per J.B. PARDIWALA, J. (Concurring)

HELD: 1. Section 141 of the NI Act states that if the personcommitting an offence under Section 138 is company, everyperson who, at the time the offence was committed, was in chargeof, and was responsible to the company for the conduct of the

DEF

Abusiness of the company, as well as the company, shall be deemedto be guilty of the offence and shall be liable to be proceededagainst and punished accordingly. The expression “as well” isoccurring in Section 141 of the NI Act. This expression means“on par”. Therefore, the liability of such persons in charge ofand responsible to the company for the conduct of its business isBthus co-extensive. [Para 33][1007-H; 1008-A-B]

2. The creditor has no option but to join the process underthe IBC. Once the plan is approved, it would bind everyone underthe sun. The making of claim and accepting whatever share isallotted could be termed as an “Involuntary Act” on behalf of theCcreditor. The making of claim under the IBC and accepting thesame and not making any claim, will not make any difference inlight of Section 31 of the IBC. Both the situations will lead toSection 31 and the finality and binding value of the resolutionplan. At best, it could be said that from the cheque amount underDSection 138 of the NI Act, the amount received under theresolution plan may be deducted. [Paras 41, 42][1020-D-F]

3. It is true that by virtue of Section 238 of the IBC, theprovisions of the CrPC shall have effect notwithstanding anythinginconsistent therewith contained in any other law for the timeEbeing in force or any instrument having effect by virtue of anysuch law. But, no provision of the IBC bars the continuation ofthe criminal prosecution initiated against the directors andofficials. It is equally true that once the corporate debtor comesunder the resolution process, its erstwhile managing director(s)cannot continue to represent the company. Section 305(2) of theFCrPC states that where corporation is the accused person orone of the accused persons in an inquiry or trial, it may appoint arepresentative for the purpose of the inquiry or trial and suchappointment need not be under the seal of the corporation.Therefore, it is only the Resolution Professional who canGrepresent the accused company during the pendency of theproceedings under IBC. After the proceedings are over, eitherthe corporate entity may be dissolved or it can be taken over bya new management in which event the company will continue to

exist. When new management takes over, it will have to makearrangements for representing the company. If the company isdissolved as result of the resolution process, obviouslyproceedings against it will have to be terminated. But even then,its erstwhile directors may not be able to take advantage of thesituation. Where the proceedings under Section 138 of the NIAct had already commenced and during the pendency the plan isapproved or the company gets dissolved, the directors and theother accused cannot escape from their liability by citing itsdissolution. What is dissolved is only the company, not thepersonal penal liability of the accused covered under Section 141of the NI Act. They will have to continue to face the prosecutionin view of the law laid down in Aneeta Hada [Paras 49, 50 and52][1030-H; 1031-B-D; 1032-B-C]

4. While interpreting Sections 14, 31 & 32A resply of theIBC vis-a-vis Sections 138 and 141 resply of the NI Act, theprinciple of harmonious construction should be applied andfollowed. By permitting to proceed against the signatories/directors even after the approval of the plan, what is achieved isuniformity in the functioning of the law by removing the anomalousand absurd situations, thereby, making it compliant with Article14 of the Constitution. The said interpretation shields therelevant provisions from attack of being manifestly arbitrary. [Para54][1033-C-E]5. If the argument that extinguishment of debt under Section31 of the IBC leads to the discharge of signatory/director underSection 138 proceedings is accepted, the same will lead to conflictin law as laid down compared to the guarantor’s liability whereinin spite of the plan being approved, the guarantor is held separatelyliable for the remaining amount. If the guarantor does not get thebenefit of extinguishment of debt under Section 31 of the IBC,then similarly for extinguishment of debt, the signatory/directorcannot get any benefit. If accepted, this may lead to uncertaintyin the first Principles of law on interpretation of extinguishmentof debt. [Para 60][1034-G-H; 1035-A-B]

6. Section 30(2)(e) of the IBC requires the resolutionprofessional to approve the resolution plan, only if the same does

Anot violate any of the provisions of the law for the time being inforce. Thus, the clauses of the resolution plan cannot control theEnactment/Rules in force. It is the resolution plan which has tocomply with the laws in force. In the case on hand, any clausegiving any effect to the corporate debtor under Section 138 NIAct proceedings, cannot be used to protect the signatories/Bdirectors under Section 138/141 NI Act. [Para 65][1039-F-G]

7. ‘Compounding’ and ‘quashing’ are not synonymousterms. In law, they have different meanings and consequences.They arise from different situations and operate in different fieldsand stages. There is no apparent legal interdependence orCinterlink to the extent that one could exist only if the conditionsof the other were satisfied or vice-versa. Quashing is one of thefacets of inherent powers, while compounding of an offence beinga statutory expression contained under Section 320 the CrPC isentirely different concept. [Para 71][1040-E-F]

8. The expressions ‘compromise’ and ‘compounding’ arenot synonyms in criminal jurisprudence even though theseexpressions are usually used without any distinction. Any disputecan be compromised between the parties if the terms are notillegal. But only compoundable offence allowed by law can beEcompounded. dispute relating to crime can be compromisedeven before the case is registered, and in that case, victim of thecrime may refuse to file complaint. But if in spite of compromise,if he files complaint and court finds that what is compromised isa compoundable offence, depending upon the facts andcircumstances of each case Magistrate can refuse to takeFcognizance, or acquit the accused as offence was compounded orthe complaint can be quashed in proceedings under Section 482of the CrPC. In compromise, consensus between the parties togive and take is more important and in compounding, decisionof the victim of the offence not to prosecute and not to continueGwith prosecution is more important. [Paras 72, 73][1040-F-H;1041-A-B]

9. As per Section 138 of the NI Act, when the cheque wasdishonoured and statutory notice demanding the cheque amountwas issued, the accused shall pay the cheque amount within 15

days from the date of receipt of the said notice. The moment thesaid 15 days expired, the cause of action arises. In other words,the offence under Section 138 of the NI Act is complete. Oncethe cause of action arose for the offence committed, thecomplainant has to approach the criminal court within one monthto take penal action under Section 138 of the NI Act. To put itclearly, the complainant approaches the criminal court not forrecovery of the legally enforceable debt, but for taking penal actionunder Section 138 of the NI Act for the offence already committedby the accused by not making the payment of the cheque amountdespite the receipt of the statutory notice. The only questionbefore the criminal court is whether the cheque issued by theaccused towards the discharge of his liability was dishonouredand despite the service of demand notice, whether he had notpaid the amount. There is no bar contained in any of the provisionsof the IBC, and the NI Act from approaching the criminal courtto seek penal action under Section 138 of the NI Act. [Para75][1041-C-F]

10. Thus, the upshot of all the decisions referred to aboveis where the proceedings under Section 138 of the NI Act hadalready commenced with the Magistrate taking cognizance uponthe complaint and during the pendency, the company getsdissolved, the signatories/directors cannot escape from theirpenal liability under Section 138 of the NI Act by citing itsdissolution. What is dissolved, is only the company, not thepersonal penal liability of the accused covered under Section 141of the NI Act. [Para 85][1051-G-H; 1052-A-B]

11. Final conclusions may be drawn as under: (a) Afterpassing of the resolution plan under Section 31 of the IBC by theadjudicating authority & in the light of the provisions of Section32A of the IBC, the criminal proceedings under Section 138 ofthe NI Act will stand terminated only in relation to the corporatedebtor if the same is taken over by new management. (b) Section138 proceedings in relation to the signatories/directors who areliable/covered by the two provisos to Section 32A(1) will continuein accordance with law. [Para 86][1052-B-D]

In the Judgment of J.B. PARDIWALA, J.:

Swiss Ribbons Private Limited and Another v. Union ofIndia and Others (2019) 4 SCC 17 : [2019] 3 SCR535; Committee of Creditors of Essar Steel India Limitedv. Satish Kumar Gupta and Others (2020) 8 SCC 531 :B[2019] 16 SCR 275; P. Mohanraj and Others v. ShahBrothers Ispat Private Limited (2021) 6 SCC 258; EbixSingapore Private Limited v. Committee of Creditors ofEducomp Solutions Limited and Another (2022) 2 SCC401; Lalit Kumar Jain v. Union of India and Others(2021) 9 SCC 321; Goa State Cooperative Bank LimitedCv. Krishna Nath A. and Others (2019) 20 SCC 38; StateBank of India v. V. Ramakrishnan and Another (2018)17 SCC 394 : [2018] 10 SCR 974; Vijay Kumar Jain v.Standard Chartered Bank (2019) 20 SCC 455; JIKIndustries Limited and Others v. Amarlal V. Jumani andDAnother (2012) 3 SCC 255 : [2012] 3 SCR 114;Narinder Garg and Others v. Kotak Mahindra BankLtd. and Others (2022) SCC OnLine SC 517 – reliedon.

Ajit Balse v. Ranga Karkere (2015) 15 SCC 748;EGhanashyam Mishra & Sons (P) Ltd. v. Edelweiss AssetReconstruction Co. Ltd., (2021) 9 SCC 657; ManishKumar v. Union of India and Another (2021) 5 SCC 1;Anil Hada v. Indian Acrylic Ltd. (2000) 1 SCC 1 : [1999]5 Suppl. SCR 6 – referred to.

FIndorama Synthetics (I) Ltd., Nagpur v. State ofMaharashtra and others 2016 SCC OnLine Bom 2611– referred to.

Case Law Reference

AJAY KUMAR RADHEYSHYAM GOENKA v. TOURISMFINANCE CORP. OF INDIA LTD.

CRIMINAL APPELLATE JURISDICTION: Criminal Appeal No.172 of 2023.

From the Judgment and Order dated 23.11.2019 of the AdditionalSessions Judge-02 South East District, Saket, New Delhi in Crl. Rev.No. 784 of 2019.

With

Crl. A. Nos.170 and 171 of 2023.

Nikhil Goel, Aditya Sharma, Kartik Kaushal, Manoj Rajpoot, Advs.for the Appellant.

Rajiv Ranjan Dwivedi, Ved Prakash, Manoj Kr. Jha, Ashish Kr.Singh, Sunil Kumar, Advs. for the Respondent.

The Judgments of the Court were delivered by

SANJAY KISHAN KAUL, J.

Factual Background:

1. M/s Rainbow Papers Limited (company incorporated andregistered under the Companies Act, 1956), of which Ajay KumarRadheyshyam Goenka, the Appellant before us, was the Promoter andManaging Director, sought loans from public financial institution, TourismFinance Corporation of India Limited, the Respondent before us, to fulfilits various corporate requirements. The proposal of the company wasconsidered by the Respondent and approval was granted for TermLoan of Rs. 30.00 crores. In pursuance to the approval, LoanAgreement was executed on 27.03.2012 in New Delhi.

2. In order to satisfy its obligations under the Agreement, theAccused company issued post-dated cheque of Rs. 25,47,945/- bearing

Acheque number 090656 dated 15.02.2016, drawn on Indian OverseasBank, Kalupur Circle Branch, Railway Pura, Ahmedabad, towards thepayment of one of the instalments. On the cheque being presented tothe bankers of the Respondent i.e., HDFC Bank Limited, Nehru PlaceBranch, New Delhi, the cheque was returned vide Memo dated07.04.2016 for the reason “Account Closed”.B3. On 19.04.2016, demand-cum-legal notice under Section 138of Negotiable Instruments Act, 1881, (hereinafter referred to as ‘the NIAct’) was issued on behalf of the Respondent calling upon the companyas Accused no.1 and the Appellant herein as Accused no. 2 to settle thedebt advanced by way of corporate loan dated 27.03.2012. The AccusedCacknowledged their liability to pay the loan amount vide reply dated28.04.2016. The amount was not paid and, thus, on 16.05.2016, CriminalComplaint No. 632982/2016 was filed in the Court of Chief MetropolitanMagistrate, Saket Courts, New Delhi, under Section 190 of the Code ofCriminal Procedure, 1973, read with Section 138[1], Section 141[2] andDSection 142[3] of the NI Act. The complaint was signed and verified byMr. N. Ramachandran, Deputy General Manager (Law) of theRespondent company. An endeavor for mediation was made but wasnot successful and, thus, the next date was scheduled before theMagistrate for 15.01.2018. In the meantime, development, which tookplace, was that in 2017 M/s Neeraj Paper Agencies Limited, stylingEitself as ‘Operational Creditor’, filed an application under Section 9 ofthe Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as‘IBC’) read with Rule 6 of Insolvency and Bankruptcy (Application toAdjudicating Authority) Rules, 2016, (hereinafter referred to as ‘IB Rules,2016’) with the request to initiate Corporate Insolvency ResolutionProcess against the Accused company, treating it as the ‘CorporateFDebtor’. The National Company Law Tribunal vide order dated12.09.2017 admitted the aforesaid insolvency application.

4. The Respondent herein filed its claim qua the debt, which wasthe subject matter of the N.I. Act proceedings, on 13.10.2017. In termsof the Resolution Plan dated 26.05.2018, the Resolution Applicant (KushalGLimited) filed the Resolution Plan and during the course of meeting theCommittee of Creditors on 05.06.2018, it was informed that therespondent herein could not be considered as Secured Financial Creditor

1 Dishonour of cheque for insufficiency, etc., of funds in the account.

2 Offences by companies.

H3 Cognizance of offences.

as per definitions contained in Section 3(30) and Section 3(31) of theIBC. In effect, on legal advice, the Respondent was opined as anUnsecured Financial Creditor. This resulted in the Respondent filingapplications, in the form of objections, before the NCLAT where thestatus was sought to be changed from the Unsecured to Secured FinancialCreditor.

5. Now turning back to the NIA proceedings, the MetropolitanMagistrate passed an interim order dated 12.11.2018 dismissing theapplication of the Appellant for exemption from personal appearance.This, in turn, was predicated on the observations of NCLAT in ShahBrothers Ispat Pvt. Ltd. Vs P. Mohan Raj &Ors, Company Appeal(AT) Insolvency No.306 of 2018, opining that Section 138 of NI Act isa penal provision, which empowers the court of competent jurisdictionto pass order of imprisonment or fine, which cannot be held to beproceedings or any judgment or decree of money claim. Thus, it wouldnot come within the purview of Section 14 of the IBC and, thus, theproceedings under Section 138 of the NI Act, 1881 could continuesimultaneously.

6. The Appellant, thus, filed an application for discharge of theComplaint Case in question herein in the present case, which wasdismissed by the Metropolitan Magistrate vide order dated 01.11.2019.The Criminal Revision Petition preferred by the Appellant bearingCriminal Revision Petition No. 784 of 2019 also met with similar fatebefore the High Court and was dismissed with cost of Rs. 20,000/- to bepaid by the Appellant to the Respondent. It is this order, which is now,sought to be assailed before us.

Appellant’s submissions:

7. Mr. Nikhil Goel, learned counsel, sought to urge on behalf ofthe appellant that the trigger of Section 138 of the NI Act, is the non-payment of legally enforceable debt. Once the debt is itself extinguished,either under Section 31 or in process from Sections 38 to 41 and 54 ofIBC, the basis of Section 138 of the NI Act disappears. We may notethat these provisions fall under Chapter III[4] of the IBC.

8. The term ‘Debt’ would mean ‘legally enforceable debt’ underthe Explanation to Section 138 of the NI Act and this may be read withSections 2(6) and 2(8) of the IBC.

4 Liquidation Process

A9. It was submitted that the nature of the proceedings under Section138 of the NI Act is primarily compensatory in nature and the punitiveelement is incorporated at enforcing the compensatory provisions.Therefore, once recovery is made partly by the receipt of money andpartly by waiver, Section 138 of the NI Act should not be permitted to becontinued.B

10. It was lastly urged that if the debt of the company is resolvedthen the payment would be governed under the Resolution Plan. If thedebts are not resolved, then the assets of the company are to be distributedin terms of Section 53 of the IBC.

CPlea of the Respondent:

11. On behalf of the Respondent, it was urged that the chequewas given for repayment of the aforementioned loan amount of Rs.30crore for which the accused company agreed to repay the principalamount in two installments with first installment of Rs.10 crore payableDon 31.03.2015 and the second installment of Rs.20 crore payable on31.03.2016. The accused company had to pay interest @ 15 per centper annum on the said principal amount of loan and such interest waspayable monthly on the 15[th] day of every month, which was in consonancewith the dates and the cheque amount.

E12. It was urged that the accused company along with the Appellantdeliberately and with the mala fide intention gave the cheque to defraudthe Respondent to take loan from it and subsequently to usurp the loanamount and hence had closed the bank account. The Appellant beingthe signatory was directly liable along with the accused company. TheAppellant was actively involved in the day to day affairs of the companyFas can be inferred from the aforementioned loan agreement signed byhim as well.

Our View:

13. We may note that on 20.09.2022 with some of the SLPs beingwithdrawn, in respect of the SLPs in question, the interim order wasGmade absolute with the direction for urgent listing as criminal proceedingshad been stayed. Learned counsel for the parties stated that they willfile short synopsis not running into more than three pages each and willnot take more than 15-20 minutes each for their respective submissions.On the conspectus of the aforesaid we heard the arguments onH17.01.2023 when we granted leave and reserved the judgment.

14. The Appellant had submitted the synopsis in advance. TheRespondent however, despite assuring that they would submit the synopsishas not cared to do so and we have gone on the basis of the record. Thisposition is prevalent right till 12.03.2023 and we do not consider itappropriate to wait any more. We assume that the Respondent is notinterested in rendering any further assistance to the Court by filingsynopsis. Fortunately for them, for the reasons to be recorded hereinafter,they have not really suffered the consequences thereof.

15. The issue whether the respondent is Secured FinancialCreditor or an Unsecured Financial Creditor within the meaning of thesaid Code is not something we can deal with as that is the matter of theproceedings under the said Code or any appeal preferred therefrom.The only issue with which we are concerned with is whether during thependency of the proceedings under the said Code which have beenadmitted, the present proceedings under the N.I. Act can continuesimultaneously or not.

16. We have no hesitation in coming to the conclusion that thescope of nature of proceedings under the two Acts and quite differentand would not intercede each other. In fact, bare reading of Section 14of the IBC would make it clear that the nature of proceedings whichhave to be kept in abeyance do not include criminal proceedings, whichis the nature of proceedings under Section 138 of the N.I. Act. We areunable to appreciate the plea of the learned counsel for the Appellantthat because Section 138 of the N.I. Act proceedings arise from defaultin financial debt, the proceedings under Section 138 should be taken asakin to civil proceedings rather than criminal proceedings. We cannotlose sight of the fact that Section 138 of the N.I. Act are not recoveryproceedings. They are penal in character. person may faceimprisonment or fine or both under Section 138 of the N.I. Act. It is nota recovery of the amount with interest as debt recovery proceedingswould be. They are not akin to suit proceedings.

17. It cannot be said that the process under the IBC whetherunder Section 31 or Sections 38 to 41 which can extinguish the debtwould ipso facto apply to the extinguishment of the criminal proceedings.No doubt in terms of the Scheme under the IBC there are sacrifices tobe made by parties to settle the debts, the company being liquidated orrevitalized. The Appellant before us has been roped in as signatory ofthe cheque as well as the Promoter and Managing Director of the Accused

Acompany, which availed of the loan. The loan agreement was also signedby him on behalf of the company. What the Appellant seeks is escapeout of criminal liability having defaulted in payment of the amount at avery early stage of the loan. In fact, the loan account itself was closed.So much for the bona fides of the Appellant.

B18. We are unable to accept the plea that if proceedings againstthe company come to an end then the Appellant as the Managing Directorcannot be proceeded against. We are unable to accept the plea thatSection 138 of the N.I. Act proceedings are primarily compensatory innature and that the punitive element is incorporated only at enforcing thecompensatory proceedings. The criminal liability and the fines are builtCon the principle of not honouring negotiable instrument, which affectstrade. This is apart from the principle of financial liability per se. To saythat under scheme which may be approved, part amount will berecovered or if there is no scheme person may stand in queue torecover debt would absolve the consequences under Section 138 of the

DN.I. Act, is unacceptable.

19. We are, thus, conclusively of the view that the impugned ordertakes the correct view in law and cannot be assailed before us.

Conclusion:

E20. The appeals are accordingly dismissed but without costs beforeus on account of what we have recorded in para 14.

J. B. PARDIWALA, J.

1. I have carefully, gone through the perspicuous opinion of myFesteemed brother Sanjay Kishan Kaul, J. I am entirely in agreementwith the discussion contained in the said judgment on all the cardinalissues that have arisen for consideration in these proceedings. At thesame time, having regard to the fact that the issues involved are ofseminal importance, I am also inclined to pen down my thoughts.

2. For the sake of convenience, the Criminal Appeal No. 170 of2023 (@ SLP (Crl) No. 417 of 2020) is treated as the lead matter.

3. This appeal by special leave is at the instance of the originalaccused No. 2 in complaint lodged by the respondent herein (originalcomplainant) for the offence punishable under Section 138 of theH

Negotiable Instruments Act, 1881 (for short, ‘the NI Act’) and is directedagainst the order passed by the Additional Sessions Judge-02 South EastDistrict, Saket Court, New Delhi dated 23.11.2019 in the CriminalRevision Application No. 593 of 2019 by which the Additional SessionsJudge affirmed the order passed by the Metropolitan Magistrate – 09,SED dated 01.11.2019 rejecting the application filed by the appellantherein seeking discharge from the criminal proceedings i.e. ComplaintCase No. 632984 of 2016 instituted by the respondent-complainant underSection 138 of the NI Act.

4. It is necessary to clarify why the appellant challenged theimpugned order passed by the Additional Sessions Judge directly beforethis Court invoking Article 136 of the Constitution of India. In this regard,the following averments made in the synopsis are reproduced hereinbelow:

“The petitioner is directly approaching this Hon’ble Court,because the first two facets are already being considered bythis Hon’ble Court, in which view, the Hon’ble High Court isnot likely to entertain quashing petition. This apart, petitionbefore any other court is likely to result in conflicting ordersand would be an exercise in futility. The earlier matterspending before this Hon’ble Court also arose directly out ofthe summons issued by the concerned Learned Magistrate.”

FACTUAL MATRIX

5. The respondent herein, namely, the “Tourism FinanceCorporation of India Limited” (hereinafter shall be referred to as, ‘thecomplainant’), had advanced sum of Rs. 30,00,00,000/- (thirty crore)as corporate loan to the Rainbow Papers Limited (Original AccusedNo. 1/corporate debtor). The appellant herein at the relevant point oftime was the Managing Director of the company i.e. the corporate debtor.The transaction between the parties took place on 31.03.2012. It appearsthat an amount of Rs. 10.88 crore came to be repaid before the disputesarose between the parties. Sometime in 2016, the complainant issued anotice to the corporate debtor to settle the balance amount. On 16.05.2016,a complaint was lodged under Section 138 of the NI Act by thecomplainant against the corporate debtor and the appellant herein(Managing Director of the Corporate Debtor) for dishonour of the threecheques issued by the appellant herein for discharge of the debt in partto the tune of Rs. 57,00,000/- (fifty-seven lakhs).

A6. The aforesaid complaint under Section 138 of the NI Act wasregistered in the Court of the Chief Metropolitan Magistrate, Saket Court,New Delhi.

7. In 2017, one of the operational creditors filed an applicationunder Section 9 of the Insolvency and Bankruptcy Code, 2016 (for short,B‘the IBC’ or ‘the IBC, 2016’) before the NCLT, Ahmedabad, seeking toinitiate Corporate Insolvency Resolution Process (for short, ‘the CIRP’)with respect to the corporate debtor.

8. The Insolvency application came to be admitted by the NCLTon 12.09.2017.C9. On 3.10.2017, the complainant filed its claim of Rs. 22,50,00,000/

9. On 3.10.2017, the complainant filed its claim of Rs. 22,50,00,000/- crore (approximately) before the Interim Resolution Professional (forshort, ‘the IRP’).

10. On 26.05.2018, the resolution applicant filed its resolution planunder the terms of which, the payment to the complainant was in fullDand final settlement of all its claims against the corporate debtor.

11. On 05.06.2018, the Committee of Creditors (for short, ‘theCoC’) approved the resolution plan proposed by the resolution applicant.The complainant was one of the members of the CoC.

12. On 23.07.2018, the complainant lodged his objections beforeEthe NCLT to the resolution plan in so far as it changed its status fromsecured to unsecured creditor.

13. It appears that in the meantime, the appellant preferred anapplication before the trial court seeking exemption from his personalappearance invoking moratorium under Section 14 of the IBC. TheFMagistrate vide order dated 12.11.2018 rejected the said application onthe ground that the criminal proceedings under the NI Act had nothing todo with the proceedings under the IBC.

14. On 27.02.2019, the NCLT approved the resolution plan so faras the corporate debtor is concerned.

15. As the resolution plan came to be approved by the NCLT, theappellant herein filed an application dated 20.07.2019 before the trialcourt, praying that he be discharged from the criminal proceedings. Thecase of the appellant herein before the Magistrate was that as the debtstood settled in the proceedings under the IBC, the criminal proceedingswould not survive.H

16. The trial court vide order dated 01.11.2019 rejected theaforesaid application essentially on the ground that it had no jurisdictionto discharge an accused in summons triable case.

17. In view of the aforesaid, the appellant herein filed the CriminalRevision Application No. 593 of 2019 before the Additional SessionsCourt, challenging the order passed by the Magistrate dated 01.11.2019referred to above. The appellant contended before the revisional courtthat as the debt in connection with which the criminal proceedings hadbeen initiated, formed part of the approved resolution plan the outstandingdebt under the NI Act could be said to have stood settled.

18. The Additional Judge vide the impugned order dated 23.11.2019rejected the Revision Application.

19. In such circumstances, referred to above, the appellant is herebefore this Court with the present appeal.

THE SUBMISSIONS ON BEHALF OF THE APPELLANT

20. Mr. Nikhil Goel, the learned counsel appearing for the appellantmade the following submissions:

A.The trigger of Section 138 of the NI Act, is the non-paymentof legally enforceable debt. Once the debt itself getsextinguished either under Section 31 of the IBC or in theEprocess from Sections 38 to 41 and 54 resply of the IBC,the basis of Section 138 of the NI Act no longer remains.The term debt would mean the ‘legally enforceable debt’under the explanation to Section 138 of the NI Act. Thismay be read with Section 2(6) & 2(8) resply of the IBC.

B.The liability is primarily of the company and prosecution ofnatural persons under Section 141 of the NI Act is vicariousto the prosecution of the company. It is for this reason thata director cannot be prosecuted without making thecompany as an accused. [See Ajit Balse v. RangaKarkere: (2015) 15 SCC 748.]

C.The nature of proceedings under Section 138 of the NI Actis primarily compensatory and the punitive element isincorporated at enforcing the compensatory provisions.(paras 53 & 63 resply in P. Mohanraj and Others v. ShahBrothers Ispat Private Limited reported in (2021) 6 SCC

A258). Therefore, once recovery is made, partly by receiptof money and partly by waiver, Section 138 of the NI Actshould not be permitted to be continued.

D.If the debt of the company is resolved then payments wouldbe governed under the resolution plan. If the debts are notBresolved then the assets of the company are to be distributedin terms of Section 53 of the IBC. Permitting twoproceedings to continue would therefore defeat eitherSection 31 or Section 53 of the IBC, as the case may be.

E.Mr. Goel submitted that this Court in P. Mohanraj (supra)Cconsidered the position of law as regards the continuationof the criminal proceedings under Section 138 of the NIAct vis-a-vis the proceedings under the IBC and answeredthe same in para 102 of the judgment. It was pointed out byMr. Goel that this Court drew fine distinction betweenthe corporate debtor and natural persons & ultimately heldDthat while corporate debtor would be protected fromSection 138 proceedings during the period of moratorium,the natural persons would not enjoy such protection andSection 138 proceedings would continue against the naturalpersons. However, according to Mr. Goel, this Court mayEnot go in the correctness of such bifurcation as in the caseon hand, the proceedings are beyond the period ofmoratorium. Mr. Goel pointed out that the question framedin para 6 of the decision in P. Mohanraj (supra) is restrictedonly to the applicability of Section 14 of the IBC to theproceedings under Section 138 of the NI Act.F

F.The principal argument of Mr. Goel is that if the IBCproceedings have travelled beyond Section 14, the processwould either lead to acceptance of resolution plan underSection 31 of the IBC or liquidation of the company afterdetermination of the claims under Chapter III of the IBC.GAccording to Mr. Goel, Section 31 of the IBC is applicableto the present litigation.

21. In such circumstances referred to above, Mr. Goel prays thatthere being merit in his appeal, the same may be allowed and the appellantmay be discharged from the criminal liability under Section 138 of theHNI Act.

THE SUBMISSIONS ON BEHALF OF THE RESPONDENT(COMPLAINANT)

22. On the other hand, this appeal has been vehemently opposedby Mr. Rajiv Ranjan Dwivedi, the learned counsel appearing for thecomplainant by submitting that in the case on hand, the criminalproceedings under the NI Act were initiated much before the proceedingsunder the IBC came to be initiated. In other words, cognizance wastaken by the learned Magistrate upon the complaint filed under Section138 of the NI Act much before the scheme came to be approved underthe IBC. He would submit that the offence alleged to have beencommitted by the appellant herein prior to the scheme would not getautomatically compounded only as result of the said scheme. He wouldfurther submit that none of the provisions of the IBC bars the continuationof the criminal prosecution initiated against the corporate debtor or itsdirectors or officials. According to the learned counsel, if the companyis dissolved as result of the resolution process, the criminal proceedingsagainst it would stand terminated, however, the signatory to the chequeor its erstwhile directors are not entitled in law to take advantage ofsuch situation created by operation of law.

23. The learned counsel appearing for the complainant, laid muchstress on Section 32A of the IBC, which states that every person whowas ‘designated partner’ or an ‘officer who is in default’ or was in anymanner in charge of/responsible to the corporate debtor for the conductof its business or associated with the corporate debtor in any mannerand who was directly or indirectly involved in the commission of suchoffence in accordance with the report submitted or complaint filed bythe investigating authority shall continue to be liable to be prosecutedand punished for such an offence committed by the corporate debtornotwithstanding that the corporate debtor’s liability has ceased underthe provision of Section 32A of the IBC.

24. In such circumstances, referred to above, the learned counselprays that there being no merit in the present appeal, the same may bedismissed.

ANALYSIS

25. Having heard the learned counsel appearing for the partiesand having gone through the materials on record, the seminal question oflaw that falls for the consideration of this Court may be formulated asunder:

Whether in light of:

(i)the complainant having participated in the proceedings underthe IBC, 2016 by putting forward its claim and consentingto accept some share as creditor; coupled with

(ii)the approval of the resolution plan under Section 31 of theBIBC, 2016; the signatory/director in charge of the day-to-day affairs would stand discharged/relieved from the penalliability under Section 138 of the NI Act?

26. Before adverting to the rival submissions canvassed on eitherside, it is necessary to look into few relevant provisions of the NI Act asCwell as IBC, 2016.

27. Section 138 of the NI Act reads thus:

“138. Dishonour of cheque for insufficiency, etc., of funds inthe account.—

DWhere any cheque drawn by person on an accountmaintained by him with banker for payment of any amountof money to another person from out of that account for thedischarge, in whole or in part, of any debt or other liability,is returned by the bank unpaid, either because of the amountof money standing to the credit of that account is insufficientEto honour the cheque or that it exceeds the amount arrangedto be paid from that account by an agreement made with thatbank, such person shall be deemed to have committed anoffence and shall, without prejudice to any other provisionof this Act, be punished with imprisonment for term whichFmay be extended to two years, or with fine which may extendto twice the amount of the cheque, or with both:Provided that nothing contained in this section shall applyunless—

(a) the cheque has been presented to the bank within aperiod of six months from the date on which it is drawn orwithin the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, asthe case may be, makes demand for the payment of thesaid amount of money by giving notice in writing, to the

drawer of the cheque, within thirty days of the receipt ofinformation by him from the bank regarding the return ofthe cheque as unpaid; and

(c) the drawer of such cheque fails to make the paymentof the said amount of money to the payee or, as the casemay be, to the holder in due course of the cheque, withinfifteen days of the receipt of the said notice.

Explanation.— For the purposes of this section, “debt ofother liability” means legally enforceable debt or otherliability.”

28. Section 139 of the NI Act raises presumption. The same reads

thus:

“139. Presumption in favour of holder.— It shall be presumed,unless the contrary is proved, that the holder of chequereceived the cheque of the nature referred to in section 138for the discharge, in whole or in part, of any debt or otherliability.”

29. Section 141 of the NI Act fastens vicarious liability upon everyperson, who at the time of the offence, was in charge of and wasresponsible to the company for the conduct of the business of thecompany. Section 141 reads thus:

“141. Offences by companies.— (1) If the person committingan offence under section 138 is company, every personwho, at the time the offence was committed, was in charge of,and was responsible to, the company for the conduct of thebusiness of the company, as well as the company, shall bedeemed to be guilty of the offence and shall be liable to beproceeded against and punished accordingly:

Provided that nothing contained in this sub-section shallrender any person liable to punishment if he proves that theoffence was committed without his knowledge, or that he hadexercised all due diligence to prevent the commission of suchoffence:

Provided further that where person is nominated as aDirector of company by virtue of his holding any office oremployment in the Central Government or State Government

Aor financial corporation owned or controlled by the CentralGovernment or the State Government, as the case may be, heshall not be liable for prosecution under this Chapter.

(2) Notwithstanding anything contained in sub-section (1),where any offence under this Act has been committed by aBcompany and it is proved that the offence has been committedwith the consent or connivance of, or is attributable to, anyneglect on the part of, any director, manager, secretary orother officer of the company, such director, manager, secretaryor other officer shall also be deemed to be guilty of thatoffence and shall be liable to be proceeded against andCpunished accordingly.

Explanation.— For the purposes of this section, —

(a) “company” means any body corporate and includes afirm or other association of individuals; and

D(b) “director”, in relation to firm, means partner in thefirm.”30. Section 142 of the NI Act is in regard to the cognizance ofoffence. The same reads thus:

“142. Cognizance of offences.— (1) Notwithstanding anythingEcontained in the Code of Criminal Procedure, 1973 (2 of1974),

(a) no court shall take cognizance of any offence punishableunder section 138 except upon complaint, in writing, madeby the payee or, as the case may be, the holder in due courseFof the cheque;

(b) such complaint is made within one month of the date onwhich the cause of action arises under clause (c) of the provisoto section 138:

Provided that the cognizance of complaint may be taken byGthe Court after the prescribed period, if the complainantsatisfies the Court that he had sufficient cause for not makinga complaint within such period.

(c) no court inferior to that of Metropolitan Magistrate ora Judicial Magistrate of the first class shall try any offenceHpunishable under section 138.

(2) The offence under section 138 shall be inquired into andtried only by court within whose local jurisdiction,—

(a) if the cheque is delivered for collection through an account,the branch of the bank where the payee or holder in duecourse, as the case may be, maintains the account, is situated;or

(b) if the cheque is presented for payment by the payee orholder in due course, otherwise through an account, thebranch of the drawee bank where the drawer maintains theaccount, is situated.

Explanation.— For the purposes of clause (a), where chequeis delivered for collection at any branch of the bank of thepayee or holder in due course, then, the cheque shall bedeemed to have been delivered to the branch of the bank inwhich the payee or holder in due course, as the case may be,maintains the account.”

31. Section 147 of the NI Act provides that the offence under theNI Act shall be compoundable. Section 147 reads thus:

“147. Offences to be compoundable.— Notwithstandinganything contained in the Code of Criminal Procedure, 1973(2 of 1974), every offence punishable under this Act shall becompoundable.”

32. The offence under Section 138 of the NI Act, is committed,after the conditions set out therein are fulfilled. Thereafter, the payee ofthe cheque has the option of prosecuting the drawer of the cheque byinstituting complaint under Section 200 of the Code of CriminalProcedure, 1973 (for short, ‘the CrPC’) before the jurisdictional criminalcourt. After cognizance of the offence is taken, the criminal court isseized of the matter. The case will have to be disposed of in terms of theprovisions set out in the CrPC. If the complainant fails to turn up on anyhearing date, the Magistrate can invoke Section 256 of the CrPC andacquit the accused. Under Section 257 of the CrPC, the complaint canbe withdrawn at any point of time before the final order is passed. UnderSection 147 of the NI Act the offence can be compounded. The casemay end in acquittal or conviction at the conclusion of the trial.

33. Section 141 of the NI Act states that if the person committingan offence under Section 138 is company, every person who, at the

Atime the offence was committed, was in charge of, and was responsibleto the company for the conduct of the business of the company, as wellas the company, shall be deemed to be guilty of the offence and shall beliable to be proceeded against and punished accordingly. The expression“as well” is occurring in Section 141 of the NI Act. This expressionmeans “on par”. Therefore, the liability of such persons in charge of andBresponsible to the company for the conduct of its business is thus co-extensive.

SCHEME OF THE IBC, 2016

34. I shall now try to understand the scheme of the IBC.C35. It is comprehensive Code enacted, as the Preamble states,to “consolidate and amend the laws relating to reorganisation andinsolvency resolution of corporate persons, partnership firms andindividuals in time bound manner for maximisation of value ofassets of such persons, to promote entrepreneurship, availability ofDcredit and balance the interests of all the stakeholders includingalteration in the order of priority of payment of Government duesand to establish an Insolvency and Bankruptcy Board of India,and for matters connected therewith or incidental thereto”.36. The Statement of Objects and Reasons of the IBC indicatesEthat the Legislature was of the opinion that the existing framework forinsolvency and bankruptcy was inadequate and ineffective and resultedin undue delays in resolution. The IBC was proposed with the objectiveof consolidating and amending the laws relating to reorganisation andinsolvency resolution of corporate persons, partnership firms andindividuals in time bound manner for maximisation of the value ofFassets of such persons, to promote entrepreneurship, availability ofcredit and balance the interests of all the stakeholders, includingalteration in the priority of payment of Government dues and to establishan Insolvency and Bankruptcy Fund, and matters connected therewithor incidental thereto. The IBC provides for designating the NCLT andGthe Debts Recovery Tribunal (DRT) as the adjudicating authorities forcorporate persons, firms and individuals for resolution of insolvency,liquidation and bankruptcy. The IBC was published in the Gazette ofIndia dated 28.05.2016. Provisions of the IBC were, however, broughtinto effect from different dates in terms of the proviso to Section 1(3)of the IBC.H

37. Section 7 of IBC lays down the procedure for the initiation ofthe corporate insolvency resolution process by the financial creditor orany other person or more financial creditors jointly. The financial creditormay file an application before the adjudicating authority along with theproof of default and the name of resolution professional proposed toact as the interim resolution professional in respect of the corporatedebtor. Once the adjudicating authority is satisfied, as to the extent ofthe default and is ensured that the application is complete and nodisciplinary proceedings are pending against the proposed resolutionprofessional, it shall admit the application.

38. Section 8 of the IBC provides that an operational creditormay, on the occurrence of default, deliver demand notice of unpaidoperational debt or copy of an invoice demanding payment of the amountinvolved in the default to the corporate debtor in such form and manneras may be prescribed.

39. Section 9 of the IBC stipulates that after the expiry of theperiod of 10 days from the date of delivery of the notice or invoicedemanding payment under sub-section (1) of Section 8 if the operationalcreditor does not receive payment from the corporate debtor or noticeof the dispute under sub-section (2) of Section 8, it would be open forthe operational creditor to file an application before the adjudicatingauthority for initiating corporate insolvency resolution process.

40. After the initiation of the CIRP the following takes place:

(a) All the creditors are mandatorily required to put forward theirclaims before the CIRP in light of the public announcement.

(b) In the aforesaid context, I must look into Sections 13 and 15resply of the IBC.

Sections 13 and 15 resply are reproduced hereinbelow:

“13. Declaration of moratorium and public announcement.—(1) The Adjudicating Authority, after admission of theapplication under section 7 or section 9 or section 10, shall,by an order—

(a) declare moratorium for the purposes referred to in section14;

(b) cause public announcement of the initiation of corporateinsolvency resolution process and call for the submission ofclaims under section 15; and

(c) appoint an interim resolution professional in the manneras laid down in section 16.

(2) The public announcement referred to in clause (b) of sub-section (1) shall be made immediately after the appointmentof the interim resolution professional.

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xxx

15. Public announcement of corporate insolvency resolutionprocess.—

(1) The public announcement of the corporate insolvencyCresolution process under the order referred to in section 13shall contain the following information, namely:—

(a) name and address of the corporate debtor under thecorporate insolvency resolution process;

(b) name of the authority with which the corporate debtorDis incorporated or registered;

(c) the last date for submission of [claims, as may bespecified];

(d) details of the interim resolution professional who shallbe vested with the management of the corporate debtorEand be responsible for receiving claims;

(e) penalties for false or misleading claims; and

(f) the date on which the corporate insolvency resolutionprocess shall close, which shall be the one hundred andFeightieth day from the date of the admission of theapplication under sections 7, 9 or section 10, as the casemay be.

(2) The public announcement under this section shall be madein such manner as may be specified.”G(c) It is important to note that the resolution professional has no

G(c) It is important to note that the resolution professional has noadjudicatory powers in regard to the claims unlike the liquidator. Theresolution professional only collates the claims. In this regard, the decisionof this Court in the case of Swiss Ribbons Private Limited and Anotherv. Union of India and Others reported in (2019) 4 SCC 17 assumesimportance. I quote paras 88-91 of Swiss Ribbons (supra) as under:H

Resolution professional has no adjudicating powers

“88. It is clear from reading of the Code as well as theRegulations that the resolution professional has noadjudicatory powers. Section 18 of the Code lays down theduties of an interim resolution professional as follows:

“18. Duties of interim resolution professional.—(1) Theinterim resolution professional shall perform the followingduties, namely—

(a) collect all information relating to the assets, financesand operations of the corporate debtor for determiningthe financial position of the corporate debtor, includinginformation relating to—

(i) business operations for the previous two years;

(ii) financial and operational payments for theprevious two years;

(iii) list of assets and liabilities as on the initiationdate; and

(iv) such other matters as may be specified;

(b) receive and collate all the claims submitted bycreditors to him, pursuant to the public announcementmade under Sections 13 and 15;

(c) constitute Committee of Creditors;

(d) monitor the assets of the corporate debtor andmanage its operations until resolution professional isappointed by the Committee of Creditors;

(e) file information collected with the information utility,if necessary; and

(f) take control and custody of any asset over whichthe corporate debtor has ownership rights as recordedin the balance sheet of the corporate debtor, or withinformation utility or the depository of securities or anyother registry that records the ownership of assetsincluding—

(i) assets over which the corporate debtor hasownership rights which may be located in foreigncountry;

(ii) assets that may or may not be in possession ofthe corporate debtor;

(iii) tangible assets, whether movable or immovable;

(iv) intangible assets including intellectual property;

(v) securities including shares held in any subsidiaryof the corporate debtor, financial instruments,insurance policies;

(vi) assets subject to the determination of ownershipby court or authority;

(g) to perform such other duties as may be specified bythe Board.

Explanation.—For the purposes of this section, the term“assets” shall not include the following, namely—

(a) assets owned by third party in possession of thecorporate debtor held under trust or under contractualarrangements including bailment;

(b) assets of any Indian or foreign subsidiary of thecorporate debtor; and

(c) such other assets as may be notified by the CentralGovernment in consultation with any financial sectorregulator.”

89. Under the CIRP Regulations, the resolution professionalhas to vet and verify claims made, and ultimately, determinethe amount of each claim as follows:

“10. Substantiation of claims.—The interim resolutionprofessional or the resolution professional, as the case maybe, may call for such other evidence or clarification as hedeems fit from creditor for substantiating the whole orpart of its claim.

12. Submission of proof of claims.—(1) Subject to sub-regulation (2), creditor shall submit claim with proof on orbefore the last date mentioned in the public announcement.

(2) creditor, who fails to submit claim with proof withinthe time stipulated in the public announcement, may submitthe claim with proof to the interim resolution professionalor the resolution professional, as the case may be, on orbefore the ninetieth day of the insolvency commencementdate.

(3) Where the creditor in sub-regulation (2) is financialcreditor under Regulation 8, it shall be included in thecommittee from the date of admission of such claim:

Provided that such inclusion shall not affect the validityof any decision taken by the committee prior to suchinclusion.

13. Verification of claims.—(1) The interim resolutionprofessional or the resolution professional, as the case maybe, shall verify every claim, as on the insolvencycommencement date, within seven days from the last date ofthe receipt of the claims, and thereupon maintain list ofcreditors containing names of creditors along with the amountclaimed by them, the amount of their claims admitted and thesecurity interest, if any, in respect of such claims, and updateit.

(2) The list of creditors shall be—

(a) available for inspection by the persons whosubmitted proofs of claim;

(b) available for inspection by members, partners,Directors and guarantors of the corporate debtor;

(c) displayed on the website, if any, of the corporatedebtor;

(d) filed with the adjudicating authority; and

(e) presented at the first meeting of the committee.

14. Determination of amount of claim.—(1) Where the amountclaimed by creditor is not precise due to any contingencyor other reason, the interim resolution professional or theresolution professional, as the case may be, shall make the

best estimate of the amount of the claim based on theinformation available with him.

(2) The interim resolution professional or the resolutionprofessional, as the case may be, shall revise the amounts ofclaims admitted, including the estimates of claims made undersub-regulation (1), as soon as may be practicable, when hecomes across additional information warranting suchrevision.”

It is clear from reading of these Regulations that theresolution professional is given administrative as opposed toquasi-judicial powers. In fact, even when the resolutionprofessional is to make “determination” under Regulation35-A, he is only to apply to the adjudicating authority forappropriate relief based on the determination made as follows:

“35-A. Preferential and other transactions.—(1) On orbefore the seventy-fifth day of the insolvencycommencement date, the resolution professional shall forman opinion whether the corporate debtor has beensubjected to any transaction covered under Sections 43,45, 50 or 66.

(2) Where the resolution professional is of the opinion thatthe corporate debtor has been subjected to anytransactions covered under Sections 43, 45, 50 or 66, heshall make determination on or before the one hundredand fifteenth day of the insolvency commencement date,under intimation to the Board.

(3) Where the resolution professional makes determinationunder sub-regulation (2), he shall apply to the adjudicatingauthority for appropriate relief on or before the onehundred and thirty-fifth day of the insolvencycommencement date.”

90. As opposed to this, the liquidator, in liquidationproceedings under the Code, has to consolidate and verifythe claims, and either admit or reject such claims underSections 38 to 40 of the Code. Sections 41 and 42, by way ofcontrast between the powers of the liquidator and that of theresolution professional, are set out hereinbelow:

“41. Determination of valuation of claims.—The liquidatorshall determine the value of claims admitted under Section40 in such manner as may be specified by the Board.

42. Appeal against the decision of liquidator.—A creditormay appeal to the adjudicating authority against thedecision of the liquidator accepting or rejecting the claimswithin fourteen days of the receipt of such decision.”

It is clear from these sections that when the liquidator“determines” the value of claims admitted under Section40, such determination is “decision”, which is quasi-judicial in nature, and which can be appealed against tothe adjudicating authority under Section 42 of the Code.

91. Unlike the liquidator, the resolution professional cannotact in number of matters without the approval of theCommittee of Creditors under Section 28 of the Code,which can, by two-thirds majority, replace one resolutionprofessional with another, in case they are unhappy withhis performance. Thus, the resolution professional is reallya facilitator of the resolution process, whose administrativefunctions are overseen by the Committee of Creditors andby the adjudicating authority.”

(d) Section 29 of the IBC deals with the information memorandumon the basis of which the resolution plan would be submitted. In thisregard, Regulation 36 of the Insolvency and Bankruptcy Board of India(Insolvency Resolution Process for Corporate Persons) Regulations,2016, assumes importance wherein Regulation 36(2)(d) covers the claimsof different kinds of creditors. Regulation 36(2)(d) reads thus:

“36. Information memorandum.-(1) Subject to sub-regulation(4), the resolution professional shall submit the informationmemorandum in electronic form to each member of thecommittee within two weeks of his appointment, but not laterthan fifty-fourth day from the insolvency commencement date,whichever is earlier.

(2) The information memorandum shall contain the followingdetails of the corporate debtor-

(a) xxxx

(d) list of creditors containing the names of creditors, theamounts claimed by them, the amount of their claims admittedand the security interest, if any, in respect of such claims;…..”

(e) In the aforesaid context, I may look into the decision of thisCourt in the case of Committee of Creditors of Essar Steel IndiaBLimited v. Satish Kumar Gupta and Others reported in (2020) 8 SCC531, more particularly, paras 42-45 which read thus:

“42. Under Section 29(1) of the Code, the resolutionprofessional shall prepare an information memorandumcontaining all relevant information, as may be specified, sothat resolution plan may then be formulated by prospectiveresolution applicant. Under Section 30 of the Code, theresolution applicant must then submit resolution plan to theresolution professional, prepared on the basis of the informationmemorandum. After this, the resolution professional must presentto the Committee of Creditors, for its approval, such resolutionplans which conform to the conditions referred to in Section30(2) of the Code — see Section 30(3) of the Code. If theresolution plan is approved by the requisite majority of theCommittee of Creditors, it is then the duty of the resolutionprofessional to submit the resolution plan as approved by theCommittee of Creditors to the Adjudicating Authority — see Section 30(6) of the Code.

43. The aforesaid provisions of the Code are then fleshed outin the 2016 Regulations. Under Chapter IV of the aforesaidRegulations, claims by operational creditors, financialcreditors, other creditors, workmen and employees are to besubmitted to the resolution professional along with proofsthereof — see Regulations 7 to 12. Thereafter, underRegulation 13, the resolution professional shall verify eachclaim as on the insolvency commencement date, and thereuponmaintain list of creditors containing the names of creditorsalong with the amounts claimed by them, the amounts admittedby him, and the security interest, if any, in respect of suchclaims, and constantly update the aforesaid list — see Regulation 13(1).

44. Chapter X of the Regulations then deals with resolutionplans that are submitted. Under Regulation 35, “fair value”

as defined by Regulation 2(1)(hb) [Under Regulation 2(1)(hb),Insolvency and Bankruptcy Board of India (InsolvencyResolution Process for Corporate Persons) Regulations,2016:” 2. (1)(hb) “fair value” means the estimated realisablevalue of the assets of the corporate debtor, if they were to beexchanged on the insolvency commencement date between awilling buyer and willing seller in an arm’s length transaction,after proper marketing and where the parties had actedknowledgeably, prudently and without compulsion;”] and“liquidation value” as defined by Regulation 2(1)(k)[Id. Under Regulation 2(1)(k):”2. (1)(k) “liquidationvalue” means the estimated realisable value of the assets ofthe corporate debtor, if the corporate debtor were to beliquidated on the insolvency commencement date;”] shall bedetermined by two registered valuers appointed underRegulation 27, which shall be handed over to the resolutionprofessional.

45. After receipt of the resolution plans in accordance withthe Code and the Regulations, the resolution professional shallthen provide the fair value and liquidation value to everymember of the Committee of Creditors — see Regulation 35(2).Regulation 36 is important as it forms the basis for thesubmission of resolution plan. The information memorandum,spoken of by this regulation, must contain the following:

“36.(2)(a) assets and liabilities with such description,as on the insolvency commencement date, as are generallynecessary for ascertaining their values.

Explanation.—”Description” includes the details suchas date of acquisition, cost of acquisition, remaining usefullife, identification number, depreciation charged, bookvalue, and any other relevant details.

(b) the latest annual financial statements;

(c) audited financial statements of the corporate debtorfor the last two financial years and provisional financialstatements for the current financial year made up to datenot earlier than fourteen days from the date of theapplication;

(d) list of creditors containing the names of creditors,the amounts claimed by them, the amount of their claimsadmitted and the security interest, if any, in respect of suchclaims;

(e) particulars of debt due from or to the corporateBdebtor with respect to related parties;

(f) details of guarantees that have been given in relationto the debts of the corporate debtor by other persons,specifying which of the guarantors is related party;

(g) the names and addresses of the members or partnersCholding at least one per cent stake in the corporate debtoralong with the size of stake;

(h) details of all material litigation and an ongoinginvestigation or proceeding initiated by Government andstatutory authorities;D

(i) the number of workers and employees and liabilitiesof the corporate debtor towards them;

(j)-(k)***

(l) other information, which the resolution professionalEdeems relevant to the committee.””

(f) On the basis of the information memorandum, the resolutionplan is submitted under Section 30(1) of the IBC.

(g) It is important to note that the operational creditors areFmandatorily entitled to the liquidation value or the amount that the planentitles them if distributed in accordance with the waterfall mechanismunder Section 53 whichever is higher. (See Section 30 (2)(b))

(h) For dissenting financial creditors, they are mandatorily entitledto the amount under Section 53 in the event of liquidation.

(i) The constitutional validity of the said provision was upheld bythis Court in the decision of Essar Steel India Limited (supra). (Seeparas 128-131)

(j) If the plan fails to comply with the above, the resolution plan isliable to be mandatorily rejected.H

(k) Section 31 of the IBC deals with the approval of the resolutionplan which shall bind everyone i.e. the corporate debtor, guarantors,creditors, other stakeholders etc. Thus, whatever amount is allotted tothe creditor under the plan, the same will have to be accepted withoutany option.

(l) The new avatar of the corporate debtor does not have to dealwith the various “hydra heads”, i.e. multiple new claims popping up afterthe approval of the plan (para 107 of the Essar Steel (supra)

(m) The aforesaid has been accepted as “Clean Slate Theory”.(See paras 93-94 of Ghanashyam Mishra & Sons (P) Ltd. v. EdelweissAsset Reconstruction Co. Ltd., (2021) 9 SCC 657).

(n) This Court in Ebix Singapore Private Limited v. Committeeof Creditors of Educomp Solutions Limited and Another reported in(2022) 2 SCC 401, has held that the resolution plan binds even the personswho have not consented. Paras 115 & 117 resply read thus:-

“115. While the above observations were made in the contextof scheme that has been sanctioned by the court, theresolution plan even prior to the approval of the adjudicatingauthority is binding inter se the CoC and the successfulresolution applicant. The resolution plan cannot be construedpurely as “contract” governed by the Contract Act, in theperiod intervening its acceptance by the CoC and the approvalof the adjudicating authority. Even at that stage, its bindingeffects are produced by IBC framework. The BLRC Reportmentions that “[w]hen 75% of the creditors agree on revivalplan, this plan would be binding on all the remainingcreditors” [ 3.3.1, The Report of the Bankruptcy Law ReformsCommittee, Vol. I : Rationale and Design (November 2015),p. 13, available at <https://ibbi.gov.in/BLRCReportVol1_04112015.pdf> last accessed 20-8-2021.]. The BLRC Reportalso mentions that, “the RP submits binding agreement tothe adjudicator before the default maximum date” [Id, p. 92.].We have further discussed the statutory scheme of IBC inSections I and J of this judgment to establish that resolutionplan is binding inter se the CoC and the successful resolutionapplicant.Thus, the ability of the resolution plan to bind those

1020SUPREME COURT REPORTS

Awho have not consented to it, by way of statutory procedure,indicates that it is not typical contract.

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117. ….. The terms of the resolution plan contain commercialbargain between the CoC and resolution applicant. There isBalso an intention to create legal relations with binding effect.However, it is the structure of IBC which confers legal forceon the CoC-approved resolution plan. The validity of theresolution plan is not premised upon the agreement or consentof those bound (although as procedural step IBC requiresCsixty-six per cent votes of creditors), but upon its compliancewith the procedure stipulated under IBC.”

(Emphasis supplied)

41. Thus, from the aforesaid, it is evident that the creditor has nooption but to join the process under the IBC. Once the plan is approved,Dit would bind everyone under the sun. The making of claim and acceptingwhatever share is allotted could be termed as an “Involuntary Act” onbehalf of the creditor. The making of claim under the IBC and acceptingthe same and not making any claim, will not make any difference in lightof Section 31 of the IBC. Both the situations will lead to Section 31 andEthe finality and binding value of the resolution plan.

42. Keeping the aforesaid discussion in mind, at best, it could besaid that from the cheque amount under Section 138 of the NI Act, theamount received under the resolution plan may be deducted. (akin towhat happens to the guarantors)FSECTION 32A OF THE IBC

43. P. Mohanraj (supra) has harmoniously construed Section 32Awith Section 14 of the IBC so as to apply to Section 138 NI Act,proceedings. Section 32A(1) is very crucial and hence, is quoted below:-

“32A. Liability for prior offences, etc.—(1) NotwithstandingGanything to the contrary contained in this Code or any otherlaw for the time being in force, the liability of corporatedebtor for an offence committed prior to the commencementof the corporate insolvency resolution process shall cease,and the corporate debtor shall not be prosecuted for such anHoffence from the date the resolution plan has been approved

by the Adjudicating Authority under section 31, if theresolution plan results in the change in the management orcontrol of the corporate debtor to person who was not—

(a) promoter or in the management or control of thecorporate debtor or related party of such person; or

(b) person with regard to whom the relevant investigatingauthority has, on the basis of material in its possession,reason to believe that he had abetted or conspired for thecommission of the offence, and has submitted or filed areport or complaint to the relevant statutory authority orcourt:

Provided that if prosecution had been instituted duringthe corporate insolvency resolution process against suchcorporate debtor, it shall stand discharged from the dateof approval of the resolution plan subject to requirementsof this sub-section having been fulfilled:

Provided further that every person who was “designatedpartner” as defined in clause (j) of section 2 of the LimitedLiability Partnership Act, 2008 (6 of 2009), or an “officerwho is in default”, as defined in clause (60) of section 2 ofthe Companies Act, 2013 (18 of 2013), or was in anymanner incharge of, or responsible to the corporate debtorfor the conduct of its business or associated with thecorporate debtor in any manner and who was directly orindirectly involved in the commission of such offence asper the report submitted or complaint filed by theinvestigating authority, shall continue to be liable to beprosecuted and punished for such an offence committedby the corporate debtor notwithstanding that the corporatedebtor’s liability has ceased under this sub-section.”

44. Section 32A of the IBC has been upheld by this Court inManish Kumar v. Union of India and Another reported in (2021) 5SCC 1. This Court has held that the said section does not permit thewrong-doer to get away. Thus, if the argument of allowing the signatory/director to go scot-free after the approval of the resolution plan is acceptedthe same would run contrary to the legislative intent of Section 32Awhich has been upheld by this Court as under:

A“326. We are of the clear view that no case whatsoever ismade out to seek invalidation of Section 32-A. The boundariesof this Court’s jurisdiction are clear. The wisdom of thelegislation is not open to judicial review. Having regard tothe object of the Code, the experience of the working of theCode, the interests of all stakeholders including mostBimportantly the imperative need to attract resolution applicantswho would not shy away from offering reasonable and fairvalue as part of the resolution plan if the legislature thoughtthat immunity be granted to the corporate debtor as also itsproperty, it hardly furnishes ground for this Court toCinterfere. The provision is carefully thought out. It is not as ifthe wrongdoers are allowed to get away. They remain liable.The extinguishment of the criminal liability of the corporatedebtor is apparently important to the new management to makea clean break with the past and start on clean slate. Wemust also not overlook the principle that the impugnedDprovision is part of an economic measure. The reverencecourts justifiably hold such laws in cannot but be applicablein the instant case as well. The provision deals with referenceto offences committed prior to the commencement of the CIRP.With the admission of the application the management of theEcorporate debtor passes into the hands of the interim resolutionprofessional and thereafter into the hands of the resolutionprofessional subject undoubtedly to the control by theCommittee of Creditors. As far as protection afforded to theproperty is concerned there is clearly rationale behind it.Having regard to the object of the statute we hardly see anyFmanifest arbitrariness in the provision.”

(Emphasis supplied)

45. In P. Mohanraj (supra), this Court in clear terms held thatSection 32A only protects the corporate debtor and not the signatories/Gdirectors etc. The prosecution against the signatories/directors wouldcontinue. In P. Mohanraj (supra): -

a.The issue involved was whether the institution/continuationof proceeding under Section 138/141 of the NI Act, 1881is said to be covered by Section 14 of the IBC, 2016.

b.That Section 138 proceedings can be said to be “civilAsheep” in “criminal wolf’s” clothing.

i.The Court relied upon Kaushalya Devi Massand v.Roopkishore Khore, (Para 59) [(2011)4 SCC 593]and Meters & Instruments (P) Ltd. v. KanchanMehta, (Para 63) [(2018)1 SCC 560]

c.Section 138 proceedings are covered by Section 14 of theIBC, 2016. (Para 67)

d.Moratorium under Section 14, IBC only applies to theCorporate Debtor and does not apply to natural personsCmentioned under Section 141 of NI Act, 1881. The saidconclusion is reached after considering Aneeta Hada v.Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661.(Para 102)

e.I quote para 102 of P. Mohanraj (supra) as under:

“102. Since the corporate debtor would be covered by themoratorium provision contained in Section 14 IBC, by whichcontinuation of Sections 138/141 proceedings against thecorporate debtor and initiation of Sections 138/141proceedings against the said debtor during the corporateinsolvency resolution process are interdicted, what is statedin paras 51 and 59 in Aneeta Hada ((2012) 5 SCC 661) wouldthen become applicable. The legal impediment contained inSection 14 IBC would make it impossible for such proceedingto continue or be instituted against the corporate debtor. Thus,for the period of moratorium, since no Sections 138/141proceeding can continue or be initiated against the corporatedebtor because of statutory bar, such proceedings can beinitiated or continued against the persons mentioned inSections 141(1) and (2) of the Negotiable Instruments Act.This being the case, it is clear that the moratorium provisioncontained in Section 14 IBC would apply only to the corporatedebtor, the natural persons mentioned in Section 141continuing to be statutorily liable under Chapter XVII of theNegotiable Instruments Act.”

(Emphasis supplied)

46. While dealing with the issue of Section 14, IBC, this Courthad the occasion to deal in detail with Section 32A also. The 2ndprovisoto Section 32A(1) is complete answerto the issue in question. Thesaid provision is discussed in detail from Paras 39-43 in P. Mohanraj’scase. Paras 39 to 43 read thus:

“39. The raison d’être for the enactment of Section 32-A hasbeen stated by the Report of the Insolvency Law Committeeof February 2020, which is as follows:

“17. LIABILITY OF CORPORATE DEBTOR FOR OFFENCES COMMITTEDPRIOR TO INITIATION OF CIRP [Recommendations containedherein have been implemented pursuant to Section 10 ofthe Insolvency and Bankruptcy Code (Amendment)Ordinance, 2019.]

17.1. Section 17 of the Code provides that oncommencement of the CIRP, the powers of management ofthe corporate debtor vest with the interim resolutionprofessional. Further, the powers of the Board of Directorsor partners of the corporate debtor stand suspended, andare to be exercised by the interim resolution professional.Thereafter, Section 29-A, read with Section 35(1)(f), placesrestrictions on related parties of the corporate debtor fromproposing resolution plan and purchasing the propertyof the corporate debtor in the CIRP and liquidationprocess, respectively. Thus, in most cases, the provisionsof the Code effectuate change in control of the corporatedebtor that results in clean break of the corporate debtorfrom its erstwhile management. However, the legal form ofthe corporate debtor continues in the CIRP, and may bepreserved in the resolution plan. Additionally, while theproperty of the corporate debtor may also change handsupon resolution or liquidation, such property also continuesto exist, either as property of the corporate debtor, or inthe hands of the purchaser.

17.2. However, even after commencement of CIRP or afterits successful resolution or liquidation, the corporate debtor,along with its property, would be susceptible toinvestigations or proceedings related to criminal offences

committed by it prior to the commencement of CIRP,leading to the imposition of certain liabilities andrestrictions on the corporate debtor and its properties evenafter they were lawfully acquired by resolution applicantor successful bidder, respectively.

Liability where Resolution Plan has been approved

17.3. It was brought to the Committee that this had createdapprehension amongst potential resolution applicants, whodid not want to take on the liability for any offencescommitted prior to commencement of CIRP. In one case,JSW Steel had specifically sought certain reliefs andconcessions, within an annexure to the resolution plan ithad submitted for approval of the adjudicating authority.[SBI v. Bhushan Steel Ltd., 2018 SCC OnLine NCLT 32305,para 83(i)] Without relief from imposition of the suchliability, the Committee noted that in the long run, potentialresolution applicants could be disincentivised fromproposing resolution plan. The Committee was alsoconcerned that resolution plans could be priced lower onan average, even where the corporate debtor did notcommit any offence and was not subject to investigation,due to adverse selection by resolution applicants who mightbe apprehensive that they might be held liable for offencesthat they have not been able to detect due to informationasymmetry. Thus, the threat of liability falling on bona fidepersons who acquire the legal entity, could substantiallylower the chances of its successful takeover by potentialresolution applicants.

17.4. This could have substantially hampered the Code’sgoal of value maximisation, and lowered recoveries tocreditors, including financial institutions who take recourseto the Code for resolution of the NPAs on their balancesheet. At the same time, the Committee was also consciousthat authorities are duty-bound to penalise the commissionof any offence, especially in cases involving substantialpublic interest. Thus, two competing concerns need to bebalanced.

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17.6. Given this, the Committee felt that distinction mustbe drawn between the corporate debtor which may havecommitted offences under the control of its previousmanagement, prior to the CIRP, and the corporate debtorthat is resolved, and taken over by an unconnectedresolution applicant. While the corporate debtor’s actionsprior to the commencement of the CIRP must beinvestigated and penalised, the liability must be affixedonly upon those who were responsible for the corporatedebtor’s actions in this period. However, the newmanagement of the corporate debtor, which has nothingto do with such past offences, should not be penalisedfor the actions of the erstwhile management of thecorporate debtor, unless they themselves were involvedin the commission of the offence, or were related parties,promoters or other persons in management and controlof the corporate debtor at the time of or any time followingthe commission of the offence, and could acquire thecorporate debtor, notwithstanding the prohibition underSection 29-A. [For example, where the exemption underSection 240-A is applicable.]

17.7. Thus, the Committee agreed that new section shouldbe inserted to provide that where the corporate debtor issuccessfully resolved, it should not be held liable for anyoffence committed prior to the commencement of the CIRP,unless the successful resolution applicant was alsoinvolved in the commission of the offence, or was relatedparty, promoter or other person in management and controlof the corporate debtor at the time of or any time followingthe commission of the offence.

17.8. Notwithstanding this, those persons who wereresponsible to the corporate debtor for the conduct of itsbusiness at the time of the commission of such offence,should continue to be liable for such an offence,vicariously or otherwise, regardless of the fact that thecorporate debtor’s liability has ceased.” (emphasis inoriginal and supplied)

40. This Court in Manish Kumar v. Union of India [(2021) 5SCC 1], upheld the constitutional validity of this provision.This Court observed : (SCC pp. 170-71, para 326)

“326. We are of the clear view that no case whatsoever ismade out to seek invalidation of Section 32-A. Theboundaries of this Court’s jurisdiction are clear. The wisdomof the legislation is not open to judicial review. Havingregard to the object of the Code, the experience of theworking of the Code, the interests of all stakeholdersincluding most importantly the imperative need to attractresolution applicants who would not shy away from offeringreasonable and fair value as part of the resolution plan ifthe legislature thought that immunity be granted to thecorporate debtor as also its property, it hardly furnishes aground for this Court to interfere. The provision is carefullythought out. It is not as if the wrongdoers are allowed toget away. They remain liable. The extinguishment of thecriminal liability of the corporate debtor is apparentlyimportant to the new management to make clean breakwith the past and start on clean slate. We must also notoverlook the principle that the impugned provision is partof an economic measure. The reverence courts justifiablyhold such laws in cannot but be applicable in the instantcase as well. The provision deals with reference to offencescommitted prior to the commencement of the CIRP. Withthe admission of the application the management of thecorporate debtor passes into the hands of the interimresolution professional and thereafter into the hands ofthe resolution professional subject undoubtedly to thecontrol by the Committee of Creditors. As far as protectionafforded to the property is concerned there is clearly arationale behind it. Having regard to the object of thestatute we hardly see any manifest arbitrariness in theprovision.”41. Section 32-A cannot possibly be said to throw any lighton the true interpretation of Section 14(1)(a) as the reasonfor introducing Section 32-A had nothing whatsoever to dowith any moratorium provision. At the heart of the section is

the extinguishment of criminal liability of the corporate debtor,from the date the resolution plan has been approved by theadjudicating authority, so that the new management may makea clean break with the past and start on clean slate. Amoratorium provision, on the other hand, does not extinguishany liability, civil or criminal, but only casts shadow onproceedings already initiated and on proceedings to beinitiated, which shadow is lifted when the moratorium periodcomes to an end. Also, Section 32-A(1) operates only afterthe moratorium comes to an end. At the heart of Section 32-Ais the IBC’s goal of value maximisation and the need to obviatelower recoveries to creditors as result of the corporate debtorcontinuing to be exposed to criminal liability.

42. Unfortunately, Section 32-A is inelegantly drafted. Thesecond proviso to Section 32-A(1) speaks of persons who arein any manner in charge of, or responsible to the corporatedebtor for the conduct of its business or associated with thecorporate debtor and who are, directly or indirectly, involvedin the commission of “such offence” i.e. the offence referredto in sub-section (1), “as per the report submitted or complaintfiled by the investigating authority …”. The report submittedhere refers to police report under Section 173 CrPC, andcomplaints filed by investigating authorities under specialActs, as opposed to private complaints. If the language of thesecond proviso is taken to interpret the language of Section32- A(1) in that the “offence committed” under Section 32-A(1) would not include offences based upon complaints underSection 2(d) CrPC, the width of the language would be cutdown and the object of Section 32-A(1) would not be achievedas all prosecutions emanating from private complaints wouldbe excluded. Obviously, Section 32-A(1) cannot be read inthis fashion and clearly incudes the liability of the corporatedebtor for all offences committed prior to the commencementof the corporate insolvency resolution process. Doubtless, aSection 138 proceeding would be included, and would, afterthe moratorium period comes to an end with resolution planby new management being approved by the adjudicatingauthority, cease to be an offence qua the corporate debtor.

43. section which has been introduced by an amendmentinto an Act with its focus on cesser of liability for offencescommitted by the corporate debtor prior to the commencementof the corporate insolvency resolution process cannot be soconstrued so as to limit, by sidewind as it were, themoratorium provision contained in Section 14, with which itis not at all concerned. If the first proviso to Section 32-A(1)is read in the manner suggested by Shri Mehta, it will impactSection 14 by taking out of its ken Sections 138/141proceedings, which is not the object of Section 32-A(1) at all.Assuming, therefore, that there is clash between Section 14IBC and the first proviso of Section 32-A(1), this clash is bestresolved by applying the doctrine of harmonious constructionso that the objects of both the provisions get subserved in theprocess, without damaging or limiting one provision at theexpense of the other. If, therefore, the expression“prosecution” in the first proviso of Section 32-A(1) refers tocriminal proceedings properly so-called either through themedium of first information report or complaint filed by aninvestigating authority or complaint and not to quasi-criminalproceedings that are instituted under Sections 138/141 of theNegotiable Instruments Act against the corporate debtor, theobject of Section 14(1) IBC gets subserved, as does the objectof Section 32-A, which does away with criminal prosecutionsin all cases against the corporate debtor, thus absolving thecorporate debtor from the same after new managementcomes in.”

(Emphasis applied)

Thus, the heart of the matter is the second proviso appended toSection 32A(1)(b) of the IBC which provides statutory recognition ofthe criminal liability of the persons who are otherwise vicariously liableunder Section 141 of NI Act, in the context of Section 138 offence.

46. Thus, Section 32A broadly leads to:

a.Extinguishment of the criminal liability of the corporatedebtor, if the control of the corporate debtor goes in thehands of the new management which is different from theoriginal old management.

ABC

1030SUPREME COURT REPORTS

Ab.The prosecution in relation to “every person who was a“designated partner” as defined in clause (j) of Section2 ofthe Limited Liability Partnership Act, 2008 (6 of2009), or an“officer who is in default”, as defined inclause (60) of Section 2 of the Companies Act, 2013(18 of 2013), or was in any manner in charge of, orBresponsible to the corporate debtor for the conduct of itsbusiness or associated with the corporate debtor in anymanner and who was directly or indirectly involved inthe commission of such offence”shall be proceeded andthe law will take it’s own course. Only the corporate debtorC(with new management) as held in Para 42 of P. Mohanrajwill be safeguarded.

c.If the old management takes over the corporatedebtor (for MSME Section 29A does not apply (see 240A),hence for MSME old management can takeover) theDcorporate debtor itself is also not safeguarded fromprosecution under Section 138 or any other offences.

47. Thus, I am of the view that by operation of the provisions ofthe IBC, the criminal prosecution initiated against the natural personsunder Section 138 read with 141 of the NI Act read with Section 200 ofEthe CrPC would not stand terminated.

48. In JIK Industries Limited and Others v. Amarlal V. Jumaniand Another reported in (2012) 3 SCC 255, this Court held that thesanction of scheme under Section 391 of the Companies Act, 1956 willnot lead to any automatic compounding of offence under Section 138 ofFthe NI Act without the consent of the complainant. Neither Section 14nor Section 31 of the IBC can produce such result. The binding effectcontemplated by Section 31 of the IBC is in respect of the assets andmanagement of the corporate debtor. No clause in the resolution planeven if accepted by the adjudicating authority/appellate tribunal can takeaway the power and jurisdiction of the criminal court to conduct andGdispose of the proceedings before it in accordance with the provisions ofthe CrPC.

49. It is true that by virtue of Section 238 of the IBC, the provisionsof the CrPC shall have effect notwithstanding anything inconsistenttherewith contained in any other law for the time being in force or anyH

instrument having effect by virtue of any such law. But, no provision ofthe IBC bars the continuation of the criminal prosecution initiated againstthe directors and officials.

50. It is equally true that once the corporate debtor comes underthe resolution process, its erstwhile managing director(s) cannot continueto represent the company. Section 305(2) of the CrPC states that wherea corporation is the accused person or one of the accused persons in aninquiry or trial, it may appoint representative for the purpose of theinquiry or trial and such appointment need not be under the seal of thecorporation. Therefore, it is only the Resolution Professional who canrepresent the accused company during the pendency of the proceedingsunder IBC. After the proceedings are over, either the corporate entitymay be dissolved or it can be taken over by new management in whichevent the company will continue to exist. When new managementtakes over, it will have to make arrangements for representing thecompany. If the company is dissolved as result of the resolution process,obviously proceedings against it will have to be terminated. But eventhen, its erstwhile directors may not be able to take advantage of thesituation. This is because, this Court in Aneeta Hada (supra), even whileoverruling its decision in Anil Hada v. Indian Acrylic Ltd. reportedin (2000) 1 SCC 1, as not laying down the correct law in so far as AnilHada (supra) states that the director or any other officer can beprosecuted without impleadment of the company, proceeded to hold thatthe matter would stand on different footing where there is some legalimpediment as the doctrine of lex non cogit ad impossibiliagetsattracted. It was specifically observed that the decision in AnilHada (supra) is overruled with the qualifier as stated in para 51.Considering the same, the ratio of the decision of this Court in Ajit Balse(supra) upon which strong reliance is placed on behalf of the appellant isof no avail.

51. What follows from the aforesaid is that for difficulty inprosecuting the corporate debtor under Section 138 of the NI Act afterthe approval of the resolution plan under the IBC, we need not let thenatural persons i.e., the signatories to the cheques/directors of thecorporate debtor escape prosecution. How can one allow the naturalpersons to escape liability on such specious plea? In such situation theLatin maxim Lex Non Cogit Ad Impossibiliais attracted which meanslaw does not compel man to do which he cannot possibly perform.

ABroom’s “Legal Maxims” contains several illustrative cases in supportof the maxim. This maxim has been referred to with approval by thisCourt in State of Rajasthan v. Shamsher Singhreported in 1985 suppSCC 416.

52. Thus, where the proceedings under Section 138 of the NI ActBhad already commenced and during the pendency the plan is approvedor the company gets dissolved, the directors and the other accused cannotescape from their liability by citing its dissolution. What is dissolved isonly the company, not the personal penal liability of the accused coveredunder Section 141 of the NI Act. They will have to continue to face theprosecution in view of the law laid down in Aneeta Hada (supra). WhereCthe company continues to remain even at the end of the resolution process,the only consequence is that the erstwhile directors can no longerrepresent it.

FEW OF THE ABSURD SITUATIONS THAT MAY ARISEIF SECTION 138 PROCEEDINGS IN RELATION TO THEDSIGNATORIES/DIRECTORS ARE HELD TO BE NOTMAINTAINABLE AFTER THE RESOLUTION PLAN ISAPPROVED

53. If the argument that the signatories/directors are not liableto be proceeded under Section 138/141 of the NI Act once theEresolution plan is approved, the same may lead to the following absurdsituations:

i.If during the lifetime of the Section 14 moratorium order,some of the accused are convicted under Section 138 ofFthe NI Act, they will have to be released in appeal once theresolution plan is approved. Thus, then, no purpose wouldbe served by proceeding further against the co-accusedunder Section 138 during the moratorium.

ii.If the resolution plan is not approved and the corporateGdebtor goes under liquidation in such circumstances underSection 35(1)(k) of the IBC the liquidator can representthe corporate debtor. Thus, the prosecution under Section138/141 continues. This may lead to absurd situations inworking of the IBC and its impact on Section 138proceedings.

iii.At the end of the liquidation, the distribution will take placeunder Section 53 of the IBC. Therein everyone, includingthe creditors will get their share as per the waterfallmechanism statutorily decided and the same would bebinding and mandatory. Thereafter, the corporate debtor isdissolved under Section 54 of the IBC after selling of theassets under liquidation. Now during the said period, theprosecution might have been completed and appeals wouldbe pending. Then it would be argued that because underthe liquidation the amount is accepted, the prosecution againstthe signatory/director cannot continue after the dissolutionof the corporate debtor.

54. Thus, while interpreting Sections 14, 31 & 32A resply of theIBC vis-a-vis Sections 138 and 141 resply of the NI Act, the principleof harmonious construction should be applied and followed. Bypermitting to proceed against the signatories/directors even after theapproval of the plan, what is achieved is uniformity in the functioningof the law by removing the anomalous and absurd situations, thereby,making it compliant with Article 14 of the Constitution. The saidinterpretation shields the relevant provisions from attack of beingmanifestly arbitrary.

55. The distinction between strict construction and more freeone has disappeared in the modern times and now mostly the question is,“what is the true construction of the statute?” passage in Craies onStatue Law 7th Edn. reads to the following effect:-

“The distinction between strict and liberal constructionhas almost disappeared with regard to all classes of statutes,so that all statutes, whether penal or not, are now construedby substantially the same rules. ‘All modern Acts are framedwith regard to equitable as well as legal principles.’ “Ahundred years ago”, said the court in Lyons’ case, “statuteswere required to be perfectly precise and resort was not hadto reasonable construction of the Act, and thereby criminalswere often allowed to escape. This is not the present mode ofconstruing Acts of Parliament. They are construed now withreference to the true meaning and real intention of thelegislature.”

A56. At page-532 of the same book, observations of Sedgwick arequoted as under:

“The more correct version of the doctrine appears to be thatstatutes of this class are to be fairly construed and faithfullyapplied according to the intent of the legislature withoutBunwarrantable severity on the one hand or unjustifiable lenityon the other, in cases of doubt the courts inclining to mercy.”

ARGUMENT THAT AS THE DEBT STOODEXTINGUISHED BY VIRTUE OF SECTION 31 OF THE CODE,THE CRIMINAL PROCEEDINGS U/S. 138 OF THE NI ACTCCANNOT CONTINUE AS REGARDS THE DIRECTOR/SIGNATORY.

57. The argument that as the debt stood extinguished by virtue ofSection 31 of the IBC, the proceedings under Section 138 of the NI Actcannot continue as regards the director/signatory, would run contrary toDthe line of reasoning assigned by this Court that the “Involuntary Act” ofthe principal debtor would not absolve the guarantors.

58. This Court in Lalit Kumar Jain v. Union of India and Othersreported in (2021) 9 SCC 321 has held that the approval of the resolutionplan per se does not operate as discharge of guarantors’ liability. Thatis because:E

a.an involuntary actof the principal debtor leading to loss ofsecurity, would not absolve guarantor of its liability.

b.a discharge which the principal debtor may secure byoperation of law in bankruptcy (or in liquidationFproceedings in the case of company) does notabsolve the surety of his liability.

59. The same principle is applicable to the signatory/director inthe case of Section 138/141 proceedings. The signatory/director cannottake benefit of discharge obtained by the corporate debtor by operationGof law under the IBC.

60. If the argument that extinguishment of debt under Section 31of the IBC leads to the discharge of signatory/director under Section138 proceedings is accepted, the same will lead to conflict in law as laiddown compared to the guarantor’s liability wherein in spite of the planHbeing approved, the guarantor is held separately liable for theremaining

amount.If the guarantor does not get the benefit of extinguishment ofdebt under Section 31 of the IBC, then similarly for extinguishment ofdebt, the signatory/director cannot get any benefit. If accepted, thismay lead to uncertainty in the first Principles of law oninterpretation of extinguishment of debt. In Lalit Kumar Jain(supra) this Court held as under:

“122. It is therefore, clear that the sanction of resolutionplan and finality imparted to it by Section 31 does not per seoperate as discharge of the guarantor’s liability. As to thenature and extent of the liability, much would depend on theterms of the guarantee itself. However, this Court hasindicated, time and again, that an involuntary act of theprincipal debtor leading to loss of security, would not absolvea guarantor of its liability. In Maharashtra SEB [MaharashtraSEB v. Official Liquidator, (1982) 3 SCC 358] the liability ofthe guarantor (in case where liability of the principal debtorwas discharged under the Insolvency law or the Companylaw), was considered. It was held that in view of theunequivocal guarantee, such liability of the guarantorcontinues and the creditor can realise the same from theguarantor in view of the language of Section 128 of theContract Act, 1872 as there is no discharge under Section134 of that Act. This Court observed as follows: (SCC pp.362-63, para 7)

“7. Under the bank guarantee in question the Bankhas undertaken to pay the Electricity Board any sum up toRs 50,000 and in order to realise it all that the ElectricityBoard has to do is to make demand. Within forty-eighthours of such demand the Bank has to pay the amount tothe Electricity Board which is not under any obligation toprove any default on the part of the Company in liquidationbefore the amount demanded is paid. The Bank cannotraise the plea that it is liable only to the extent of any lossthat may have been sustained by the Electricity Board owingto any default on the part of the supplier of goods i.e. theCompany in liquidation. The liability is absolute andunconditional. The fact that the Company in liquidationi.e. the principal debtor has gone into liquidation also

Awould not have any effect on the liability of the Bank i.e.the guarantor. Under Section 128 of the Contract Act, 1872,the liability of the surety is coextensive with that of theprincipal debtor unless it is otherwise provided by thecontract. surety is no doubt discharged under Section134 of the Contract Act, 1872 by any contract between theBcreditor and the principal debtor by which the principaldebtor is released or by any act or omission of the creditor,the legal consequence of which is the discharge of theprincipal debtor. But discharge which the principal debtormay secure by operation of law in bankruptcy (or inCliquidation proceedings in the case of company) doesnot absolve the surety of his liability (see JagannathGaneshram Agarwale v. Shivnarayan Bhagirath [1939 SCCOnLine Bom 65 : AIR 1940 Bom 247] ; see also Fitzgeorge,In re [Fitzgeorge, In re, (1905) 1 KB 462]).””

(Emphasis supplied)

LITIGANT CANNOT TAKE ADVANTAGE OF ITS OWNWRONG (NULLUS COMMODUM CAPERE POTEST DEINJURIA SUA PROPRIA)

61. This Court while upholding the validity of Section 32A, IBCE(Manish Kumar’s case) has held that “The provision is carefullythought out. It is not as if the wrongdoers are allowed to get away.”That is very important object and the same should not be permitted tobe defeated by accepting the argument that permits the Signatory/Director to enjoy the fruits of their own wrong.F

62. In an interesting case titled Goa State Cooperative BankLimited v. Krishna Nath A. and Others reported in (2019) 20 SCC 38,the facts were that the liquidation proceedings were required to becompleted within fixed number of years, but failed. Thereafter theborrowers claimed in the recovery suit that now no recovery could bemade. This Court held that the defaulters cannot take benefit of theirGown action. The disbursement of loan in an arbitrary manner and failureto recover was the very fulcrum on the basis of which the winding up ofthe Society was ordered. I quote the relevant observations as under:-

“21. It is apparent that on the termination of the liquidationproceedings, liability of the members for the debts taken byH

them does not come to an end. There is no such provision inthe Act providing once winding-up period is over, the liabilityof the members for loans obtained by them which is in theirhands, and for which recovery proceedings are pending shallcome to an end. No automatic termination of recoveryproceedings against the members is contemplated. On theother hand, on completion of the period fixed to liquidate theSociety, final report has to be submitted as to the amountstanding to the credit of the Society in liquidation after payingoff its liabilities including the share or interest of members.Thus, even in the case of liquidation the accountabilityremains towards surplus and liabilities do not come to an end.Even if the period fixed for liquidation of Society is over, thatdoes not terminate the proceedings for recovery which havebeen initiated and appeals are pending.

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24. The concept of restitution is common law principle andit is remedy against unjust enrichment or unjust benefit.The court cannot be used as tool by litigant to perpetuateillegality. person who is on the right side of the law, shouldnot have feeling that in case he is dragged in litigation, andwins, he would turn out to be loser and wrongdoer as realgainer, after 20 or 30 years. Thus, the members who haveobtained stay in appeal or on recovery proceedings or thecase is pending, cannot take advantage of the fact that theperiod fixed for the Liquidator under the Act is over.

25. Once report has been submitted, the Registrar has totake action in terms of the report and in such circumstanceswhen the proceedings for recovery are pending against themembers and the Society has taken loan from the banks forits member, the actual money has to go to the creditor i.e. tothe bank who is going to be benefitted by recovery of publicmoney in the hands of members. In such cases it would beappropriate for the Registrar to send notice of the proceedingsto person who is to be benefitted from the recovery. In theinstant case, the Bank itself is prime lender-cum- liquidator.The proceedings cannot come to the end. Thus, in ourconsidered opinion, it is open to the bank to continue with

Athe recovery proceedings and make recoveries from thedefaulting members. Merely on the liquidation of the Society,or the factum that the period fixed for liquidation is over,liability of the members for the loans cannot be said to havebeen wiped off. The disbursement of loan in an arbitrarymanner and failure to recover was the very fulcrum on theBbasis of which winding up of the Society was ordered.”

(Emphasis supplied)

TERMS OF THE RESOLUTION PLAN CANNOTCONTROL THE ENACTMENT/RULES

63. Before I proceed to comment on the aforesaid, it is necessaryto look into the relevant clauses of the resolution plan upon which strongreliance is sought to be placed on behalf of the appellant. The relevantclauses read thus:

“Part K: Extinguishment of Claims/Rights

1. Save and except specifically dealt with under this ResolutionPlan, no other payments or settlements (of any kind) shall bemade to any other Person in respect of claims filed under theCIRP (including, for the avoidance of doubt, any unverifiedportion of their claim) and all claims against the CorporateEDebtor along with any related legal proceedings, includingcriminal proceedings, and other penal proceedings, shallstand irrevocably and unconditionally abated, settled andextinguished in perpetuity on the Effective Date, and witheffect from the Appointed Date.

F2. The payment to Persons contemplated in this ResolutionPlan shall be the Corporate Debtors and ResolutionApplicant’s full and final performance and satisfaction of allits obligations to such Persons and all Claims (including, forthe avoidance of doubt, any unverified portion of their Claims)of such Persons against the Corporate Debtor shall standGirrevocably and unconditionally settled and extinguished inperpetuity on the Effective Date and with effect from theAppointed Date.

3. …Accordingly, the Resolution Applicant and the CorporateDebtor shall have no responsibility or liability in respect of

any claims against the Corporate Debtor attributable to theperiod prior to the Effective Date other than any payments tobe made under this Resolution Plan and all claims along withany related legal proceedings, including criminal proceedingsand other penal proceedings, shall stand irrevocably andunconditionally abated, settled and extinguished in perpetuity.

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6. On the Effective Date and with effect from the AppointedDate, all the outstanding negotiable instruments issued byDirector/promoter or Corporate Debtor or by any Person onbehalf of the Corporate Debtor for any dues of CorporateDebtor including demand promissory notes, post-datedcheques and letters of credit, shall stand terminated and theCorporate Debtor’s liability under such instruments shall standextinguished.”

(Emphasis supplied)

64. I have referred to Section 31 of the IBC and Ebix Singapore(supra) to explain that the resolution plan is binding on the creditors whohave not consented to it. This is very important factor, which indicatesthat the complainant under Section 138 NI Act is bound by the approvedresolution plan, even though he may not have consented to it (if he ispart of the CoC) or likes it. If he is not part of the CoC, then also it isbinding on him.

65. Section 30(2)(e) of the IBC requires the resolutionprofessional to approve the resolution plan, only if the same doesnot violate any of the provisions of the law for the time being inforce.Thus, the clauses of the resolution plan cannot control theEnactment/Rules in force. It is the resolution plan which has to complywith the laws in force. In the case on hand, any clause giving any effectto the corporate debtor under Section 138 NI Act proceedings, cannotbe used to protect the signatories/directors under Section 138/141 NIAct.

66. Section 61(3)(i) of the IBC provides for an appeal against anorder approving resolution plan if it contravenes any provision of law.

“61. Appeals and Appellate Authority.—

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A(3) An appeal against an order approving resolution planunder Section 31 may be filed on the following grounds,namely:

(i) the approved resolution plan is in contravention ofthe provisions of any law for the time being in force;….”

67. The complainant-creditor of Section 138 NI Act proceedingsmay or may not have any role to play in the approval of the resolutionplan and majority of Section 138 creditors may be small players unlikebig financial creditors.

68. The terms of the resolution plan cannot run contrary to theCenactment i.e. the IBC or any other plenary law or rules.

69. Thus, the said clauses of the resolution plan have no role toplay in answering the neat question of law, which is dependent on theinterpretation of various provisions of the IBC and NI Act.

D70. It was also sought to be argued on behalf of the appellant thatthe plain reading of the clauses of the resolution plan referred to above,would indicate that the respondent (complainant) could be said to havecompounded the offence punishable under Section 138 of the NI Act.

71. ‘Compounding’ and ‘quashing’ are not synonymous terms. InElaw, they have different meanings and consequences. They arise fromdifferent situations and operate in different fields and stages. There isno apparent legal interdependence or interlink to the extent that onecould exist only if the conditions of the other were satisfied or vice-versa. Quashing is one of the facets of inherent powers, whileFcompounding of an offence being statutory expression contained underSection 320 the CrPC is entirely different concept.

72. The expressions ‘compromise’ and ‘compounding’ are notsynonyms in criminal jurisprudence even though these expressions areusually used without any distinction. Any dispute can be compromisedGbetween the parties if the terms are not illegal. But only compoundableoffence allowed by law can be compounded. dispute relating to acrime can be compromised even before the case is registered, and inthat case, victim of the crime may refuse to file complaint. But if inspite of compromise, if he files complaint and court finds that what iscompromised is compoundable offence, depending upon the facts andH

circumstances of each case Magistrate can refuse to take cognizance,or acquit the accused as offence was compounded or the complaint canbe quashed in proceedings under Section 482 of the CrPC.

73. In compromise, consensus between the parties to give andtake is more important and in compounding, decision of the victim ofthe offence not to prosecute and not to continue with prosecution ismore important.

74. I am of the view that the clauses as contained in the resolutionplan referred to above, only extinguishes the liability of the corporatedebtor and not the natural persons.

75. As per Section 138 of the NI Act, when the cheque wasdishonoured and statutory notice demanding the cheque amount wasissued, the accused shall pay the cheque amount within 15 days fromthe date of receipt of the said notice. The moment the said 15 daysexpired, the cause of action arises. In other words, the offence underSection 138 of the NI Act is complete. Once the cause of action arosefor the offence committed, the complainant has to approach the criminalcourt within one month to take penal action under Section 138 of the NIAct. To put it clearly, the complainant approaches the criminal court notfor recovery of the legally enforceable debt, but for taking penal actionunder Section 138 of the NI Act for the offence already committed bythe accused by not making the payment of the cheque amount despitethe receipt of the statutory notice. The only question before the criminalcourt is whether the cheque issued by the accused towards the dischargeof his liability was dishonoured and despite the service of demand notice,whether he had not paid the amount. There is no bar contained in any ofthe provisions of the IBC, and the NI Act from approaching the criminalcourt to seek penal action under Section 138 of the NI Act.FEW RELEVANT DECISIONS ON THE SUBJECT

76. In State Bank of India v. V. Ramakrishnan and Anotherreported in (2018) 17 SCC 394, this Court held that:-

“31. The Insolvency Law Committee, appointed by the Ministryof Corporate Affairs, by its Report dated 26-3-2018, madecertain key recommendations…..

32. The Committee insofar as the moratorium under Section14 is concerned, went on to find:…

A“5.11. Further, since many guarantees for loans of corporatesare given by its promoters in the form of personal guarantees,if there is stay on actions against their assets during CIRP,such promoters (who are also corporate applicants) may filefrivolous applications to merely take advantage of the stayand guard their assets. In the judgments analysed in thisBrelation, many have been filed by the corporate applicantunder Section 10 of the Code and this may corroborate theabove apprehension of abuse of the moratorium provision.The Committee concluded that Section 14 does not intend tobar actions against assets of guarantors to the debts of theCcorporate debtor and recommended that an explanation toclarify this may be inserted in Section 14 of the Code. Thescope of the moratorium may be restricted to the assets of thecorporate debtor only.”

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25. Section 31 of the Act was also strongly relied upon by therespondents. This section only states that once resolutionplan, as approved by the Committee of Creditors, takes effect,it shall be binding on the corporate debtor as well as theguarantor. This is for the reason that otherwise, under SectionE133 of the Contract Act, 1872, any change made to the debtowed by the corporate debtor, without the surety’s consent,would relieve the guarantor from payment. Section 31(1), infact, makes it clear that the guarantor cannot escape paymentas the resolution plan, which has been approved, may wellinclude provisions as to payments to be made by suchFguarantor. This is perhaps the reason that Annexure VI(e) toForm 6 contained in the Rules and Regulation 36(2) referredto above, require information as to personal guarantees thathave been given in relation to the debts of the corporatedebtor. Far from supporting the stand of the respondents, it isGclear that in point of fact, Section 31 is one more factor infavour of personal guarantor having to pay for debts duewithout any moratorium applying to save him.

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26.1. Section 14 refers only to debts due by corporate debtors,who are limited liability companies, and it is clear that in the

vast majority of cases, personal guarantees are given byDirectors who are in management of the companies. The objectof the Code is not to allow such guarantors to escape from anindependent and co-extensive liability to pay off the entireoutstanding debt, which is why Section 14 is not applied tothem. …”

(Emphasis supplied)

77. In Committee of Creditors of Essar Steel India Limited v.Satish Kumar Gupta and Others reported in (2020) 8 SCC 531, thisCourt held that:

“106. Following this judgment in V. Ramakrishnan case (2018)17 SCC 394, it is difficult to accept Shri Rohatgi’s argumentthat that part of the resolution plan which states that the claimsof the guarantor on account of subrogation shall beextinguished, cannot be applied to the guarantees furnishedby the erstwhile Directors of the corporate debtor. So far asthe present case is concerned, we hasten to add that we aresaying nothing which may affect the pending litigation onaccount of invocation of these guarantees. However, NCLATjudgment being contrary to Section 31(1) of the Code andthis Court’s judgment in V. Ramakrishnan case (2018) 17 SCC394, is set aside.”

(Emphasis supplied)

78. In Vijay Kumar Jain v. Standard Chartered Bank reportedin (2019) 20 SCC 455, this Court held that:

“19.3… we find that Section 31(1) of the Code would make itclear that such members of the erstwhile Board of Directors,who are often guarantors, are vitally interested in resolutionplan as such resolution plan then binds them. Such plan mayscale down the debt of the principal debtor, resulting in scalingdown the debt of the guarantor as well, or it may not. Theresolution plan may also scale down certain debts and notothers, leaving guarantors of the latter kind of debts exposedfor the entire amount of the debt.

19.4. The regulations also make it clear that these personsare vitally interested in resolution plans as they affect them.”

(Emphasis supplied)

A79. In Lalit Kumar Jain (supra), this Court held that:

“122. It is therefore, clear that the sanction of resolutionplan and finality imparted to it by Section 31 does not per seoperate as discharge of the guarantor’s liability. As to thenature and extent of the liability, much would depend on theterms of the guarantee itself. However, this Court hasindicated, time and again, that an involuntary act of theprincipal debtor leading to loss of security, would not absolvea guarantor of its liability…..”

(Emphasis supplied)

80. In JIK Industries Limited and Others v. Amarlal V. Jumaniand Another reported in (2012) 3 SCC 255, this Court held that:

“19. In the instant appeal in most of the cases the offenceunder the NI Act has been committed prior to the scheme.Therefore, the offence which has already been committed priorto the scheme does not get automatically compounded onlyas result of the said scheme. Therefore, even by relying onthe ratio of the aforesaid judgment in J.K. (Bombay) (P)Ltd. [J.K. (Bombay) (P) Ltd. v. New Kaiser-I-Hind Spg. AndWvg. Co. Ltd., AIR 1970 SC 1041], this Court cannot acceptthe appellant’s contention that the scheme under Section 391of the Companies Act will have the effect of automaticallycompounding the offence under the NI Act.

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27. The compounding of an offence is always controlled bystatutory provision. There are various features in thecompounding of an offence and those features must besatisfied before it can be claimed by the offender that theoffence has been compounded. Thus, compounding of anoffence cannot be achieved indirectly by the sanctioning of ascheme by the Company Court.

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70. In the instant case no special procedure has beenprescribed under the NI Act relating to compounding of anoffence. In the absence of special procedure relating tocompounding, the procedure relating to compounding under

Section 320 shall automatically apply in view of clearmandate of sub-section (2) of Section 4 of the Code.

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83. For the reasons aforesaid, this Court is unable to acceptthe contentions of the learned counsel for the appellant(s)that as result of sanction of scheme under Section 391 ofthe Companies Act there is an automatic compounding ofoffences under Section 138 of the NI Act even without theconsent of the complainant.”

(Emphasis supplied)

81. In Indorama Synthetics (I) Ltd., Nagpur v. State ofMaharashtra and others reported in 2016 SCC OnLine Bom 2611, thequestion that arose before the Bombay High Court was whether theexpression “suit or other proceedings” mentioned in Section 446(1) ofthe Companies Act, 1956 would include criminal proceedings under Section138 NI Act. It was held that:-

“17. Thus, the main object of section 138 of N.I. Act, whichcan be inferred, is to safeguard the credibility of commercialtransactions and to prevent bouncing of cheques by providinga personal criminal liability against the drawer of the chequein public interest. No civil liability or any liability against theassets of the drawer of the cheque is contemplated undersection 138 of the N.I. Act. Hence, it follows that the provisionsof section 446(1) of the Companies Act can have apparentlyand in essence no application to the proceedings under section138 of Negotiable Instruments Act, as it is not suit orproceeding having direct bearing on the proceedings forwinding-up or the assets of the Company.

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24. Thus, the sum and substance of all these judicial decisionsis that the provisions of section 446(1) of the Companies Actare to be invoked judiciously only when it has got any concernwith either the winding-up proceedings or with the assets ofthe Company. The expression “suit or other proceedings”,therefore, as used in section 446(1) of the Companies Act,has to be construed accordingly and not to be interpreted soliberally and widely so as to include each and every

Aproceeding of whatsoever nature initiated against theCompany, including even the criminal proceedings like forthe offence under section 138 of N.I. Act, which has got nobearing on the winding-up proceedings of the Company andare not concerned with, directly with the assets of theCompany, but are mainly dealing with the penal and personalBliability of the Directors of the Company.

25. The conflict involved in the case can also be looked intofrom another aspect ‘as to whether the provisions of section138 of N.I. Act can override the provisions of Companies Act,as it is very special provision incorporated in the NegotiableCInstruments Act, though the Companies Act contains certainspecial provisions in order to safeguard the rights of theCompany under liquidation?’

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28. If one considers the provisions of section 138 of the N.I.Act, which are introduced subsequently by way of amendmentin the said Act, in the year 1988, it being subsequent Statute,it will necessarily override the provisions of General Statute,like, the Companies Act.

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30. Thus, there is long line of decisions making the positionclear that the expression ‘suit or legal proceedings’, used insection 446(1) of the Companies Act, can mean only thoseproceedings which can have bearing on the assets of thecompanies in winding-up or have some relation with the issuein winding-up. It does not mean each and every civilproceedings, which has no bearing on the winding-upproceedings, or criminal offences where the Director of theCompany is presently liable for penal action.”

(Emphasis supplied)

82. In Manish Kumar (supra), this Court upheld Section 32A ofthe IBC and stated thus:

“318. The first proviso in sub-section (1) declares that if thereis approval of resolution plan under Section 31 and aHprosecution has been instituted during the CIRP against the

corporate debtor, the corporate debtor will stand discharged.This is, however, subject to the condition that the requirementsin sub-section (1), which have been elaborated by us, havebeen fulfilled. In other words, if under the approved resolutionplan, there is change in the management and control of thecorporate debtor, to person, who is not promoter, or inthe management and control of the corporate debtor, or arelated party of the corporate debtor, or the person whoacquires control or management of the corporate debtor, hasneither abetted nor conspired in the commission of theoffence, then, the prosecution, if it is instituted after thecommencement of the CIRP and during its pendency, will standdischarged against the corporate debtor. Under the secondproviso to sub-section (1), however, the designated partnerin respect of the liability partnership or the officer in default,as defined under Section 2(60) of the Companies Act, 2013,or every person, who was, in any manner, in charge orresponsible to the corporate debtor for the conduct of itsbusiness, will continue to be liable to be prosecuted andpunished for the offence committed by the corporate debtor.This is despite the extinguishment of the criminal liability ofthe corporate debtor under sub-section (1). Still further, everyperson, who was associated with the corporate debtor in anymanner, and, who was directly or indirectly involved in thecommission of such offence, in terms of the report submittedand report filed by the investigating authority, will continueto be liable to be prosecuted and punished for the offencecommitted by the corporate debtor.

319. Thus, the combined reading of the various limbs of sub-section (1) would show that while, on the one hand, thecorporate debtor is freed from the liability for any offencecommitted before the commencement of the CIRP, the statutoryimmunity from the consequences of the commission of theoffence by the corporate debtor is not available and thecriminal liability will continue to haunt the persons, who werein charge of the assets of the corporate debtor, or who wereresponsible for the conduct of its business or those who wereassociated with the corporate debtor in any manner, and who

were directly or indirectly involved in the commission of theoffence, and they will continue to be liable.

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326. We are of the clear view that no case whatsoever is madeout to seek invalidation of Section 32-A. The boundaries ofBthis Court’s jurisdiction are clear. The wisdom of thelegislation is not open to judicial review. Having regard tothe object of the Code, the experience of the working of theCode, the interests of all stakeholders including mostimportantly the imperative need to attract resolution applicantswho would not shy away from offering reasonable and fairCvalue as part of the resolution plan if the legislature thoughtthat immunity be granted to the corporate debtor as also itsproperty, it hardly furnishes ground for this Court tointerfere. The provision is carefully thought out. It is not as ifthe wrongdoers are allowed to get away. They remain liable.DThe extinguishment of the criminal liability of the corporatedebtor is apparently important to the new management tomake clean break with the past and start on clean slate.We must also not overlook the principle that the impugnedprovision is part of an economic measure. The reverencecourts justifiably hold such laws in cannot but be applicableEin the instant case as well. The provision deals with referenceto offences committed prior to the commencement of the CIRP.With the admission of the application the management of thecorporate debtor passes into the hands of the interim resolutionprofessional and thereafter into the hands of the resolutionFprofessional subject undoubtedly to the control by theCommittee of Creditors. As far as protection afforded to theproperty is concerned there is clearly rationale behind it.Having regard to the object of the statute we hardly see anymanifest arbitrariness in the provision.

327…..Significantly every person who was associated withthe corporate debtor in any manner and who was directly orindirectly involved in the commission of the offence in termsof the report submitted continues to be liable to be prosecutedand punished for the offence committed by the corporatedebtor.”

(Emphasis supplied)

83. In P. Mohanraj (supra) Full Bench of this Court held thus:

“41. Section 32-A cannot possibly be said to throw any lighton the true interpretation of Section 14(1)(a) as the reasonfor introducing Section 32-A had nothing whatsoever to dowith any moratorium provision. At the heart of the section isthe extinguishment of criminal liability of the corporate debtor,from the date the resolution plan has been approved by theadjudicating authority, so that the new management maymake clean break with the past and start on clean slate. Amoratorium provision, on the other hand, does not extinguishany liability, civil or criminal, but only casts shadow onproceedings already initiated and on proceedings to beinitiated, which shadow is lifted when the moratorium periodcomes to an end. Also, Section 32-A(1) operates only afterthe moratorium comes to an end. At the heart of Section 32-Ais the IBC’s goal of value maximisation and the need toobviate lower recoveries to creditors as result of thecorporate debtor continuing to be exposed to criminal liability.42. Unfortunately, Section 32-A is inelegantly drafted. Thesecond proviso to Section 32-A(1) speaks of persons who arein any manner in charge of, or responsible to the corporatedebtor for the conduct of its business or associated with thecorporate debtor and who are, directly or indirectly, involvedin the commission of “such offence” i.e. the offence referredto in sub-section (1), “as per the report submitted or complaintfiled by the investigating authority …”. The report submittedhere refers to police report under Section 173 CrPC, andcomplaints filed by investigating authorities under specialActs, as opposed to private complaints. If the language of thesecond proviso is taken to interpret the language of Section32-A(1) in that the “offence committed” under Section 32-A(1) would not include offences based upon complaints underSection 2(d) CrPC, the width of the language would be cutdown and the object of Section 32-A(1) would not be achievedas all prosecutions emanating from private complaints wouldbe excluded. Obviously, Section 32-A(1) cannot be read inthis fashion and clearly incudes the liability of the corporatedebtor for all offences committed prior to the commencement

of the corporate insolvency resolution process. Doubtless, aSection 138 proceeding would be included, and would, afterthe moratorium period comes to an end with resolution planby new managementbeing approved by the adjudicatingauthority, cease to be an offence qua the corporate debtor.

43….the expression “prosecution” in the first proviso ofSection 32-A(1) refers to criminal proceedings properly so-called either through the medium of first information reportor complaint filed by an investigating authority or complaintand not to quasi-criminal proceedings that are instituted underSections 138/141 of the Negotiable Instruments Act againstthe corporate debtor, the object of Section 14(1) IBC getssubserved, as does the object of Section 32-A, which doesaway with criminal prosecutions in all cases against thecorporate debtor, thus absolving the corporate debtor fromthe same after new management comes in.

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45. Section 138 contains within it the ingredients of the offencemade out. The deeming provision is important in that thelegislature is cognizant of the fact that what is otherwise acivil liability is now also deemed to be an offence, since thisliability is made punishable by law. It is important to note thatthe transaction spoken of is commercial transaction betweentwo parties which involves payment of money for debt orliability. The Explanation to Section 138 makes it clear thatsuch debt or other liability means legally enforceable debtor other liability. Thus, debt or other liability barred by thelaw of limitation would be outside the scope of Section 138.This, coupled with fine that may extend to twice the amountof the cheque that is payable as compensation to the aggrievedparty to cover both the amount of the cheque and the interestand costs thereupon, would show that it is really hybridprovision to enforce payment under bounced cheque if it isotherwise enforceable in civil law. Further, though theingredients of the offence are contained in the first part ofSection 138 when the cheque is returned by the bank unpaidfor the reasons given in the section, the proviso gives anopportunity to the drawer of the cheque, stating that the

drawer must fail to make payment of the amount within 15days of the receipt of notice, again making it clear that thereal object of the provision is not to penalise the wrongdoerfor an offence that is already made out, but to compensatethe victim.”

(Emphasis supplied)

84. In Narinder Garg and Others v. Kotak Mahindra BankLtd. and Others reported in (2022) SCC OnLine SC 517, this Courtheld that:

“3. In P. Mohanraj v. Shah Brothers Ispat Private Limited,(2021) 6 SCC 258, Bench of three-Judges of this Courtconsidered the matter whether corporate entity in respectof which moratorium had become effective could be proceededagainst in terms of Sections 138 and 141 of the NegotiableInstruments Act, 1881 (“the Act” for short).

4. subsidiary issue was also about the liability of naturalpersons like Director of the Company. In paragraph 77 ofits judgment, this Court observed that the moratoriumprovisions contained in Section 14 of the Insolvency andBankruptcy Code, 2016 would apply only to the corporatedebtor and that the natural persons mentioned in Section 141of the Act would continue to be statutorily liable under theprovisions of the Act.

5. It is submitted by Mr. Gopal Sankaranarayanan, learnedSenior Advocate that the resolution plan having been acceptedin which the dues of the original complainant also figure, theeffect of such acceptance would be to obliterate any pendingtrial under Sections 138 and 141 of the Act.

6. The decision rendered in P. Mohanraj is quite clear on thepoint and, as such, no interference in this petition is calledfor.”

(Emphasis supplied)

85. Thus, the upshot of all the decisions referred to above is wherethe proceedings under Section 138 of the NI Act had already commencedwith the Magistrate taking cognizance upon the complaint and duringthe pendency, the company gets dissolved, the signatories/directors cannot

Aescape from their penal liability under Section 138 of the NI Act byciting its dissolution. What is dissolved, is only the company, not thepersonal penal liability of the accused covered under Section 141 of theNI Act.

86. I may draw my final conclusions as under:B

(a)After passing of the resolution plan under Section 31 of theIBC by the adjudicating authority & in the light of theprovisions of Section 32A of the IBC, the criminalproceedings under Section 138 of the NI Act will standterminated only in relation to the corporate debtor if theCsame is taken over by new management.

(b)Section 138 proceedings in relation to the signatories/directors who are liable/covered by the two provisos toSection 32A(1) will continue in accordance with law.

87. In view of the aforesaid discussion, the appeal fails and isDhereby dismissed.

88. The connected appeals also fail and are hereby dismissed.89. Pending application(s), if any, shall stand disposed of.

EAnkit Gyan(Assisted by : Adityaraj Patodia and Mahendra Yadav, LCRAs)

Appeals dismissed.