Legal Issue

The principal issue was whether criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881 could be quashed against a company undergoing CIRP and liquidation under the Insolvency and Bankruptcy Code, 2016, particularly when the dishonoured cheque was drawn on the personal account of a director and not on the company’s bank account. The Court also examined whether the summoning order suffered from non-application of mind.

Brief Facts

A complaint under Section 138 NI Act was filed in respect of a cheque for ?2 crores dated 05.06.2018, drawn on the personal account of a director of the petitioner-company pursuant to a Deed of Personal Guarantee. The cheque was dishonoured on 08.06.2018. The company was subsequently admitted into CIRP on 03.01.2020 and ordered into liquidation on 26.02.2021. The company, through its liquidator, approached the High Court under Section 482 CrPC seeking quashing of the summoning order dated 23.08.2018 and also challenged rejection of its application seeking stay of proceedings under Section 33(5) IBC.

Court’s Reasoning

The Court first addressed the argument that since the cheque was drawn on the personal account of the director, the company could not be arrayed as an accused. It held that the cheque had been issued pursuant to a Personal Guarantee Deed executed in favour of the complainant to secure performance of obligations of the company. At the summoning stage, it was not possible to conclusively infer that the cheque was not issued in discharge of a liability of the company. Whether the liability ultimately attaches to the company is a matter for trial. On the impact of insolvency proceedings, the Court noted that the dishonour of cheque occurred in 2018, whereas CIRP commenced only in January 2020 and liquidation followed in February 2021. Therefore, the alleged offence under Section 138 NI Act arose prior to the moratorium and liquidation. Whether subsequent insolvency proceedings would efface or affect criminal liability would have to be examined during trial in light of Sections 33(5) and 35(1)(k) of the IBC. The Court did not accept that initiation of CIRP automatically nullifies criminal proceedings arising from pre-CIRP conduct. Regarding the summoning order, although the Magistrate had not elaborately narrated the ingredients of the offence, the High Court held that at the stage of issuing process under. Section 204 CrPC in a Section 138 complaint, detailed reasoning is not mandatory. The Magistrate had considered the complaint, affidavit, original cheque, return memo and statutory notice before forming a prima facie opinion. Applying the principles laid down in Pepsi Foods, Mehmood Ul Rehman, and Sunil Todi, the Court found no sufficient ground to invoke inherent jurisdiction under Section 482 CrPC to quash the proceedings.