Company officials can't use insolvency proceedings as protective shield: Court

Chandigarh, March 26

In a significant judgment, the Punjab and Haryana High Court has made it clear that a company’s directors and officials cannot use insolvency proceedings as a protective shield against civil and criminal liability. Justice Ashok Kumar Verma also made it clear that only the corporate debtor or the company was protected by moratorium.

Only corporate debtor protected

• Justice Ashok Kumar Verma said only the corporate debtor or the company was protected by moratorium
• Protection against civil & criminal liability was unavailable to guarantors or any other person committing a criminal act

Protection against civil and criminal liability was unavailable to the guarantors or any other person committing a criminal act.

The signatories or the directors could not escape penal liability under Section 138 of the Negotiable Instruments Act on cheque bounce by citing dissolution of a company. “What is dissolved is only the company, not the personal penal liability of the accused,” Justice Verma asserted.

Referring to the Insolvency and Bankruptcy Code, Justice Verma asserted that no provision barred the continuation of civil and criminal proceedings initiated against the corporate debtor-company or its directors and officials. The ruling came on a petition by erstwhile director, managing director and employee of a firm for anticipatory bail in an FIR registered in March last year for cheating and criminal conspiracy.

Among other things, it was argued on the petitioners’ behalf that insolvency proceedings initiated against the company before the registration of the FIR extinguished the petitioners’ civil and criminal liability. It was also argued that the FIR was an abuse of the process of law and an act of double jeopardy under criminal law for same offence.

Elaborating, it was argued that the complainant in the case had also filed two cases under Section 138 of the Act before the registration of the present FIR, which were pending before the competent court at in Jalandhar.

Justice Verma asserted that offences under Section 138 of the Negotiable Instruments Act and 420 of the IPC were distinct from each other as the ingredients of the two were different. Fraudulent or dishonest intention at the time of issuance of cheque was not required to be proved in prosecution under Section 138. But such intention was an important ingredient to be established in prosecution under Section 420.

For proving an offence under Section 138, it was required to be established that the cheque was issued by the accused to discharge a legally enforceable debt or liability and was dishonoured for insufficiency of funds. Besides, the accused failed to pay the cheque amount within the stipulated time despite receipt of statutory notice of demand. “In the case of prosecution for charge under Section 420, these ingredients need not be proved by the prosecution. However, it has to be proved by the prosecution that at the very inception — at the time of issuance of the cheque by the accused — he had a dishonest intention”.