Can passing of a Resolution Plan obliterate proceedings under section 138 of NI Act?

Introduction

The Supreme Court of India vide its order dated 28th March, 2022 in Narinder Garg v. Kotak Mahindra Bank Ltd. (“Narinder Garg”) decided upon the effect of the passing of a resolution plan, under section 30(4)  of the Insolvency and Bankruptcy Code, 2016 (“IBC”), on the validity of proceedings under section 138 of the Negotiable Instruments Act (“NI Act”). Given its brief nature, relying solely upon the landmark case of P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (“P. Mohanraj”), and its lack of reasoning for its ratio, this case has not entered the academic circle of debate despite its notable implications. While the judgement settles the position of law pertaining to the particular interface of the IBC and NI Act, its lack of rationale creates a shroud of ambiguity which this article aims to unveil.

Factual Background 

The judgement was made in light of a writ petition filed before the court which sought for the complaints pending before the Judicial Magistrate against the Directors of the Company under section 138 and section 141 of the NI Act to be quashed. The arguments of the learned Advocate for Narinder Garg (Petitioner) was that the effect of the passing of a resolution plan in which the dues of the complainant also figure, would be to obliterate any pending trials under the NI Act. In response to this, the 3 judge bench held that “The decision rendered in P. Mohanraj is quite clear on the point and, as such, no interference in this petition is called for,” and dismissed the writ petition.

Relevance of decision in P. Mohanraj 

In P. Mohanraj, following a detailed analysis of the quasi-criminal nature of a section 138 offence, the Supreme Court determined that it would fall within the ambit of ‘proceedings’ under Section 14 of the IBC relating to the moratorium period. However, it declared that this protection of the moratorium period would only extend towards the Company. Natural persons including the directors of the company would continue to be held liable.

NI Act

The primary reasoning laid down by the court was that the moratorium period casts a temporary “shadow” upon the liability of the Company, through legal fiction, but does not extinguish the debt altogether. Hence it was possible to fulfil the requirement of ‘an existing debt or liability’ for completion of an offence under section 138 of the NI Act, and thereby extend vicarious liability to the directors.

However, in the Narinder Garg case, once the resolution plan is passed, and the moratorium is lifted, the Company’s debt is considered ‘extinguished’ as per Gaurav Dalmia v. RBI. With the exception of the dues paid under the resolution plan, no further debt is considered to be owed. However, as one of the core ingredients of section 138 of NI Act is a ‘debt’ owed to the drawee for the payment of which the cheque was drawn, this poses an issue of interpretation as to the ramifications of the Corporate Insolvency Resolution Process (“CIRP”) on the validity of a section 138 charge, reducing the relevance of P. Mohanraj.

Effect of extinguishment of debt

Yet, it has been observed that in proceedings under section 138 of the NI Act, the requirement of the existing debt is to be at the time of the offence, more specifically at the time of presentation of the cheque. Therefore, in determining whether or not the extinguishment of the debt has any bearing on the proceedings it would be necessary to understand whether this ‘extinguishment’ is sufficient so as to ‘obliterate’ the charge under section 138.

In this regard, related case law on ‘debt’ under section 138 indicates that part payment does not absolve the drawer from liability. As per Rajneesh Aggarwal v. Amit Kumar Bhalla, mere offer of payment at a later stage by the accused, cannot compel the complainant to accept it and the complainant would be justified in pursuing the complaint which was lodged under the NI Act. Applying the same principle, the acceptance of the resolution plan to clear dues at a later stage would not have the effect of obliterating the proceedings under the NI Act.

This consideration is buttressed by the objective of the NI Act as elucidated in Lafarge Aggregates & Concrete India case which is to ensure that the accused honours negotiable instruments to increase their credibility in business transactions. Also, the Goa Plast Pvt. Ltd. case discusses the incalculable loss and injury to the payee caused by dishonour of cheques as a result of which up to twice the amount of the cheque is paid as compensation. In due regards, if the debt were to be considered ‘extinguished’ so as to disqualify proceedings under section 138, upon approval of the resolution plan, this primary objective would be lost.

Therefore, the provisions of IBC intend only to protect the assets of the company notwithstanding the right to recovery of debt by means of section 138 r/w section 141 of the NI Act through the directors and officer in charge. The benefit of some remedy or payment through the resolution plan should not debar or dilute criminal prosecution or absolve liability of the previous management.

Understanding or effect of section 32A

The purpose of section 32A of the IBC was to absolve the liability of the corporate debtor such that resolution applicants are not deterred from acquiring the company and exempted from liability of criminal acts of its antecedents. But, the bare perusal of the proviso of the section 32A of the IBC provides an understanding that designated partners, officers in default, or persons in charge of the activities of the business involved in the commission of the crimes prior to or during CIRP can be continue to be prosecuted and held liable even after approval of the resolution plan without the consideration that the liability of corporate debtor has ceased to exist. This idea that the wrongdoers cannot be allowed to wash off their liability for the offence committed was reinstated in Manish Kumar v. UOI. Considering this point, the passing of the resolution plan should have no bearing on the criminal liability under cheque bounce cases.

Analysing the reasoning (or lack thereof) in Narinder Garg

The judgement lacks reasoning of these pertinent issues essential for understanding the unsettled legal position. It only recites the reasoning provided under P. Mohanraj’s case, which is fairly differentiated from the case at hand. The lack of limpidity on the intersection of the IBC and NI Acts, as specifically brought out by the facts of this unique case created a need and provided the court with an opportunity to clear the lacuna by determining the legal impacts of post-debt clearance on a section 138 offence.

Considering that a 3-judge bench was deciding the case, the substantial questions of law could have been dealt with in depth and a forward-looking precedent could have been set up. As per  UOI v. Raghubir Singh the reasoning provided in a judgement symbolises a declaration of law which has a precedential value for future cases. Unfortunately, in the present case there persists an ambiguity in its scope of application and interpretation diminishing its precedential value for future cases. Another factor to notice is that the case was evidently de-tagged from the P. Mohanraj case. In light of the same, and given the distinction in the factual matrix and substantive issues of the present case, the bench erred in deciding the matter solely on the basis of the decision in P. Mohanraj.

Conclusion 

To sum up, the directions and final ratio of the court, holding that passing of a resolution plan would not obliterate proceedings under section 138 of the NI Act is in consonance with law, and holds water when analysed. Yet, the absence of detailed reasoning in the order reduces its value. It cannot be negated that the final decision was on the right end but the path followed was wrong as there was a stark difference in nature of debt prior and post approval of the resolution plan. It should clearly be demarcated that to proceed with a cheque bounce case, there is a need for the debt in question to exist and to explicate the implications of the advent of IBC on the validity of the proceedings.

The issues surrounding the arbitrage between the provisions of  IBC with various other specialised laws such as the NI Act are vast which require clarity by the apex court for smooth implementation. This must form a key note for future cases similar to Narinder Garg, wherein the apex court must take initiative to precisely determine these grey areas through a reasoned decision.

Author: : Niharika Agarwal, A Student of Gujarat National Law University, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

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