Case: – Ajay Kumar Radheyshyam Goenka v/s Tourism Finance Corporation of India Ltd.; Criminal Appeal No. 172 of 2023
The ruling, arising from the above case, has far-reaching implications for corporate debtors and their erstwhile directors. The Supreme Court of India has delivered a crucial clarification regarding the interplay between the Insolvency and Bankruptcy Code (IBC) of 2016 and the criminal liability of directors under Section 138 of the Negotiable Instruments Act (NI Act) of 1881.
The central issue addressed by the Apex Court was whether the approval of a resolution plan under the IBC could extinguish the criminal liability of a company’s former director in cases related to dishonour of cheques under Section 138 of the NI Act.
Hon’ble Apex Court unequivocally stated that, IBC proceedings, including those under Section 31 or Sections 38 to 41, do not automatically bar Section 138 NI Act proceedings against a director. The court emphasized that the processes under the IBC, which may extinguish the corporate debt, do not ipso facto apply to the criminal proceedings. It rejected the argument that the resolution of corporate debt automatically absolves directors from facing charges under the NI Act.
The Court while dealing with the said aspect, provided additional clarity on the termination of criminal proceedings after the approval of a resolution plan. According to the courts conclusions, criminal proceedings under Section 138 of the NI Act stand terminated only in relation to the corporate debtor if the company is taken over by a new management. However, proceedings against the signatories/directors covered by specific provisions of Section 32A(1) will continue in accordance with the law.
Crucially, the Hon’ble Supreme Court of India has highlighted that the personal liability of directors, as stipulated under Section 141 of the NI Act, persists even if the company undergoes dissolution. He argued that the dissolution of the company does not dissolve the personal penal liability of the accused directors, and they must continue to face prosecution.
The judgment seeks to prevent potential misuse of the resolution plan process as a shield against criminal liability for directors. The Court underscored this point by illustrating certain “absurd situations” that may arise if the argument favouring directors’ immunity post-resolution plan approval is accepted.
In summary, the Supreme Court’s ruling reinforces the distinction between the resolution of corporate debt and the personal liability of directors under the NI Act. Directors cannot escape criminal proceedings under Section 138 simply because the company’s debt has been settled through the IBC process, emphasizing the court’s commitment to upholding accountability in financial matters even in the context of insolvency resolution.

Author of this article:
Adv. Ravish Bhatt,
Partner, R&D Law Chambers,
Dual Qualified Lawyer Solicitor | International Tax Affiliate

Connect with Mr. Bhatt on Linkedin: https://www.linkedin.com/in/adit-ravishbhatt/

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