Criminal Writ Petition No. 2186 of 1999

8th March, 2000

Petitioner Counsel: Mr. M.C.SHAH, Mr. V.K.WASNIK
Respondent Counsel: Mr. P.JANARDHAN, Ms. USHA KEJARWAL

Cases Cited:
M/s. BSI Ltd. Vs. Gift Holdings Pvt.Ltd., 2000 ALL MR (Cri) 730 (S.C.) [Para 3]
M/s. BSI Ltd. Vs. Gift Holdings Pvt.Ltd., 2000(2) ALL MR 455 (S.C.) [Para 3]
M/s. Kusum Ingots & Alloys Ltd. Vs. M/s. Pennar Peterson Securities Ltd., 2000 ALL MR (Cri) 1223 (S.C.)=2000(2) SCALE 80 [Para 4]
Pankaj Mehra Vs. State of Maharashtra, 2000 ALL MR (Cri) 736 (S.C.)=JT 2000(2) SC 113 [Para 6]
Anil Hada Vs. Indian Acrylic Ltd., 2000 ALL MR (Cri) 136 (S.C.) [Para 6]
Anil Hada Vs. Indian Acrylic Ltd., 2000(1) ALL MR 722 (S.C.) [Para 6]

JUDGMENT

JUDGMENT :- Rule. Returnable forthwith. By consent heard both sides.

1. This writ petition is filed for quashing the proceedings in case nos. 739/S/98, 740/S/98 and 741/S/98 on the file of Addl.Chief Metropolitan Magistrate, 37th Court, Esplanade, Bombay. The aforesaid cases were filed on account of dishonoring of three cheques issued by the petitioner company in favour of the respondents for Rs. 1,01,155/- each. The cheques were drawn on 29th June, 29th July and 29th August, 1997 respectively, on the Oriental Bank of Commerce, Ghatkopar (w) branch, Bombay. Even after the statutory notice as envisaged under section 138 of the Negotiable Instruments Act, the respondent did not pay the amount covered by the cheques. Therefore the complaint was filed before the Chief Metropolitan Magistrate by the Respondent no.2.

2. The petitioner in this writ petition interalia has contended that the first petitioner company has been registered before the Board for Industrial & Financial Reconstruction, under section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 and therefore no prosecution against the petitioner company and directors are maintainable.

3. The Supreme Court had examined this question in two of its recent decisions. In M/s. BSI Ltd. Vs. Gift Holdings Pvt.Ltd. reported in Judgment Today 2000(II) S.C. Page 2127 : (2000 ALL MR (Cri) 730 (S.C) : 2000(2) ALL MR 455(S.C.)), has examined the first facet and held that if the offence is proved to be committed by the company, its directors are liable. In para 19, the Supreme Court held thus:

19. "The said contention is also devoid of merits. The word "suit" envisaged in Section 22(1) cannot be stretched to criminal prosecutions. The suit mentioned therein is restricted to "recovery of money or for enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company." As the suit is clearly delineated in the provision itself, the context would not admit of any other stretching process.

20. A criminal prosecution is neither for recovery of money nor for enforcement of any security etc. Section 138 of the NI Act is a penal provision the commission of which offence entails a conviction and sentences on proof of the guilt in a duly conducted criminal proceedings. Once the offence under section 138 is completed the prosecution proceedings can be initiated not for recovery of the amount covered by the cheque but for bringing the offender to the penal liability. What was considered in Maharashtra Tubes Ltd. (Supra) is whether the remedy provided in section 29 or 31 of the State Finance Corporation Act, 1951 could be pursued notwithstanding the ban contained in Section 22 of the SICA. Hence the legal principle adumbrated in the said decision is of no avail to the appellants.

21. In the above context it is pertinent to point out that Section 138 of NI Act was introduced in 1988 when SICA was already in vogue. Even when the amplitude of the word "company" mentioned in section 141 of the NI Act was widened through the Explanation added to the Section, Parliament did not think it necessary to exclude companies falling under section 22 of SICA from the operation thereof. If Parliament intended to exempt sick companies from prosecution proceeding, necessary provision would have been included in Section 141 of the NI Act. More significantly, when Section 22 (1) of SICA was amended in 1994 by inserting the words "and no suit for the recovery of money or for enforcement of any security against industrial company or of any guarantee in respect of any loans or advance granted to industrial company" Parliament did not specifically include prosecution proceedings within the ambit of the said ban.

22. The conclusion which we have to draw is that if commission of the offence under Section 138 of the NI Act was completed before the commencement of proceedings under section 22(1) of SICA there is no hurdle in any of the provisions of SICA against the maintainability and prosecution of a criminal complaint duly instituted under section 142 of the NI Act. The decisions rendered by the High Courts, which are assailed before us in this batch of appeals, are therefore not liable to be interfered with. Appeals are accordingly dismissed. Special Leave Petitions heard along with the above appeals are also hence dismissed."

4. In M/s. Kusum Ingots & Alloys Ltd. Vs. M/s. Pennar Peterson Securities Ltd. & Ors., reported in 2000(2) SCALE at Page 80 : (2000 ALL MR (Cri) 1223), in para 19 the Supreme Court held thus :

19. "The question that remains to be considered is whether section 22 A of SICA affects a criminal case for an offence under section 138 NI Act. In the said section provision is made enabling the Board to make an order in writing to direct the sick industrial company not to dispose of, except with the consent of the Board, any of its assets - (a) during the period of preparation or consideration of the scheme under section 18, and (b) during the period beginning with the recording of opinion by the Board for winding up of the company under sub-section (1) of section 20 and upto commencement of the proceedings 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 necessary in the interest of the sick industrial company or its creditors or shareholders or in the public 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 22A restraining the company or its directors not to dispose of any of its assets except with consent of he Board then the contention raised on behalf of the appellants that a criminal case 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 and 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 22A 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 dishonoring 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 complainant is not recoverable from the assets of the company in view of the ban order passed by the BIFR. 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 compelled to face trial in a criminal case."

5. In this case it is not the case of the petitioners that an offence is complete after the petitioner company is declared by the BIFR as Sick Industries and declaration to that effect is made under section 22 (A) of the SICA. In the light of the above decisions of the Supreme Court the first point is to be found against the petitioner.

6. Apart from the above points the petitioner also raised a ground that the petitioner is in liquidation and winding up petition is pending under section 433 read with 434 of the Companies Act and it also causes an impediment in prosecuting the petitioner company and its directors under section 138 of the NI Act. As regards this point raised by the petitioner based on section 433 and 434 of the Companies Act, the Supreme Court had occasion to consider in Pankaj Mehra & Anr. etc. Vs. State of Maharashtra & ors. reported in JT 2000(2) SC 113 : (2000 ALL MR (Cri) 736 (S.C.)) wherein it has been held thus:

"20. It is difficult to lay down that all disposition of properly made by a company during the interregnum between the presentation of a petition for winding up and the passing of the order for winding up would be null and void. If such a view is taken the business of the company would be paralyzed, for, the company may have to deal with very many day-to-day transactions, make payments of salary to the staff and other employees and meet urgent contingencies. An interpretation which could lead to such a catastrophic situation should be averted. That apart, if any such view is adopted, a fraudulent company can deceive any bonafide person transacting business with the company by stage-managing a petition to be presented for windings up in order to defeat such bona fide customers. This consequence has been correctly voiced by the Division Bench in the impugned judgment.

21. If the payment is not ab initio void the company cannot contend that it is legally forbidden from making payment of the cheque amount when notice was issued by the payee regarding dishonour of the cheque. To circumvent this hurdle an endeavour was made by some of the appellants counsel to show that the very issuance of a cheque would amount to disposition of property. We are unable to accept the said contention particularly in view of the definition of cheque in the NI Act. "A Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand."

22. Bill of exchange is "an instrument in writing containing an unconditional order, signed by the maker, directing certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument." The cheque, therefore, can be an order on the banker to pay the amount to the holder thereof and no disposition of property would take place until the payment is made by the banker pursuant thereto. At the most, drawing of a cheque can be considered as a step towards disposition of property, but that is insufficient to amount to disposition of property.

23. It was next contended that since one of the conditions to constitute the offence of Section 138 of the NI Act is that a cheque should have been drawn for the discharge of a legally enforceable "debt or other liability" no such cheque can possibly be conceived in a situation such as this because the creditor would be disabled from legally enforcing the debt with the commencement of winding up proceedings. Section 138 of the NI Act, no doubt, contemplates only when the cheque is drawn by a person "for the discharge, in whole or in part, of any debt or other liability". Explanation to Section 138 says that "for the purposes of this Section 'debt or other liability' means 'a legally enforceable debt or liability' Therefore, the first limb of the contention is forceful that for the offence under section 138 the cheque should have been drawn for discharging a legally enforceable debt or discharging a legally enforceable debt or other liability. But the second limb of the contention is tenuous as the debt would not cease to be legally enforceable merely because some body has filed a petition for winding up.

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27. The alternative approach is this : Even assuming that any disposition of the property made by a company after commencement of the winding up proceedings is null and void, how that is an escape ground from the offence under Section 138 of the NI Act? That section created a statutory offence which on the confluence of the various factors enumerated therein, commencing with the drawing of the cheque and ending with the failure of the drawer of the cheque to pay the amount covered by it within the time stipulated, ripens into a penal liability.

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29. The words "the drawer of such cheque fails to make the payment" are ostensibly different from saying "the drawer refuses to make payment". Failure to make payment can be due to the reasons beyond the control of the drawer. An illustrative case is, if the drawer is not a company but individual who has become so pauper or so sick as he cannot raise the money to pay the demanded sum, can he contend that since failure to make payment was on account of such conditions he is entitled to be acquitted? The answer cannot be in the affirmative though the aforesaid conditions can be put forth while considering the question of sentence.

30. We therefore feel that legislature has thoughtfully used the word "fails" instead of other expressions as failure can be due to variety of reasons including his disability to pay. But the offence would be complete when the drawer "fails to make payment within the stipulated time, whatever be the cause for such failure."

The Supreme Court also decided a question which may likely to arise very often as a subsidiary question whether Managing Director or Director of a company is liable under section 138. In Anil Hada Vs. Indian Acrylic Ltd. reported in S.C.C. (2000) 1 S.C.C. : 2000 ALL MR (Cri) 136 (S.C.) : 2000(1) ALL MR 722 (S.C.). It has held in para 12 of the said decision thus:

"12. Thus when the drawer of the cheque who falls within the ambit of section 138 of the Act is human being or a body corporate or even firm, prosecution proceedings can be initiated against such drawer. In this context the phrase "as well as" used in sub section (1) of Section 141 of the Act has some importance. The said phrase would embroil the persons mentioned in the first category within the tentacles of the offence on a par with the offending company. Similarly the words "shall also" in sub section (2) are capable of bringing the third category persons additionally within the dragnet of the offence on an equal par. The effect of reading section 141 is that when the company is the drawer of the cheque such company is the principal offender under section 138 of the Act and the remaining persons are made offenders by virtue of the legal fiction created by the legislature as per the section. Hence the actual offence should have been committed by the company, and then alone the other two categories of persons can also become liable for the offence.

13. If the offence was committed by a company it can be punished only if the company is prosecuted. But instead of prosecuting the company if a payee opts to prosecute only the persons falling within the second or third category the payee can succeed in the case only if he succeeds in showing that the offence was actually committed by the company. In such a prosecution the accused can show that the company has not committed the offence, though such company is not made an accused, and hence the prosecuted accused is not liable to be punished. The provisions do not contain a condition that prosecution of the company is sine qua non for prosecution of the other persons who fall within the second and the third categories mentioned above. No doubt a finding that the offence was committed by the company is sine qua non for convicting those other persons. But if a company is not prosecuted due to any legal snag or otherwise, the other prosecuted persons cannot, on that score alone, escape from the penal liability created through the legal fiction envisaged in section 141 of the Act.

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21. We therefore, hold that even if the prosecution proceedings against the company were not taken or could not be continued, it is no bar for proceeding against the other persons falling within the purview of sub sections (1) and (2) of section 141 of the Act. In the light of the aforesaid view we do no consider it necessary to deal with the remaining question whether winding-up order of a company would render the company non-existent."

7. What can be deducible from the above observation of Supreme Court is that winding-up petition if ordered by the court dates back at the filing of the company petition. Therefore the contention of the petitioner that the winding up petition is pending at the time of issuing a cheque is not a ground for quashing the proceedings. If such company is found to have been committed an offence under section 138 of NI Act, its directors or any other person as indicated in section 141 of the said Act is liable to be prosecuted.

8. In view of the aforesaid pronouncement of the Supreme Court, on both the points raised by the petitioners I do not think that the writ petition, to quash the proceedings before the learned Magistrate is sustainable. In view of this, the writ petition is dismissed. But however, I make it clear that all other grounds, which have been taken in the writ petition can be raised by the petitioner at the appropriate stage. Since the matter is of 1998, the trial court is directed to expedite the matter.

9. The petitioners are directed to appear before the Magistrate's court on 10-4-2000.

Rule is discharged accordingly.

No order as to costs.

Writ be sent immediately

Parties to act on the ordinary copy of this order issued by P.A. and authenticated by the Sheristedar of this court.

Petition dismissed.