KUSUM INGOTS AND ALLOYS LTD. v. PENNAR PETERSON SECURITIES LTD. AND ORS

Citation: [2000] 1 S.C.R. 1120

Court: Supreme Court of India

Bench: K.T. THOMAS, D.P. MOHAPATRA

Judgment text

KLSUM INGOTS AND ALLOYS LTD. v. PENNAR PETERSON SECURITIES LTD. AND ORS. FEBRUARY 23, 2000 [K. T. THOMAS AND D. P. MOHAPATRA, JJ. ] Criminal Law : Negotiable Instruments Act, 188I : Section 138--lngredients of-Dishonour of cheque-Criminal proceeding~~Against sick company and its directors-Maintainability of-Cheques issued by company dishonoured-But before completion of offence under S. 138 drawer company was declared sick by BIFR under S. 22 ofSICA: -Held: S. 22 does not bar criminal proceedings if the ingredients of S. 138 are made out-However, if a ban order regarding deposal of assets of the company is passed by BIFR under S. 22 of SICA before the date of drawal of cheque or before expiry of notice period under Cl. (b) ofproviso to S. I38, offence under S. 138 not completed-Hence, in such a case criminal proceedings not maintainable. Sick Industrial Companies (Special Provisions) Act, 1985: Section 22.

Scope and ambit of-Held : Does not bar payment of money by the company or its directors to other persons for satisfaction of their legally enforceable dues. Dishonour of cheque-Criminal proceeding~~Against company or its directors-Held : S. 22 deals only with proceedings for recovery of money-It does not bar criminal proceedings against a company or its directors for dishonour of cheque. The appellant-company issued post dated cheques in favour of the respondent-complainant in course of business of the company. When the complainant presented the cheques in the bank they were returned without payment. Then the complainant issued notice to the compaDy and/or its Directors stating the facts of dishonour of the cheques and demanding payment. Since no payment was made within the period of 15 days stipulated under Clause (b) of proviso to Section l3B of the Negotiable Instru- Kl:SUM INGOTSANDALLOYS LTD. v. PENNAR PEIBRSON SECURIT1ES LTD.

1121 ments Act, 1881, the payee filed a complaint against the company and/or its Directors alleging, inter a/ia, that they had committed an offence under Section 138 of the NI Act. Before the cheques were presented in the bank or after the bank declined to honour the cheques the drawer company was declared sick under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) by the Board of Industrial and Financial Reconstruction (BIFR).

On receipt of the summons from the Court in a criminal case registered on the basis of the complaint, the accused company and/or its Directors filed petitions under Section 482 of the Criminal Procedure Code, 1973 or under Article 127 of the Constitution seeking quashing of the complaint/proceeding in the criminal case, mainly on the ground that in view of the provisions in Section 22 of SICA the criminal case instituted against them for commission of the alleged offence under Section 138 of the NI Act is misconceived and compelling the accused to race trial in the case would amount to abuse of the process of the Court. The High Court dismissed the petition. Hence this appeal. Disposing of the appeal, this Court HELD : 1. 1. The object of bringing Section 138 of the Negotiable Instruments Act, 1881 on statute is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments.

l1128-H) Electronics Trade & Technology Development Corps. Ltd. v. Indian Technologists & Engineers (Electronics) Pvt. Ltd. , [1996) 2 SCC 739, relied on. 1. 2. The ingredients which are to be satisfied for making out a case under Section 138 of the NI Act are : (i) a person must have drawn a cheque on an account maintained by him in a bank for payment of money to another person from out of that account for the discharge of any debt or other liability; [1131-f . PENNARPElERSON SECURillESL1D. ! D. P. MOHAPATRA. J. i 1125 The Judgment of the Court was delivered by D. P. MOHAPATRA, J. Leave granted.

The common question that arises for consideration in these appeals is whether a company and its Directors can be proceeded against for having committed an offence under section 138 of the Negotiable Instruments Act, 1881 (for short 'the NI Act') after the company has been declared sick under the provisions of The Sick Industrial Companies (Special Provisions) Act, 1985 (for short 'SICA') before the expiry of the period for payment of the cheque amount. The answer to the question depends on interpretation of section 138 of the NI Act and its interaction with the relevant provisions of SICA. Since the relevant facts involved in all the cases are similar and a common question of law arises in all the cases they were heard together and they are being disposed of by this judgment. The factual positions about which there is no dispute may be stated thus: Post-dated cheques were issued on behalf of the company in favour of the complainant in course of business of the company.

When the complainant presented the cheques in the bank they were returned without payment. Then the complainant issued notice to the company and/or its Directors stating the facts of dishonour of the cheques and demanding payment. Since no payment was made within the period of 15 days stipulated under the NI Act the payee filed complaint against the company and/or its Directors alleging inter-alia that they had committed an offence under section 138 of the NI Act. Before the cheques were presented in the bank or after the bank declined to honour the cheques the drawer company p was declared sick under the provisions of the SICA by the Board of Industrial and Financial Reconstruction (for short 'BIFR').

On receipt of the summons from the Court in the criminal case registered on the basis of the complaint the accused company and/or its Directors filed petitions under section 482 of the Code of Criminal Procedure or under Article 227 of the Constitution seeking quashing of the complaint/proceeding in the criminal ease, mainly on the ground that in view of the provisions in section 22 of SICA the criminal case instituted against them for commission of the alleged offence under section 138 NI Act is misconceived and compelling the accused to face trial in the case will amount to abuse of the process of Court. The High Court having declined to interfere in the proceeding and dismissed the petitions filed by the accused, they have filed these appeals challenging the order passed by the High Court.

The main thrust of the arguments of the learned counsel appearing for the appellants is that on the company being declared sick by the BIFR no steps could bt: taken by the complainants for realisation of thi: amounts said to be due to them and therefore the criminal proceeding initiated against the drawer company and its Director on tht: allt:gation that the cheques drawn in favour of the complainant were dishonoured by the bank is misconceived and should be quashed; alternatively it is their contention that the proceedings in the criminal case should be stayed or suspended till the accused company becomes a functional and viable unit. On behalf of the appellants reliance is placed on sections 22 and 22-A of the SICA.

The learned counsel appearing for the respondents on the other hand contend that on the undisputed fact situation of the case a prima-facie case under section 138 of the NI Act is made out against the accused and on being satisfied about this position the learned magistrate took cognizance of the offenct: and ordi:red issue of summons to the appdlants. It is their submission that section 22 has no application to, criminal proceed· ings and that the said section does not bar payment of dm:s by the accused company or its Directors; an embargo is placed only on the creditors from realising their dues from the company by a proceeding for winding up or execution or distress. It is also the submi~sion of learned counsel for the respondents that the criminal case cannot be said to be a proceeding for realisation of money due from the company. Before dealing with the rival contentions raised on behalf of the parties it will be convenient to note relevant provisions of the NI Act and SICA.

Sections 138 tu 141 uf the NI Act which are relevant for the purpose of the case are quoted hereunder : "138. Dishonour of cheque for insufficiency, t:tc. of funds in the account - Where any cheque drawn by a pt:rson on an account maintained by him with a bankt:r for paymt:nt of any amount of money to anotht:r person from out of that account for tht: discharge, in whole or in part, of any debt or other liability, is ri:turned by the bank unpaid, either because of the amount of money KU>UMINGOTSANDALLOYSLID. '· PENNARPE:IERSONSECUR! IlES LID. (D. P. MOHAPATRA, J.

11127 standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without pn:judice to any other provision of this Act, be punished with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply un!

t:ss:- (a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier; (b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the eneque, within fifteen days of the receipt of information by him from the bank n:garding the return of the cheque as unpaid; and (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or as the case may be, to the holder in due course of the cheque within fifteen days of the n. :ceipt of the said notice. Explanation : For the purpose of this section, "debt or other liability" means a legally enforceable debt or other liability. 139.

Presumption in favour of holder - It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque, of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt or other liability. 140. Defence which may not be allowed in any prosecution under Section 138. It shall not be a defence in a prosecution for an offence under Section 138 that the drawer has no reason to believe when he issued the cheque that the cheque may be 1128 SUPREME COVRT REPORTS [2000] 1 S. C. R. dishonoured on presentment for the reasons stated in that section. 141.

Offences by companies (1) If the person committing an offence under Section 138 is a company, every person, who at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly : Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1); where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation - For the purposes of this section - (a) "Company" means any body corporate and includes a firm or other association of individuals; and (b) "director", in relation to a firm, means a partner in the firm. It is relevant to note here that Chapter XVII of the NI Act in which the aforementioned sections are included was inserted in the Act w. e. f. 1. 4. 1989 by Act 66 of 1988.

The object of bringing Section 138 on statute is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. (See : Electronics Trade & Technology Development Corpn. Ltd. , Secunderabad v. Indian Technologists KUSUMINGOTSANDALLOYS LID. '- PENNARPEfERSON SECURITIESLID. [D. P. MOHAPATRA. J. J 1129 & Engineers (Electronics) P. Ltd. And Anr. , (19%] 2 SCC 739. Coming to the provisions of SICA sections 22 and 22-A which are relevant for appreciating the questions raised in the case, are quoted hereunder: "22.

Suspension of legal proceedings, contracts etc - (1) Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (l of 1956), or any other law orthe memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof (and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company) shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.

(2) Where the management of the sick industrial company is taken over or changed (in pursuance of any scheme sanctioned under section 18), notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or in the memorandum and articles of association of such company or any instrument having effect under the said Act or other law - (a) it shall not be lawful for the shareholders of such company or · any other person to nominate or appoint any person to be a director of the company; (b) no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the Board. (3) (Where an inquiry under section 16 is pending or any scheme referred to in section 17 is under preparation or during the period) 1130 SLPREME COL:RT RHORTS 12000] 1S. C. R.

or consider,1tion of any scheme und;;;r section 18 or where any such scheme is ;anctioned thereunder, for due implementation of the scheme, the Board may by order dcdart: with n;spect to the sick industrial company concern 0M ]~l-iUfS AND AU. ,OYS L'JD, "· . l'J: atisfaction of their legally enforceable due;. The quL·stil1IJ that rcmains to be rnnsidcred is whdhcr section 22 A uf SICA affc:ct> a cTimina1 cast: for an ,,tfonce . mder s~ction 1:'8 ;-.. 1 Act. In th. ; said section prnvision is made ~nahling the BlldTd to make an order in writing tu dircd the sick industrial company nut to . iispuse of, except with the const:nt Df the Board, any of its assets - (a) during th..

: period of preparation or cnnsideration of tht scheme under st:ctiun 18; and (b) during the period beginning with the recurding of opinion by the Board for winding up of the company under sub-section (1) of section 20 and up to commencement uf the proceeding5 relating to the winding up before the concerned High Court. This exercise of the power by the Board is conditioned by the prescription that the Board is of the opinion that such a direction is nece,sary in the intc:re~t of the sick induMrial company or its creditors or shareholders or in the ;mblic interest. In a case in which the BIFR has submitted its report declaring a company as 'sick' and has also issued a direction under section 22 A restraining the company or its directors not tu dispose of any of its assets except with consent of the Board then the contention raised on bthalf of the appellants that a criminal case KUSL'MINGITTSANDALLOYS LID. '· PENNARP1'""TERSON SECURillESLID. [D. P. MOHAPATRA, J.

; 1135 for the alleged offence under section 138 NI Act cannot be instituted during the period in which the restraint order passed by the BIFR remains operative cannot be rejected outright. Whether the contention can be accepted or not will depend on the facts nd circumstances of the case. Take for instance, before the date on which the cheque was drawn or before expiry of the statutory period of 15 days after notice, a restraint order of the BIFR under Section 22-A was passed against the company then it cannot be said that the offence under section 138 NI Act was completed. In such a case it may reasonably be said that the dishonouring of the cheque by the bank and failure to make payment of the amount by the company and/or its Directors is for reasons beyond the control of the accused. It may also be contended that the amount claimed by the cumplainant is nut recoverable from the assets of the company in view of the ban order passed by the BlFR.

In such circumstances it would be unjust and unfair and against the intent and purpose of the statute to hold that the Directors should be cumpelh:d to face trial in a criminal case. Except in the circumstances noted above we do nut find any 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. lt will be opt:n tu the appellants to place relevant matt:riab in this regard before the learned Magistratt: before whom the case:. arc pending and the learned Magistrate will ex amine the matter keeping in mind the discussions made in this ;udgtnent. We make it clear that we have not considered the question whether in the facts and circumstances of a particular case Section 138 NI Act is attracted or nut, for that is a question tu be considered by the Court at the appropriate stage of the case in the ! ight evidence on record.

The appeals are disposed of on the terms aforesaid. v. s. s. Appeals disposed of.