In a recent instance, the Appellant, who was the promoter and managing director of M/s Rainbow Papers Limited (“Accused Company”), issued a post-dated cheque to pay a term loan installment received from a public financial institution (“Respondent”). When presented to the Respondent’s bankers, the cheque was returned with the reason “Account Closed.” Following that, the Respondent filed a complaint against the Accused Company and the Appellant under Sections 138, 141, and 142 of the Negotiable Instruments Act,1881 (“NIA”). Meanwhile, M/s Neeraj Paper Agencies Limited filed an application under Section 9 of the Insolvency and Bankruptcy Code (“IBC”) to initiate corporate insolvency resolution proceedings against the Accused Company, which was eventually admitted, and the National Company Law Tribunal (“NCLT”) approved a resolution plan. The Appellant submitted an application for discharge of the NIA proceeding because the debt was satisfied in the IBC proceedings, the NIA Proceeding would not survive, which was denied by both the Magistrate Court and the High Court. The Appellant filed this appeal with the Supreme Court.
The Appellant contended that since the debt had been paid in the IBC proceedings, the NIA Proceedings would be null and void. The Respondent contended that criminal proceedings under Section 138 of the NIA would be dismissed only if the corporate debtor was taken over by new management.
The bench noted that the scope and substance of proceedings under the IBC and the NIA are fundamentally different and would not be interceded with. Firstly, the court ruled that the moratorium imposed by Section 14 of the IBC does not extend to proceedings brought against signatories/directors under the NIA. Secondly, the court further ruled that the NIA actions are not like debt collection processes, but rather punitive. Apart from the idea of financial culpability per se, the court ruled that criminal liability and fines are based on the premise of failing to honor a negotiable instrument, which has a direct impact on trade. Thirdly, the court further ruled that the signatory/personal director’s penal obligation under Section 141 of the NIA would not be discharged with the liquidation of the Accused Company. Finally, the adoption of the resolution plan under Section 31 of the IBC and in light of Section 32A of the IBC, the criminal proceedings under Section 138 of the NIA will be terminated only concerning the corporate debtor if the same is taken over by new management.