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CHEQUE BOUNS CASE

Negotiable Instruments Act, 1872-Section 138-Dishonour of che-ques- Complaint u/s. 138 against companies-Companies declared sick after institution of complaints uls 138-Whether they are liable to be prosecuted in view of embargo contained in Section 22(1) of Sick Industrial Companies (Special Provisions) Act, 1985-Held, Yes. Cheques issued by the appellant company and their Directors were dishonoured by the drawee bank on the ground of insufficiency of amount in the account concerned. A complaint was filed against the company and its Directors for the offence u/s. 138 of the Negotiable Instruments Act. Those companies, subsequent to the filing of complaints against them, sought for declaration before the Board for Industrial Finance and Reconstruction, that those companies became sick as envisaged in the Sick Industrial Companies (Special Provisions) Act, 1985 and a declaration was made by the Board as per Section 22(3) of SICA. The appellants contended that they were not liable to be prosecuted in view of the ban against maintainability of a complaint u/s. 138 of the Negotiable Instruments Act, for the recovery of amount as contained in Section 22(1) of SICA, since a court would not be able to effectively impose a sentence on a company after convicting it of the offence u/s. 138 of the NI Act. The appellants’ case was dismissed both by the trial court as well as by the High Court. Hence this appeal. Dismissing the Special Leave Petition and appeal, this Court HELD : 1.1. If commission of the offences under Section 138 of the Negotiable Instruments Act was completed before the commencement of proceedings under Section 22(1) of Sick Industrial Companies (Spe-cial Provisions) Act, 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. [824-F] 1.2. If Parliament intended to exempt sick companies from prosecu-tion proceedings, 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 words “(and no suit for the recovery of money or for enforcement of any security against industrial company or of guarantee in respect of any loans or advance granted to industrial com-pany)”. Parliament did not specifically include prosecution proceedings within the ambit of the ban. [824-E] 13. Section 138 of the NI Act is a penal provision the commission of which offence entails a conviction and sentence on proof of the guilt in a duty 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 penal liability. [823-H; 824-A] 1.4. The word “suit” envisaged in Section 22(1), SICA, 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. [823- G] 1.5. Maintainability of a prosecution proceeding is not to be tested on the touchstone of any practical hurdle in enforcing the sentence which might be imposed on a company after conviction. Second is, there is no insurmountable hurdle for recovery of the fine covered by the sentence even from a sick industrial company because the ban contained in Section 22(1) is only conditional as could be discerned from the last limb thereof which reads thus: “Except with the consent of the Board or, as the case may be, the Appellate Authority.” It means that with such consent the court would be in a position to resort to proceedings for distress against the properties of the sick industrial company. [822-F-G] Anil Hada v. India Acrylic Ltd., [2000] 1 SCC 1, relied On. Maharashtra Tubes Ltd. v. State Industrial & Investment Corporation of Maharashtra Ltd. & Anr., [1993] 2 SCC 144, distinguished. CRIMINAL APPELLATE JURISDICTION : Criminal Appeal No. 8747 of 1999 Etc. 2000 AIR 926, 2000( 1 )SCR 815, 2000( 2 )SCC 737, 2000( 1 )SCALE540 , 2000( 2 )JT 127

CASE NO.:
Appeal (crl.) 847 of 1999

 

PETITIONER:
M/S. BSI LTD. & ANR.

Vs.

RESPONDENT:
GIFT HOLDINGS PVT. LTD. & ANR.

DATE OF JUDGMENT: 15/02/2000

BENCH:
K.T. THOMAS D.P. MOHAPATRA

 
JUDGMENT:
THOMAS, J.

L…I…T…….T…….T…….T…….T…….T…….T..J

Some companies and their Directors are now frantically
struggling to get themselves extricated from the catch of
prosecution proceedings pitted against them, consequent to
non-payment of amounts covered by cheques issued by such
companies. All the companies involved in this batch of
appeals have a common cause now in that those companies
have, subsequent to the filing of complaints against them,
approached the Board for Industrial Finance and
Reconstruction (‘BIFR’ for short) and sought for declaration
that those companies became sick as envisaged in the Sick
Industrial Companies (Special Provisions) Act, 1985, (‘SICA’
for short). They maintained the stand that when proceedings
are pending before the BIFR no prosecution can be maintained
under law against those companies. But the plea so made by
such companies was not found favour with the trial courts,
nor with the revisional courts nor even with the High Courts
before which the companies approached. All these appeals
have been filed by special leave against the orders passed
by the High Courts by which the aforesaid plea was
discountenanced.
It is sufficient to set out the facts from one of these
appeals in this batch. Answers given to the questions
raised in that appeal would apply to all the connected
appeals now being heard along with that appeal. Facts in
Criminal Appeal No.847 of 1999 are the following: Cheques
issued by the appellant therein were dishonoured by the
drawee bank on 27.12.1996 on the ground of insufficiency of
amount in the account concerned, and the payee thereof
issued a notice on 2.1.1997, demanding payment of the amount
covered by such cheques. As the drawer of the cheques
failed to make the payment as per demand, within 15 days of
receipt of the notice, a complaint was filed on 29.1.1997
against the company and its Directors for the offence under
Section 138 of the Negotiable Instruments Act (‘NI Act’ for
short). The magistrate before whom the complaint was filed
issued process against the accused who were arrayed therein.

Two petitions for winding up of the company were filed
in June 1997, one at the instance of a creditor of the
company and the other by the company itself. Thereafter the
company moved the BIFR to declare it a sick industrial
company. When proceedings were pending before the BIFR
under Section 16 of the SICA a declaration was made by the
order passed by the BIFR as per Section 22(3) of SICA. The
above is the background in which the appellants contend that
they are not liable to be prosecuted in view of the embargo
contained in Section 22(1) of SICA.

When the offence under Section 138 of the NI Act has
been committed by a company “every person who, at the time
the offence was committed, was in charge of, and was
responsible to the company for the conduct of the business
of the company, as well as the company, shall be deemed to
be guilty of the offence and shall be liable to be proceeded
against and punished accordingly.” (vide Section 141 of the
NI Act).

In Anil Hada vs. Indian Acrylic Ltd. {2000 (1) SCC 1}
it has been pointed out that three categories of persons can
be discerned as brought within the purview of the penal
liability, through the legal fiction envisaged in Section
141 of the NI Act. They are: (1) The company which
committed the offence. (2) Every person who was in charge
of and responsible to the company for the conduct of the
business of the company. (3) Any other person who is a
director or a manager or a secretary or an officer of the
company with whose connivance or with whose neglect the
company has committed the offence.

Learned counsel for the appellant submitted that when
reconstruction efforts of a sick industrial company are
pending under the provisions of SICA all other legal
proceedings including any prosecution proceedings would
stand suspended by the operation of the embargo contained in
Section 22(1) of SICA. In order to persuade the court to
place such an interpretation on the said sub-section learned
counsel invited our attention to certain other provisions of
SICA also.

In the Statement of Objects and Reasons for introducing
the Bill in the Parliament which later became Act No.1 of
1986, it is stated, inter alia, that the ill effects of
sickness in industrial companies such as loss of production,
loss of employment, loss of revenue to the Governments and
locking up of investible funds of banks and financial
institutions are of serious concern to the Government and
the society at large. “A need has, therefore, been felt to
enact in public interest a legislation to provide for timely
detection of sickness in industrial companies and for
expeditious determination by a body of experts of the
preventive, ameliorative, remedial and other measures that
would need to be adopted with respect to such companies and
for enforcement and for enforcement of the measures
considered appropriate with utmost practicable despatch.” A
sick industrial company is a company which has “at the end
of any financial year accumulated losses equal to or
exceeding its entire net worth.” {vide Section 3(1) of SICA}

Section 15 enables the Board of Directors of a company
which has become sick to make reference to the BIFR for
determination of measures which shall be adopted with
respect to the company. (The Central Government or the
Reserve Bank or the State Government concerned may also make
the reference to the BIFR for the same purpose if it has
sufficient reasons to believe that a company has become
sick.) Once a reference is made it is open to BIFR to
conduct an inquiry for determining whether the company has
become sick. If the BIFR is satisfied, on completion of the
inquiry, that the company has become sick it can adopt any
of the measures envisaged in Section 17 of SICA. When an
order is made under Section 17 a scheme with respect to the
company shall be prepared by “the operating agency”
specified in such order. The above is the general scheme of
SICA.

It is in the above background that Section 22 of SICA
has to be looked at. Sub-section (1) of Section 22 is
extracted below:

“Where in respect of an industrial company, an inquiry
under section 16 is pending or any scheme referred to under
section 17 is under preparation or consideration or a
sanctioned scheme is under implementation or where an appeal
under Section 25 relating to an industrial company is
pending, then, notwithstanding anything contained in the
Companies Act, 1956, or any other law or the memorandum and
articles of association of the industrial company or any
other instrument having effect under the said Act or other
law, no proceedings for the winding up of the industrial
company or for execution, distress or the like against any
of the properties of the industrial company or for the
appointment of a receiver in respect thereof and no suit for
the recovery of money or for the enforcement of any security
against the industrial company or of any guarantee in
respect of any loans or advance granted to the industrial
company shall lie or be proceeded with further, except with
the consent of the Board or, as the case may be, the
Appellate Authority.”
Sub-section (2) is not of any relevance so far as the
points raised in this batch of appeals are concerned. Sub-
section (3) confers power on the BIFR to declare that the
operation of all or any of the contracts, assurances of
property, agreements, settlements, awards, standing orders
or other instruments in force shall be suspended and that
all or any of the rights, privileges, obligations and
liabilities accruing or arising thereunder before the said
date shall remain suspended. Sub-section (4) says that when
any such declaration is made under sub-section (3) it shall
have overriding effect and “any remedy for the enforcement
of any right, privilege, obligation and liability suspended
or modified by such declaration, and all proceedings
relating thereto pending before any court shall
remain stayed.”

As the arguments based on Section 22(1) of SICA were
endeavoured to be fortified with the help of Section 22.A of
SICA the said provision is extracted below:

22.A Direction not to dispose of assets. – The Board
may, if it is of opinion that any direction is necessary in
the interest of the sick industrial company or creditors or
shareholders or in the public interest, by order in writing,
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 up to commencement of the
proceedings relating to the winding up before the concerned
High Court.”

We do not think it necessary to labour on the scope of
Section 22.A of SICA in the present batch of appeals as the
BIFR did not pass any order against any company involved
herein until the expiry of the period of 15 days from the
receipt of notice contemplated in clause (c) of the proviso
to Section 138 of the NI Act. So none of the companies was
interdicted by any such order envisaged in Section 22.A
during the above period of 15 days. Hence, we are unable to
find any help from the said provision which could salvage
the appellants from the prosecution proceedings against
them.

Switching back to sub-section (1) of Section 22 of SICA,
we may point out that its operation commence in respect of
the companies involved in this batch of appeals only after
the expiry of the period of 15 days envisaged in clause (c)
of the proviso to Section 138 of the NI Act within which the
companies did not pay the amount covered by the cheques.
The ban imposed, as per Section 22(1) of the SICA, is
against maintainability of the following legal actions:

(1) Proceedings for the winding up of the company;

(2) Proceedings for execution, distress or the likes
against any of the properties of the company;

(3) Proceedings for the appointment of a receiver in
respect of such properties;

(4) Suits for recovery of money or for enforcement of
any security against the company or guarantee in respect of
any loan or advance granted to the company.

Some of the learned counsel pointed out that when a
company is convicted under Section 138 of the NI Act the
court can only impose a fine as the sentence since a
juristic person like the company cannot possibly be sent to
prison. On its premise learned counsel contended that
recovery of the fine covered by such sentence would be
impractical on account of the ban envisaged in Section 22(1)
of SICA against proceedings for execution, distress or the
likes as against any of the properties of the company. As a
corollary, it was submitted that prosecution against the
company cannot be maintained since a court would not be able
to effectively impose a sentence on a company after
convicting it of the offence under Section 138 of NI Act.

The fallacy of the above contention is two-fold. First
is that maintainability of a prosecution proceeding is not
to be tested on the touchstone of any practical hurdle in
enforcing the sentence which might be imposed on a company
after conviction. Second is, there is no insurmountable
hurdle for recovery of the fine covered by the sentence even
from a sick industrial company because the ban contained in
Section 22(1) is only conditional as could be discerned from
the last limb thereof which reads thus: “Except with the
consent of the Board or, as the case may be, the Appellate
Authority.” It means that with such consent the court would
be in a position to resort to proceedings for distress
against the properties of the sick industrial company.
Hence the aforesaid contention has no merit at all.

It was next contended that the ban against
maintainability of a suit for the recovery of money would
encompass prosecution proceedings also. To support the said
contention reliance was sought to be made on the following
meaning of the word “suit” as given in Bouvier’s Law
Dictionary:
“Suit is a generic term of comprehensive signification,
and applies to any proceeding in a court of justice in which
the plaintiff pursues, in such court, the remedy which the
law affords him for the redress of any injury or the
recovery of a right In its most extended sense, the
word suit includes not only a civil action, but also a
criminal prosecution, as, indictment, information and a
conviction by a magistrate”.

Learned counsel invited our attention to the maxim
contemporanea expositio est optima et fortissima in lege
(contemporaneous exposition is the best and strongest in
law) for the purpose of stretching the scope of the word
suit to envelope criminal prosecution as well.

Our attention has also been invited to the observation
of a two Judge Bench of this Court in Maharashtra Tubes Ltd.
vs. State Industrial & Investment Corporation of
Maharashtra Ltd and anr. {1993 (2) SCC 144}. While
considering the purpose and objects of suspension of
proceedings mentioned in Section 22(1) of SICA, therein it
has been held that the expression “proceedings” in the sub-
section must be widely construed. This is what the Bench
has observed:

“The legislature has advisedly used an omnibus
expression ‘the like’ as it could not have perceived of all
possible coercive measures that may be taken against a sick
undertaking.”

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.

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 sentence 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.

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.

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.

 

 

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