Corporate debtor protected from prosecution for pre-resolution offences under Section 32-A IBC but directors remain personally liable

HC held that after Section 32-A insertion in IBC (effective 28/12/2019), corporate debtor's liability for prior offences is restricted post-resolution plan approval. Following SC precedent in Ajay Kumar case, while the company cannot be prosecuted for dishonour of cheque under Section 138 NI Act after resolution plan approval, directors and signatories remain personally liable under Section 141 NI Act. Protection under Section 32-A extends only to corporate debtor, not to directors who were in-charge when offence was committed. Criminal petitions allowed.

---

---

Issues Involved:

1. Whether the criminal liability of the company and its erstwhile directors under Section 138 of the Negotiable Instruments Act is extinguished due to the resolution plan approved by the NCLT under the Insolvency and Bankruptcy Code (IBC).
2. The applicability of Section 32A of the IBC in protecting the corporate debtor from prosecution for offences committed prior to the commencement of the Corporate Insolvency Resolution Process (CIRP).

Issue-wise Detailed Analysis:

1. Extinguishment of Criminal Liability Due to Resolution Plan:

The petitioner company faced prosecution under Section 138 of the Negotiable Instruments Act for dishonored cheques issued to discharge its liability. During the pendency of these proceedings, the company underwent CIRP initiated by another creditor, resulting in the approval of a resolution plan by the NCLT. The petitioner argued that according to the resolution plan, all civil and criminal litigations against the corporate debtor should be extinguished. The resolution plan was approved with the condition that all pending proceedings against the corporate debtor would be extinguished, thus arguing that the prosecution under Section 138 cannot proceed.

The judgment highlighted that the erstwhile directors of the company ceased to represent the company after the management was vested with the Interim Resolution Professional (IRP) and later the Resolution Professional. The petitioner contended that with the approval of the resolution plan, the prosecution could not be sustained against the company.

2. Applicability of Section 32A of IBC:

The court examined the provisions of Section 32A of the IBC, which limits the liability of the corporate debtor for offences committed prior to the CIRP. The Supreme Court's interpretation in the case of Ajay Kumar Radheshyam Goenka was pivotal, where it was clarified that Section 32A absolves the corporate debtor from criminal liability after a new management takes over post-resolution plan approval. The court noted that the inelegant drafting of Section 32A should not limit its scope, and it should include liabilities arising from private complaints under Section 138 of the Negotiable Instruments Act.

The court emphasized that while the corporate debtor is protected under Section 32A, this protection does not extend to the directors or signatories of the cheques who were responsible for the conduct of the company's business when the offence was committed. The liability of these individuals persists despite the resolution process.

In conclusion, the court allowed the petitions to quash the criminal prosecution against the corporate debtor, the first accused company, in the specified case numbers. The court clarified that the protection under Section 32A of the IBC applies only to the corporate debtor and not to its directors or signatories of the cheques. Consequently, the criminal proceedings against the company were quashed, but the personal liability of the directors or signatories remains unaffected.

---