Directors Can’t Use Personal Insolvency to Evade Liability for Company’s Cheque Defaults

Case Details: Ashok B. Jeswani v. Redington India Ltd. - [2024] 158 taxmann.com 187 (Madras)

Judiciary and Counsel Details

• • Dr. G. Jayachandran, J.

Facts of the Case

In the instant case, the Petitioners were directors of accused company. They were held guilty under section 138 of the Negotiable Instruments Act, 1881 by Trial Court. Trial Court sentenced petitioners to undergo simple imprisonment for a period of nine months and to pay jointly cheque amount as compensation to complainant.

Later, the Petitioners preferred an application to suspend sentence, pending appeal. Session Judge allowed application for suspension of sentence on condition to deposit 20 percent of compensation amount.

The Petitioners have not complied condition, instead filed a memo reporting pendency of insolvency proceedings under section 94 of Insolvency and Bankruptcy Code, 2016 (IBC) before NCLT and moratorium provided under IBC for insolvent.

Those memos were rejected by Session Judge. Consequently, against rejection order, instant petition under section 484 of CrPC was filed. It was noted that application by petitioners were debtors application under section 94 of IBC and it was filed after they were found guilty for offence under section 138/141 of the Negotiable Instruments Act, 1881.

In addition, if the interim moratorium under Section 96 of the IBC were extended to the petitioners, who represent a company not currently undergoing the resolution process under the Code, the implicated company would be left without a natural person to act on its behalf.

Consequently, the insolvency of the directors, who are legal entities liable for penal action, would potentially be shielded from prosecution. Ultimately, any discharge order granted in the application of these two petitioners could also extend to cover the debts owed by their company to the complainant.

High Court Held

The High Court observed that directors as signatory or guarantor or person responsible for affairs of company, which has issued cheque to discharge its liability, cannot have advantage of their application to declare them as insolvent as an individual to seek moratorium.

Thus, the High Court held that the instant petition under section 484 of CrPC was to be dismissed.