Ganesh Chandra Bamrana & Ors. Vs. Rukmani Gupta: DHC Holds Section 138 NI Act Proceedings Cannot Continue After Commencement Of CIRP Proceeding

Introduction:

The judgment in Ganesh Chandra Bamrana & Ors. Vs. Rukmani Gupta delves into the legal intricacies of balancing the objectives of the Insolvency and Bankruptcy Code, 2016 (IBC) with the criminal liability provisions under the Negotiable Instruments Act, 1881 (NI Act). The central question before the Court was whether proceedings under Section 138 of the NI Act could continue against individuals associated with a corporate debtor after the commencement of CIRP and the imposition of a moratorium under Section 14 of the IBC.

The Hon'ble Court reaffirmed the principle that once a moratorium is in place, the control and management of the corporate debtor vests in the Interim Resolution Professional (IRP). Consequently, individuals like suspended directors or authorized signatories, who no longer have authority over the corporate debtor’s affairs, cannot be held vicariously liable for actions such as dishonor of cheques.

The judgment provides a comprehensive analysis of the statutory framework of the IBC, which aims to preserve the debtor’s assets, ensure equitable treatment of creditors, and protect associated individuals from multiplicity of proceedings. This decision reaffirms the judiciary’s role in harmonizing conflicting statutes while upholding the legislative intent behind insolvency laws.

Background:

The dispute in Ganesh Chandra Bamrana & Ors. Vs. Rukmani Gupta arose when the corporate debtor, represented by the petitioners, entered into insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). Petitioner No. 1 was a suspended director, and Petitioner No. 2 was an authorized signatory of the corporate debtor. The petitioners had issued six cheques in compliance with an order dated July 24, 2019, passed by the National Consumer Disputes Redressal Commission (NCDRC) in Execution Application 93/2017. Out of these six cheques, two, amounting to ?5 lakh each, were duly honored. However, two cheques, dated January 15, 2020, and March 15, 2020, for ?10 lakh each, were dishonored with the reason “Drawer Signature to operate account not received.”

On October 31, 2019, before the dishonor occurred, the corporate debtor was admitted into the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC, and a moratorium under Section 14 of the IBC was imposed. This moratorium prohibited financial institutions from debiting the corporate debtor’s accounts without approval from the Interim Resolution Professional (IRP). Despite the moratorium, the respondent filed a complaint under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), resulting in a summoning order issued by the Metropolitan Magistrate on April 1, 2022.

The petitioners approached the Delhi High Court, seeking to quash the summoning order and all related proceedings. They argued that the cheques were incapable of encashment due to the moratorium and that they were no longer responsible for the corporate debtor’s affairs, as the IRP had taken over the management of the company. This case brought to light the conflict between the protective scope of the IBC and the criminal liability provisions under the NI Act.

Questions of Law:

1. Can proceedings under Section 138 of the NI Act continue against individuals after the commencement of CIRP and imposition of a moratorium under Section 14 of the IBC?
2. Can suspended directors and authorized signatories be held vicariously liable for cheque dishonor when they no longer manage the corporate debtor’s affairs?
3. How does the moratorium under the IBC affect pending or new proceedings under the NI Act?

Findings and Rationale:

1. Impact of Section 14 IBC Moratorium: The Court reiterated that once a moratorium under Section 14 is in effect, the control and management of the corporate debtor’s affairs vests solely in the IRP. It observed: "The account was blocked due to the order issued by the NCLT, and this cannot be attributed to the account holder. As a result of the NCLT’s order, the authority and control of the account holder over the account ceased to exist."
2. Vicarious Liability under Section 138 NI Act: The Court held that the petitioners could not be held liable for the dishonor of cheques issued after the CIRP initiation. It stated: "The offence under Section 138 of the NI Act was committed on the date when the petitioners were neither ‘in charge of’ nor ‘responsible for’ the conduct of the business of the company." The Court relied on its earlier decision in Govind Prasad Todi & Anr. Vs. Govt. of NCT of Delhi & Anr., where it was held: "Once the corporate insolvency resolution process proceedings have been admitted, the proceedings against the corporate debtor cannot continue. Since the IRP was responsible for managing the corporate debtor’s affairs, natural persons cannot be prosecuted under Section 138 of the NI Act."
3. Protective Intent of IBC: The Court emphasized that the moratorium aims to protect the corporate debtor’s assets and prevent multiplicity of proceedings. It noted: "The ingredients for constituting the offence punishable under Section 138 of the NI Act occurred post-imposition of the moratorium. The petitioners, therefore, cannot be held vicariously responsible for dishonor of cheques."

Conclusion:

The Delhi High Court’s judgment in Ganesh Chandra Bamrana & Ors. Vs. Rukmani Gupta reinforces the primacy of the IBC over other proceedings, ensuring that individuals associated with a corporate debtor are shielded from criminal liability during CIRP. The decision clarifies that once a moratorium under Section 14 of the IBC is in effect, proceedings under Section 138 of the NI Act cannot continue against individuals or the corporate debtor.

This judgment serves as a critical precedent, emphasizing the need to harmonize insolvency laws with criminal liability statutes, thereby preserving the protective intent of the IBC.

?Disclaimer:

This post is for educational and informational purposes only. It is not intended to defame, discredit, or tarnish the reputation of any individual, entity, or organization. The opinions expressed are based on publicly available judicial decisions and are aimed at fostering a better understanding of legal principles. For specific legal advice, readers are encouraged to consult a professional.