Case Title: Ajay Kumar Radheshyam Goenka Vs. Tourism Finance Corporation of India Ltd.
Introduction
Welcome to the official blog of the Law Offices of Kr. Vivek Tanwar Advocate and Associates, where we are dedicated to providing litigation support services for matters related to IBC Debt and NI Act Charges. In today’s blog post, we aim to shed light on the prevailing issues surrounding the IBC Debt and NI Act Charges, the legal framework for their protection, and the steps we can take as a society to combat these acts. Join us as we explore this critical subject and empower you with the knowledge to protect your rights and safety.
In a significant ruling, the Supreme Court has settled the issue regarding whether the extinguishment of debt under the Insolvency and Bankruptcy Code (IBC) leads to the discharge of criminal proceedings under Section 138 of the Negotiable Instruments Act (NI Act). The verdict, delivered by a bench consisting of Justice Sanjay Kishan Kaul, Justice Abhay S Oka, and Justice JB Pardiwala, reaffirms the independence of these two legal processes and upholds the penal liability of signatories and directors even in the event of debt extinguishment under the IBC.
The Legal Dispute
The case in question involved M/s Rainbow Papers Limited, referred to as the “Accused Company,” which had borrowed funds from the Tourism Finance Corporation of India Limited. In a bid to meet its financial obligations, the company issued a post-dated check, which was subsequently dishonored due to “Account Closed.” A demand-cum-legal notice under Section 138 of the Negotiable Instruments Act was sent, demanding the settlement of the debt. When the company failed to make the payment, legal proceedings commenced, and simultaneously, a request for initiating the Corporate Insolvency Resolution Process under the IBC was made.
Court’s Ruling
The primary issue before the Supreme Court was whether the NI Act proceedings could continue alongside IBC proceedings. In the context of this matter, Justice Sanjay Kishan Kaul and Justice Abhay S Oka, in their analysis, pointed out that the nature and scope of proceedings under the IBC and the NI Act differ significantly and do not overlap. Section 138 of the NI Act pertains to criminal penalties and is not akin to debt recovery proceedings. Debt extinguishment under the IBC, which falls under Sections 31 and 38 to 41, cannot automatically extinguish criminal proceedings under Section 138 of the NI Act.
IBC Debt Extinguishment Doesn’t Automatically Clear Criminal Charges
In a related context, it was emphasized that the Insolvency and Bankruptcy Code (IBC) process, including Section 31 or Sections 38 to 41, designed to extinguish debt, does not automatically result in the dismissal of criminal proceedings. While the IBC may require parties to make sacrifices to settle debts and potentially liquidate or revive a company, the personal liability of individuals involved, such as the appellant, who was both a signatory of the check and the Accused company’s Promoter and Managing Director, remains. Their attempt to escape criminal liability for early loan payment default was rejected, even though the loan account itself was closed.
Legal View on IBC and Criminal Liability
Moreover, the court underscored its rejection of the notion that proceedings under Section 138 of the Negotiable Instruments Act (N.I. Act) are essentially compensatory. It clarified that the criminal liability and fines within these proceedings stem from the fundamental principle of honoring negotiable instruments to maintain the integrity of trade, distinct from financial obligations. The acceptance of extinguishing criminal consequences under Section 138 due to an approved scheme or debt recovery process was deemed unacceptable.
In a concurring judgment, Justice JB Pardiwala affirmed that the extinguishment of debt under the IBC does not lead to the discharge of signatories or directors under Section 138 proceedings. Drawing a parallel with the guarantor’s liability, the judge stated that the guarantor remains liable even after an IBC plan is approved, similarly, the signatories/directors cannot escape their liability through IBC’s debt extinguishment provisions.
IBC Debt Extinguishment: No Escape for Directors from Section 138 Proceedings
The court also emphasized that in cases where Section 138 proceedings under the Negotiable Instruments (NI) Act had already commenced, the approval of a resolution plan or company dissolution wouldn’t absolve directors and other accused parties from their liability. The dissolution solely pertains to the company, not the personal penal liability of those covered under Section 141 of the NI Act. As a result, they would still be subject to prosecution. Even if the company survived the resolution process, the former directors couldn’t represent it.
Consequently, the Court rejected the appeal.
Conclusion
In conclusion, the Supreme Court’s decision underscores that the debt extinguishment under the IBC does not absolve the penal liability under Section 138 of the NI Act. Even if a company is dissolved or its plan is approved, signatories and directors will remain subject to prosecution under Section 138. The court dismissed the appeal, thus resolving a contentious legal issue.
We are a law firm in the name and style of Law Offices of Kr. Vivek Tanwar Advocate and Associates at Gurugram and Rewari. We are providing litigation support services for matters related to the IBC Debt and NI Act Charges.
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