1998 (6) TMI 587 - HC - Indian Laws

Court dismisses criminal writ petitions, directs accused to appear before magistrates

The court dismissed all criminal writ petitions, vacated the interim stay, and directed the accused to appear before magistrates on specified dates. It ... Failure to make payment under section 138 of the Negotiable Instruments Act - Voidness of dispositions during winding up proceedings under section 536(2) of the Companies Act - Deeming commencement of winding up from presentation of petition under section 441(2) of the Companies Act - Effect of presentation of a winding up petition on company's power to make payments - Court's power to validate or protect dispositions during pendency of winding up proceedings - Interaction between Companies Act and Negotiable Instruments Act regarding criminal liabilityEffect of presentation of a winding up petition on company's power to make payments - Failure to make payment under section 138 of the Negotiable Instruments Act - Mere presentation of a petition for winding up does not create an absolute bar or legal disability preventing the company or its directors from making payments and, consequently, non-payment within 15 days after demand will amount to 'failure to make payment' under section 138. - HELD THAT: - The Court held that if presentation of a winding up petition alone rendered all dispositions void ab initio, it would paralyse ordinary commercial activity and facilitate abuse by creditors or companies. Authorities recognise that companies must be able to carry on business and make payments in the ordinary course; the company court has power to sanction or protect dispositions made in good faith and for commercial necessity. Absent an order for winding up or appointment of a provisional liquidator (or other specific legal disability such as an injunction), there is no statutory prohibition on making payments. Thus where no legal restraint existed during the 15 day period after receipt of notice, non payment is a factual 'failure to make payment' under section 138. [Paras 44, 46, 47, 48]Mere presentation of a winding up petition does not prevent payment and non payment within the statutory period constitutes failure under section 138.Voidness of dispositions during winding up proceedings under section 536(2) of the Companies Act - Deeming commencement of winding up from presentation of petition under section 441(2) of the Companies Act - Court's power to validate or protect dispositions during pendency of winding up proceedings - Dispositions do not become void immediately on presentation of a winding up petition; voidness takes effect only upon the passing of a winding up order or appointment of a provisional liquidator, and then, by the statutory fiction, relates back to the date of presentation. - HELD THAT: - The Court accepted that section 441(2) creates a legal fiction by which a winding up relates back to presentation of the petition, and that section 536(2) renders dispositions void 'in winding up.' But the Court rejected the proposition that every disposition is void ab initio on mere presentation of petition. If dispositions were void immediately they could not revive if the petition were dismissed or withdrawn; authorities and practice show that courts may validate or protect bona fide transactions necessary for carrying on the business and such protection is framed to operate in the event of a winding up order. Therefore the conversion of otherwise valid transactions into void ones occurs upon the order of winding up or appointment of provisional liquidator, with retrospective effect by virtue of the legal fiction. [Paras 45, 46]Transactions become void only when a winding up order is made or a provisional liquidator appointed, and then relate back by virtue of the deeming provision.Interaction between Companies Act and Negotiable Instruments Act regarding criminal liability - Failure to make payment under section 138 of the Negotiable Instruments Act - A subsequent order of winding up or appointment of a provisional liquidator cannot absolve a company or its directors of an offence under section 138 that was already completed when non payment became due within the 15 day period. - HELD THAT: - The Court reasoned that the offence under section 138 is complete on expiry of the 15 day period after receipt of demand if payment is not made. If at that time no legal disability preventing payment exists, the deemed commission of the offence is unaffected by a later winding up order which only affects the civil status of dispositions by relation back. Hence a later order cannot nullify criminal liability already incurred; to hold otherwise would produce anomalous results whereby dismissal of the winding up petition would retroactively create criminal liability while a subsequent winding up order would erase it. [Paras 53, 55]A later winding up order does not absolve criminal liability under section 138 if the offence was complete before that order.Effect of presentation of a winding up petition on company's power to make payments - Court's power to validate or protect dispositions during pendency of winding up proceedings - The court will not grant a writ stay of criminal proceedings under section 138 until disposal of winding up petitions merely because those petitions are pending; no stay of the criminal proceedings is justified on the grounds advanced. - HELD THAT: - The Court distinguished cases where the company court itself, exercising its statutory company jurisdiction, granted a stay; here no such company court stay had been granted. Given that presentation of a winding up petition does not automatically bar payments and that subsequent winding up orders do not affect offences already completed, there was no legal basis to stay the criminal prosecutions pending disposal of the winding up petitions. [Paras 56]No stay of section 138 proceedings warranted merely because winding up petitions are pending; the interim stay was vacated.Failure to make payment under section 138 of the Negotiable Instruments Act - Effect of presentation of a winding up petition on company's power to make payments - The factual conduct of the companies (payments made, undertakings given, suppression of facts) indicates they did not consider themselves under a legal disability; that conduct disentitles them to equitable relief and supports dismissal of the writ petitions. - HELD THAT: - The Court noted that the companies had in many instances made payments and had given undertakings to magistrates to pay in instalments while company petitions were pending, and in some cases had obtained dismissals of company petitions by representing payments. Such conduct demonstrates that the companies did not regard themselves as legally barred from paying. The suppression of material facts and the inconsistent conduct led the Court to conclude that equitable relief should not be granted; the writ petitions were therefore dismissed. [Paras 49, 59, 60]Companies' conduct shows no claimed legal disability to pay; suppression of facts and payments preclude equitable relief and the writ petitions are dismissed.Final Conclusion: Writ petitions seeking quashing of proceedings under section 138 of the Negotiable Instruments Act and related reliefs are dismissed; the interim stays are vacated and directions are issued for accused to appear before the concerned magistrates. Issues Involved:1. Whether the proceedings under Section 138 of the Negotiable Instruments Act can be quashed due to the pendency of winding-up petitions under Sections 536(2) and 441(2) of the Companies Act.2. Whether the undertakings given by the petitioners to pay amounts can be quashed.3. Whether the presentation of a winding-up petition creates a legal disability to make payments, thus preventing the commission of an offence under Section 138 of the Negotiable Instruments Act.4. Whether there is a conflict between Section 138 of the Negotiable Instruments Act and Sections 536(2) and 441(2) of the Companies Act.Detailed Analysis:1. Quashing of Proceedings under Section 138 of the Negotiable Instruments Act:The petitioners argued that payments made after the commencement of winding-up proceedings would be void under Section 536(2) of the Companies Act, and hence, they were justified in refusing to make such payments. The court examined whether the presentation of a winding-up petition creates a legal disability to make payments, thus preventing the commission of an offence under Section 138 of the Negotiable Instruments Act. The court held that Section 536(2) does not lay down any bar or prohibition preventing the company from making payments or even disposing of property. The court concluded that there would be a failure under Section 138 if the company or its directors do not make payment only on the ground that a petition for winding up has been presented. The court dismissed the petitions, stating that the offence under Section 138 is deemed committed on dishonour and non-payment within 15 days of receipt of notice of demand.2. Quashing of Undertakings:The court noted that the petitioners had given undertakings to the magistrates in some proceedings under Section 138 of the Negotiable Instruments Act, agreeing to pay the disputed amounts in installments. The court observed that the petitioners did not consider themselves restrained by law from making payments at the time of giving these undertakings. The court found that the non-payment within 15 days from receipt of notice was not due to any legal disability but due to other reasons such as inability to pay or lack of funds. Therefore, the court did not quash the undertakings given by the petitioners.3. Legal Disability to Make Payments:The court examined whether the presentation of a winding-up petition creates a legal disability to make payments. The court held that merely on the presentation of a petition for winding up, the affairs of a company do not come to an absolute standstill. The court stated that the company can carry on its business and make necessary payments for its commercial survival. The court concluded that there is no absolute prohibition or bar preventing the company or its directors from making payments or even making dispositions for the purpose of running the business of the company in the ordinary course. Therefore, the court held that there would be a failure to make payment under Section 138 if the company or its directors do not make payment merely on the ground that a petition for winding up has been presented.4. Conflict Between Section 138 of the Negotiable Instruments Act and Sections 536(2) and 441(2) of the Companies Act:The petitioners argued that there is a conflict between Section 138 of the Negotiable Instruments Act and Sections 536(2) and 441(2) of the Companies Act, and that the provisions of the Companies Act should prevail. The court rejected this argument, stating that there is no conflict between the two provisions. The court held that the two provisions operate in separate fields. The court noted that the offence under Section 138 is complete on the 15th day after receipt of the notice by virtue of non-payment, and a subsequent order of winding up has no effect on the offence which has already been committed. The court concluded that the commission of the offence is not dependent upon the winding up of the company but is dependent upon dishonour and non-payment of the amount within 15 days of the receipt of the notice.Conclusion:The court dismissed all the criminal writ petitions and vacated the interim stay granted in these petitions. The court directed the accused in various cases to appear before the respective magistrates on specified dates. The court held that the presentation of a winding-up petition does not create a legal disability to make payments, and there is no conflict between Section 138 of the Negotiable Instruments Act and Sections 536(2) and 441(2) of the Companies Act.