Analyzing Impact of CIRP and Approval on Liability of Natural Persons under the N.I. Act.

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Introduction

With the progression in the prism of value addition holding the corporate entities as the principal actors, parallelly, new questions and jurisprudence have also evolved revolving from the same disagreements, compromises, and consensus by congruent reasoning from the established legal framework.  To hold, or not to hold is the legal and logical dilemma with the dynamic dimensions dealing with the liability of the ‘natural persons’ for the acts of the juristic person, i.e., a company. The instances of well-woven conspiracies by the association of individuals with malicious intentions abusing the shortcomings in the process of law within the veil of the corporate identity and the shadow of the insolvency resolution process are expanding exponentially but balancing the other segment, this must not act as an obstruction to the foundational reasoning of forming a company for a business – the separate legal entity.

Prevalent Structural Review

In alignment with the same analogy, the Negotiable Instruments Act, 1881 (NI Act) is an act to define law pertaining to promissory notes, bills of exchange, and cheques, and whereby Section 138 of the Act deals with ‘Dishonour of Cheques’. In the realm of corporate entities, such offenses are dealt with in the ambit of Section 141, which substantiates the ‘vicarious liability’ of the persons in charge and responsible for the company in the course of arising of the cause of action. In the harmonious application and to obtain a relatively complete perspective of the law, this has to be read with the Insolvency and Bankruptcy Code, 2016 (IBC), which holds fundamental intent to reorganize and provide insolvency resolution, wherein, Section 14 provides for declaration of the moratorium during the Corporate Insolvency Resolution Process (CIRP), ergo, prohibiting proceedings against the corporate debtor. Flowing further in the CIRP Process, Section 32A of the IBC exhibits immunity that the corporate debtor cannot be prosecuted and held liable for the offense committed before the commencement of the CIRP after the resolution plan approval abiding by the procedure laid in Section 31. On that premise, whether the natural persons responsible for the operations, the ex-directors, can be held liable for prosecution under Section 138 referred to with Section 141 of the NI Act after the approval of the resolution plan by the National Company Law Tribunal (NCLT) or not becomes a substantive question of law. A stark contrast and a reasonable conflict have been sparked as well as analyzed by the authors within the horizon of the established structure and developments. 

Analysis and application

Theory of ‘alter-ego’ for attributing liability for the ‘mental element’

In the light of the legal superstructure, the Supreme Court has considered the theory of alter-ego propounded by Viscount Haldane in JK Industries v. Chief Inspector of Factories and Boilers, establishing that the ‘directing minds’ of the company have to be held vicariously liable for the commission of statutory offenses. The concept of an individual’s “alter ego,” or secondary or “alternative personality,” has evolved since the Assistant Commissioner, Assessment-II, Bangalore & Ors. v. Velliappa Textiles Ltd. & Ors., and culminated in Iridium India Telecom Ltd. v. Motorola Incorporated & Ors., resulting in a position where directors can be charged with criminal wrongdoing by the companies. Since the acts of one are equivalent to those of the other, and the juristic person is void in the absence of human agency, the theory of the alter ego is applicable, specifically when the criminal statute explicitly stipulates the attribution in accordance with the paradigm entrenched in Sunil Bharti Mittal v. Central Bureau of Investigation.

Comprehending the question at hand, the actions of the key managerial persons, the ex-directors, while discharging day-to-day responsibilities constitute the offense under the NI Act and, thereby, can be held vicariously liable with the fulfillment of conditions of (a) Control, (b) Commission of a wrong and (c) Causing of the injury.  Holding Key Managerial Personnel liable is equivalent to holding the company liable as they represent the organs of the company and are the ‘directing mind and will’ of the company holding criminal culpability.

Legal empowerment of piercing the corporate veil

Within the purview of the established legal framework, a company will generally be regarded as a legal entity unless compelling evidence to the contrary surfaces; but the law will perceive a company to be an association of individuals when it is used to undermine public convenience, justify wrongdoing, protect fraud, or defend crime. The courts must overlook interpretation that is pushed to an objective and purpose that is not consistent with the spirit and policy of the fiction and herein, the NI Act was intended to bring security to the payment mechanism. The concession theory, among other theories of corporate identity, recognizes that the legal personality of body corporates is derived from the law and that the law, therefore, provides a concession.[1] This concession is made for a precise reason, impairing and exploiting that reason empowers the law to pierce the corporate veil.

The companies have separate personalities from their directors and they enjoy the benefit of not sharing liability owing to the imposition of a moratorium under Section 14 and subsequent approval of the CIRP plan under Section 31. However, if the company’s activities don’t further the interests of justice, this legal concession may very possibly be revoked. In the legal perspective manifested in the NI Act, while dissolving the same with the dilemmatic matrix, it becomes essential to clearly and substantially establish certain aspects to derive the completeness of the offense under Section 138 and Section 141 of the NI Act.

Gravity to the essential ingredients of the offense under Section 138

In the bare perusal of Section 138, which is reassured in the judicial interpretations in various cases, including Dashrath Rupsingh Rathod v. the State of Maharashtra, the ingredients of the offense are:

“(a) Drawing of a cheque

(b) in the discharge of a legally enforceable debt or liability, and

(c) the cheque is returned unpaid.”

In compliance with the literal interpretation of the provisos in Section 138, dissolved with the law established fundamentally in Kusum Ingots and Alloys ltd. v. Pennar Peterson Securities Ltd. and MSR Leathers v. S. Palaniappan, that before the dishonor of a cheque may be considered an offense and penalized, three specific prerequisite elements must be accomplished. Firstly, Presentation within six months, secondly, a written demand notice within thirty days of dishonor, and thirdly, failure of payment within fifteen days after receipt of the notice are the conditions that have to be transpiciously understood and complied with.

Furthermore, cognizance is brought to the aspect that if the payee does not receive back the postal acknowledgment or the postal cover, it is assumed that the notification has been delivered, as underlined in the case of Central Bank of India v. Saxena Pharma and N. Parameswaran Unni v. G. Kannan. The dishonor of the cheque combined with absolute satisfaction of the conditions; the conduct of the directors constitutes an offense punishable within Section 138 referred to with Section 141 of the NI Act.

The statutory liability of natural persons remains unaffected by the imposition of a moratorium and the passing of the resolution plan.

On the premise of the legal principles owing to the substantiated reasons hereinabove:

1. Section 138 NI Act proceedings will continue parallelly with the CIRP following the Quasi-criminal nature of proceedings.

The apex court in P. Mohanraj & Ors. v. Shah Brothers Ispat Pvt. Ltd. earmarked Section 138 as a “’Civil Sheep’ In A ‘Criminal Wolf’s Clothing’” and it holds Quasi-criminal nature. The aspect of parallel proceedings was dealt with in the case of Vishnu Dutt v. Daya Sapra, wherein the Court made it crystal clear that criminal proceedings can continue simultaneously with the other nature of trials. The trial for the dishonor of cheques within Section 138 of the NI Act is quasi-criminal in nature, and thereby, the offenses of the company can be tried without any bar posed by the imposition of a moratorium or any other aspect of CIRP.

• The moratorium applies only to corporate debtors and imposition doesn’t bar complaints against natural persons within Section 138.

Outlining the observations following P. Mohanraj & Ors. v. Shah Brothers Ispat Pvt. Ltd., it was bestowed that the moratorium imposition will have no impact on the proceedings being carried out within Section 138, which has been further reaffirmed in Anjali Rathi & others v. Today Homes & Infrastructure Pvt. Ltd. & others. Adding essence to the said dimension, the apex court in Narinder Garg v. Kotak Mahindra Bank imparted that the natural individuals indicated in Section 141 of the Act would remain to be statutorily liable with the obedience of the Act, and the moratorium principles in Section 14 of the Insolvency and Bankruptcy Code, 2016, would indeed be implemented to the corporate debtor. Emphasis supplied, the Madras HC in M/s. Nag Leather Pvt. Ltd. v. M/s. Muzain Hides brought forth that the imposition of moratorium under IBC doesn’t even bar complaints under the NI Act. Along with the said interpretations and applications, in absolute consonance with the settled position of law, the declaration of a moratorium will not hinder the proceedings under the NI Act relating to the statutory liability of the ex-directors under Section 141 of the Act.

• Acceptance and approval of the CIRP Plan cannot take away criminal jurisdiction and thereby don’t constitute a ground to quash a case under the NI Act.

Emphasis is to be placed on the case of Ajay Kumar Bishnoi v. M/s Tap Engineering, which made evident that in compliance with the criminal procedure, no clause of CIRP on its acceptance and approval can bar the jurisdiction for inquiry and trial under the NI Act. The apex court in JK Industries Limited v. Amarlal V.Jumani, in drawing congruence, demonstrated that no arrangement with creditors (Section 391) could lead to compounding of the offense within Section 138. Making the analogy complete, the Principal Court while dealing with Aneeta Hada v. Godfather Travels & Tours (P) Ltd. outlined that the directors cannot escape Section 138 proceedings prescribed in the NI Act by citing the dissolution of the corporate body. Furthermore, recently the NCLT in Naviplast Traders Pvt. Ltd. v. R. G. Shaw & sons Pvt. Ltd., provided a lucid distinction between CIRP and Section 138 and held that Section 138 proceedings have nothing to do with the CIRP proceedings. In legal and logical essence, the acceptance of the CIRP plan doesn’t constitute a ground to quash a case under NI Act and the natural person will continue to be liable.

Conclusion

Ascertaining and utilizing the legal analogy revolving around the issue, unquestionably, with the resolution plan approval and lifting of the moratorium, the proceedings under Section 138 will continue as per the Criminal Procedure, and owing to the absolute line, there is a distinction between the dissolution and Section 138 proceedings against the individuals referred to in Section 141. In the implementation of theories of corporate law with the IBC jurisprudence, to establish control, there exists a necessity to hold natural persons liable, who failed to exercise ‘reasonable care’. Tracing reason of such distinction, both the proceedings share no inter-relation, and natural persons cannot escape the proceedings for the offenses as the acceptance of the resolution plan cannot take away criminal jurisdiction to inquire and try the case under the NI Act with the applicability of the theory of ‘alter-ego’ and undermining of the concession of separate identity by exploiting the legal procedure to devalue the legislative intent of the NI Act as well as the interests of justice. The legislative arm should establish lucid lines of distinction where liability can be attributed to natural persons which can be done on the foundation of several ingredients, illustratively:

• In charge and responsible for the Company at the time of commission. (Section 141 NI Act)
• Authorized signatory of the Cheque. (K.K. Ahuja v. V.K. Vora & another)
• Holding a position that sufficiently explains participation in the conduct of the business, for example, Managing Director. (Sunita Palita vs Panchami Stone Quarry)

On the precedential, legal, and logical premise, the apex court or the parliament should explore the scope, crystalize and settle the position holding the natural persons liable for the criminal conduct under the NI Act.

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[1] G.W. Paton, A Textbook on Jurisprudence, 411(4th ed.).