The Madras High Court ruled that a company's corporate insolvency resolution process does not extinguish personal criminal liability under section 138 of the Negotiable Instruments Act for cheque dishonor, as such proceedings seek to uphold the credibility of commercial transactions. The court noted that even if a resolution plan is approved, it does not impede ongoing criminal cases related to the corporation's actions prior to insolvency. Therefore, the application to dismiss these proceedings was rejected, affirming that personal culpability remains despite a company's dissolution.

1. CASE ANANLYSIS-13
Prosecution u/s 138 of N.I Act can’t be quashed on grounds of
acceptance of CIRP: Madras HC
Status as on- 29/07/2021
Brief Facts of the Case
1. The observations were made in an application filed under Section 482 of the CrPC, asking to
dismiss Section 138 proceedings as non-est in law and directing the Complainant-
Respondent to pursue their remedies under IBC.
2. During the pendency of allegations about cheque dishonour, the Petitioner-company went
through the Corporate Insolvency Resolution Process under Section 31 of the Code, and a
moratorium was declared under Section 14 of the Code.
3. The petitioner contended in court that because the Resolution Professional had taken over
the full operation of the company, including its assets and liabilities, he had no access to any
corporate data and thus couldn't pursue the case.
4. He contended that the IBC was a self-contained enactment with precedence over other
laws. As a result, continuing the contested prosecution would be an abuse of legal
procedure.
5. In his submission, he also stated that the resolution plan clearly states that all outstanding
negotiable instruments issued by the company prior to the insolvency commencement date
shall be terminated, and the liability of the company and its current employees under such
instruments shall be extinguished, as shall all legal proceedings relating thereto.
Held
The Hon’ble Madras High Court ruled as following:

2. 1. The Madras High Court ruled in Ajay Kumar Bishnoi v. Tap Engineering held that where
proceedings under Section 138 of the Negotiable Instruments Act, 1881 have already begun
and the company has been dissolved, the directors and other accused cannot avoid
culpability by pleading the firm's dissolution. Only the corporation is dissolved, not the
accused's personal penal culpability under Section 141 of the statute. It went on to say that
once a corporate debtor enters the resolution process, its former managing director or
directors are no longer allowed to represent the company.
2. When comparing the criminal aspect of proceedings under the act and the insolvency
provisions of the code as they effect the corporate debtor's promoters and directors, the
court noted that section 138 of the act provides not only for imprisonment but also for the
payment of fines and compensation.
3. A convicted person may face imprisonment, a fine of up to double the amount of the check,
or both. A corporation, of course, cannot be imprisoned. However, under Section 141 of the
legislation, the person in charge of the entity might be imprisoned. The amount of the
punishment and compensation can also be recovered from the corporate debtor's assets or
from those of its directors and officers who were found guilty and vicariously liable in the
same trial.
Impact of the Case
Justice Swaminathan held that the main object of Section 138 of the NI Act is to safeguard
the credibility of commercial transactions and to prevent bouncing of cheques by providing a
personal criminal liability against the drawer of cheque in public interest, said.
Therefore, even if the resolution plan was approved and made binding on the corporate
debtor and its employees, members, creditors, guarantors and other stakeholders
under Section 31 of the Code, criminal proceedings under Section 138 will not abate. In
proving its point, the Court placed reliance on the case of JIK Industries Limited vs
Amarlal V Jumani.
Conclusion
These petitions were submitted in accordance with Section 482 of the Cr. PC. The inherent
powers of this Court are intended to be used only to prevent abuse of the legal process or to
secure the goals of justice. The facts on record and the arguments advanced by the learned
counsel for the petitioner do not lead to the conclusion that continuing the impugned
prosecution would be an abuse of legal process. As a result, the Court declined to exercise its
inherent powers under Section 482 of the Cr. PC in favour of the petitioner.
The Court determined that the major purpose of Section 138 of the NI Act is to protect the
legitimacy of commercial transactions and to prevent cheque bouncing by imposing personal
criminal liability on the drawer of the cheque in the public interest. As a result, even if the
corporate debtor's resolution plan was authorised and declared binding on the corporate
debtor and its workers, members, creditors, guarantors, and other stakeholders under Section
31 of the Code, criminal proceedings under Section 138 will continue.
Source-
Ajay Kumar Bishnoi V/s M/s. Tap Engineering

3. (MADRAS HIGH COURT Judgment dated 09.01.2020 in Crl OP(MD)No.34996 of 2019)
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