Initiation Of IBC Proceedings Doesn't Exempt Cheque Signatory From Liability Under Negotiable Instruments Act: Madhya Pradesh High Court

Initiation Of IBC Proceedings Doesn't Exempt Cheque Signatory From Liability Under Negotiable Instruments Act: Madhya Pradesh High Court

The Madhya Pradesh High Court, Justice Gurpal Singh Ahluwalia, has ruled that the initiation of proceedings under the Insolvency and Bankruptcy Code, 2016 does not absolve the signatory of a cheque from liability under the Negotiable Instruments Act, 1881.

The applicant approached the Madhya Pradesh High Court (High Court) by filing an application under Section 482 of the Cr.P.C., seeking examination of records in a case pending before the II Additional Sessions Judge and the quashing of a condition to deposit ₹13,73,890. This condition was imposed in an application under Section 389 of the Cr.P.C., which sought suspension of the execution of the sentence, including the order to pay compensation, during the appeal's pendency. The petitioner argued that this condition was impacted by an interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016, initiated by the National Company Law Tribunal, Indore Bench.

The applicant had been convicted under Section 138 of the Negotiable Instruments Act and was sentenced to six months in jail with a compensation amount of ₹68,69,457.24. Aggrieved by this judgment, the applicant filed an appeal along with an application under Section 389 of the Cr.P.C.

The applicant contended that he was the guarantor of M/s Shree Geeta Textiles Private Limited, which defaulted on debt payments. Consequently, the borrower filed an application under Section 94 of the Insolvency and Bankruptcy Code, 2016, with the National Company Law Tribunal, Indore Bench, for initiating the insolvency resolution process. The applicant argued that under Section 96 of the Code, an interim moratorium commenced from the date of filing for personal insolvency. Therefore, the interim moratorium was effective on the date of the conviction judgment and remained in effect until the date of filing the appeal. It was argued that this interim moratorium rendered the conviction and the direction to pay compensation conditions for suspending the sentence, contrary to Section 96 of the IBC.

The High Court referred to the Supreme Court's ruling in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited, where the Supreme Court highlighted the distinction between proceedings under the Insolvency and Bankruptcy Code (IBC) and those under the Negotiable Instruments Act (NI Act). The Supreme Court emphasized that these proceedings are separate and non-overlapping, with Section 138 proceedings under the NI Act being criminal in nature as opposed to civil proceedings. As such, they are not governed by the IBC provisions.

Furthermore, the Supreme Court clarified that the approval of a resolution plan under the IBC does not absolve individuals, such as signatories of cheques or directors of corporate debtors, from criminal liability under Section 138 of the NI Act. The court referred to the legal principle "lex non cogit ad impossibilia" (the law does not compel the impossible) to stress that the dissolution of a company does not eliminate the personal criminal liability of the accused.

Accordingly, the High Court ruled that the initiation of IBC proceedings does not exempt a cheque signatory from liability under the NI Act. Therefore, it upheld the conviction rendered by the Trial Court, confirming that it was not invalidated by the commencement of IBC proceedings. Consequently, the High Court affirmed the Appellate Court's decision requiring the applicant to deposit ₹13,73,890 as a condition for suspending the sentence.