Supreme Court on Cheque Bounce

Posted on 17 March, 2023 by Administrator

In a matter of Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Ltd, The Supreme Court on Thursday reiterated that the insolvency process initiated to recover debt does not absolve accused from criminal liability in cheque dishonour cases.

A Bench of Justices Sanjay Kishan Kaul, Abhay S Oka and JB Pardiwala clarified that  proceedings under Section 138 of the Negotiable Instruments (NI) Act are penal in character and not mere recovery or suit proceedings.

"We are unable to accept the plea that Section 138 of the N.I. Act proceedings are primarily compensatory in nature and that the punitive element is incorporated only at enforcing the compensatory proceedings. The criminal liability and the fines are built on the principle of not honouring a negotiable instrument, which affects trade. This is apart from the principle of financial liability per se. To say that under a scheme which may be approved, a part amount will be recovered or if there is no scheme a person may stand in a queue to recover debt would absolve the consequences under Section 138 of the N.I. Act, is unacceptable," the majority opinion signed by Justices Kaul and Oka stated.

"It cannot be said that the process under the IBC whether under Section 31 or Sections 38 to 41 which can extinguish the debt would ipso facto apply to the extinguishment of the criminal proceedings."

The Bench said it could not accept the contention that if proceedings against the company under the Insolvency and Bankruptcy Code (IBC) come to an end, then a managing director cannot be proceeded against in the criminal case. Accordingly, the Court upheld a Delhi High Court order that had refused to set aside a magistrate order rejecting the discharge application of the present appellant in a ₹30 crore default case.

The appellant had moved the top court contending that once the debt involved was extinguished under the IBC, the basis of Section 138 of the NI Act disappears. It was pointed out that the National Company Law Appellate Tribunal (NCLAT) had admitted the insolvency application.

Counsel for the respondent argued that the appellant had deliberately and with mala fide intentions given a cheque to defraud it. The Court at the outset noted that scope of proceedings under the two Acts were quite different and do not intercede each other.

" ... a bare reading of Section 14 of the IBC would make it clear that the nature of proceedings which have to be kept in abeyance do not include criminal proceedings, which is the nature of proceedings under Section 138 of the N.I. Act. We are unable to appreciate the plea of the learned counsel for the Appellant that because Section 138 of the N.I. Act proceedings arise from a default in financial debt, the proceedings under Section 138 should be taken as akin to civil proceedings rather than criminal proceedings."

The Bench opined that possible recovery of the debt in question would not ipso facto apply 'to the extinguishment of the criminal proceedings'. It called into question the conduct and bonafides of the appellant.

"No doubt in terms of the Scheme under the IBC there are sacrifices to be made by parties to settle the debts, the company being liquidated or revitalized. The Appellant before us has been roped in as a signatory of the cheque as well as the Promoter and Managing Director of the Accused company, which availed of the loan. The loan agreement was also signed by him on behalf of the company. What the Appellant seeks is escape out of criminal liability having defaulted in payment of the amount at a very early stage of the loan. In fact, the loan account itself was closed."

The appeal was accordingly, dismissed, but without costs, as the respondent had not filed a synopsis in the case.