2000 (2) TMI 724 - SC - Companies Law

Company Directors Not Immune in Criminal Case Despite Sick Company Status

The court held that criminal proceedings under Section 138 of the Negotiable Instruments Act can continue against a company and its directors even after ... Whether a company and its directors can be proceeded against for having committed an offence under section 138 of the Negotiable Instruments Act, 1881 after the company has been declared sick under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 before the expiry of the period of payment of the cheque amount? Held that:- Section 22 SICA does not create any legal impediment for instituting and proceeding with a criminal case on the allegations of an offence under section 138 against a company or its directors. The section as we read it only creates an embargo against disposal of assets of the company for recovery of its debts. The purpose of such an embargo is to preserve the assets of the company from being attached or sold for realisation of dues of the creditors. The section does not bar payment of money by the company or its directors to other persons for satisfaction of their legally enforceable dues. Non good reason for accepting the contentions raised by the learned counsel for the appellants in favour of the prayer for quashing the criminal proceedings or for keeping the proceedings in abeyance. It will be open to the appellants to place relevant materials in this regard before the learned magistrate before whom the cases are pending and the learned magistrate will examine the matter keeping in mind the discussions made in this judgment Issues Involved:1. Whether a company and its directors can be proceeded against under Section 138 of the Negotiable Instruments Act, 1881 after the company has been declared sick under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).2. Interpretation of Section 138 of the Negotiable Instruments Act and its interaction with relevant provisions of SICA.3. Applicability of Sections 22 and 22A of SICA to criminal proceedings under Section 138 of the Negotiable Instruments Act.4. Impact of BIFR's declaration and orders on the proceedings under Section 138 of the Negotiable Instruments Act.Detailed Analysis:1. Whether a company and its directors can be proceeded against under Section 138 of the Negotiable Instruments Act, 1881 after the company has been declared sick under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA):The court examined whether criminal proceedings under Section 138 of the Negotiable Instruments Act can continue against a company and its directors after the company has been declared sick under SICA. The court held that Section 22 of SICA does not bar criminal proceedings. It only restricts proceedings for winding up, execution, distress, or the like against the properties of the company. Therefore, the criminal proceedings under Section 138 can proceed irrespective of the company's status under SICA.2. Interpretation of Section 138 of the Negotiable Instruments Act and its interaction with relevant provisions of SICA:The court analyzed the ingredients required to constitute an offence under Section 138 of the Negotiable Instruments Act. These include drawing a cheque for discharge of debt, presentation of the cheque within six months, dishonour due to insufficiency of funds, notice of demand within 15 days of dishonour, and failure to pay within 15 days of notice. The court found that these conditions were satisfied in the present case, thus justifying the magistrate's cognizance of the offence and issuance of summons.3. Applicability of Sections 22 and 22A of SICA to criminal proceedings under Section 138 of the Negotiable Instruments Act:The court clarified that Section 22 of SICA, which suspends legal proceedings, does not apply to criminal proceedings. It only applies to proceedings for recovery of money or enforcement of security against the company. The court also addressed the argument that if convicted, the realization of fines would affect the company's assets, stating that this concern is premature and not a ground to quash the criminal proceedings.4. Impact of BIFR's declaration and orders on the proceedings under Section 138 of the Negotiable Instruments Act:The court discussed Section 22A of SICA, which restricts the disposal of assets of a sick company without BIFR's consent. It acknowledged that if a restraint order under Section 22A was in place before the cheque was drawn or before the expiry of the statutory notice period, it might affect the completion of the offence under Section 138. In such cases, the failure to honour the cheque could be considered beyond the control of the accused. However, this would depend on the specific facts and circumstances of each case, and the magistrate should consider these aspects during the trial.Conclusion:The court concluded that Section 22 of SICA does not create a legal impediment for instituting and proceeding with a criminal case under Section 138 of the Negotiable Instruments Act. The appeals were disposed of with the observation that the appellants could present relevant materials before the magistrate, who would examine the matter in light of the court's discussions. The court did not address whether Section 138 was attracted in specific cases, leaving that determination to the trial court based on the evidence presented.