The Supreme Court has clearly belaboured that the initiation of insolvency process for recovering a debt would not absolve an accused from criminal liability in cheque dishonour cases.

A Bench comprising of Justice Sanjay Kishan Kaul, Justice  Abhay S Oka and Justice JB Pardiwala reiterated that under Section 138 of the Negotiable Instruments (NI) proceedings are not recovery or suit , but penal in character.

The majority opinion signed by Justice Kaul and Justice Oka said that Section 138 of the N.I. Act proceedings are primarily compensatory in nature and that the punitive element is incorporated only at enforcing the compensatory proceedings is unacceptable.

The bench said that the criminal liability and the fines are built on the principle of not honouring a negotiable instrument, which affects trade.

The Court had upheld a Delhi High Court order which refused to set aside a magistrate order rejecting the discharge application of the present appellant in a ₹30 crore default case.

The Bench said it disagrees with contention that if proceedings against the company under the Insolvency and Bankruptcy Code (IBC) come to an end, then a managing director cannot be proceeded against in the criminal case.

The top court was approached by the appellant contending that once the debt involved was extinguished under the IBC, the basis of Section 138 of the NI Act disappears. It was pointed out that the National Company Law Appellate Tribunal (NCLAT) had admitted the insolvency application.

The respondent-creditor counsel argued that the appellant had deliberately and with mala fide intentions given a cheque to defraud it.

The Court at the outset noted that scope of proceedings under the two Acts were quite different and do not intercede each other.

The Bench opined that possible recovery of the debt in question would not ipso facto apply ‘to the extinguishment of the criminal proceedings’. It called into question the conduct and bonafides of the appellant.

The appeal was accordingly, dismissed, but without costs, as the respondent had not filed a synopsis in the case.

Justice Pardiwala stated that the clauses in the concerned resolution plan only extinguished the liability of the corporate debtor (company), and not the individual accused.

The Supreme Court has come down heavily on the Rajasthan High Court order for quashing the proceedings in a case under Section 138 of the Negotiable Instruments Act 1881, observing that the bank cannot deny the existence of an account, when it has itself returned a cheque from the same, with remarks, ‘Account Frozen’.

A Bench comprising Chief Justice of India (CJI) N.V. Ramana, Justice A.S. Bopanna and Justice Hima Kohli set aside the Rajasthan High Court order, after observing discrepancy in the statements of bank managers.

The Court noted that while the managers denied opening and maintaining any such account in their bank, but the dishonoured cheque drawn by the respondent in favour of the appellant, was returned with the remark ‘account frozen,’ which meant the account existed.

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The Apex Court then directed the trial court to consider the matter, not merely on the deposition of bank managers, but in detail and conclude it within six months.

Case name: Vikram Singh vs Shyoji Ram

The Supreme Court on Tuesday directed the High Courts to submit their response within four weeks in the suo motu cognizance of the issue relating to the expeditious trial of cheque bounce cases under Section 138 of Negotiable Instruments Act. The Court has asked the High Courts who have not responded yet to file appropriate affidavit. (In Re: Expeditious Trial of Cases Under Section 138 of N.I. Act 1881) 

A three-judge bench of Chief Justice S.A. Bobde and Justices L. Nageswara Rao and Vineet Saran was hearing the matter through video conferencing. During the hearing today, Senior Advocate Siddharth Luthra, who was appointed Amicus Curiae, submitted before the Court that most of the High Courts have not responded yet. He suggested that interim orders can be passed to ask the High Courts who have not responded yet, to file their response in two or three weeks. NALSA has submitted a report on pre-litigation mediation. But it’s not possible unless cognizance is taken of the case. It has to be done post-cognizance and not pre-cognizance as NALSA suggests.

CJI Bobde stated that Supreme Court took suo motu cognizance of the matter in March 2020. There was an order of take steps to reduce high pendency of cases relating to dishonored cheques. Amicus Curiaes have made submissions and NALSA has submitted a report. RBI has filed a reply to the preliminary report. The DGP of states were directed to respond with respect to service of summons by October 27, 2020 but only 7 DGPs have submitted response.

A division bench of CJI Bobde and Justice Nageswara Rao had taken up the suo motu case in March 2020 stating that with the ever growing number of cheque bounce cases, there is need to develop a mechanism for pre-litigation settlement in these cases. 

Despite many changes brought through legislative amendments and various decisions of the Supreme Court mandating speedy trial and disposal of these cases, trial courts are filled with large number of pending cases.

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The Court had suggested development of a separate software-based mechanism to track and ensure the service of process on the accused in cases relating to offences under Section 138 of NI Act. The RBI was also suggested to consider developing a new proforma of cheques so as to include the purpose of payment, along with other information to facilitate adjudication of real issues.