Nitin Chandrakant Naik Vs. Sanidhya Industries LLP - In Resolution Plan of Corporate Debtor provision relating to right of Financial Creditor to proceed against Personal Guarantor can be there, but enforcement of such right has to be as per provisions of law as discussed.

NCLAT (26.08.2021) in Nitin Chandrakant Naik Vs. Sanidhya Industries LLP  [Company Appeal (AT) (Insolvency) No. 257 of 2020 & 239 of 2021] held that; 

• Now, after portion of Part-III has been applied to Personal Guarantors of Corporate Debtor, one would have to resort to those provisions under IBC if Personal Guarantors of Corporate Debtor are to be proceeded against. In Resolution Plan of Corporate Debtor provision relating to right of Financial Creditor to proceed against Personal Guarantor can be there, but enforcement of such right has to be as per provisions of law as discussed.

•  . . there have been material irregularities in exercise of powers by the Adjudicating Authority when it directed the Appellants (in para 26 of the impugned order (referred supra)), that the owners of the premises as mentioned in the judgment shall enter into Tripartite Agreements for transfer of the premises (as mentioned in para 18 of impugned order). In fact, if para 18 is seen, after describing the properties in the chart there is also portion added which says that the Financial Creditors shall be at liberty to proceed against the properties of the Promoters erstwhile Directors/ Guarantors “other than those mentioned above to recover their balance”. This, in the Resolution Plan would be blank cheque given to proceed even with regard to any other property also of the Personal Guarantors. In our view, without resorting to appropriate proceedings against the Personal Guarantors of Corporate Debtor this is irregular exercise of powers.

Excerpts of the order;

# 1. The Appellants, Promoter and Suspended Directors of the Corporate Debtor- ‘Simrut Foods & Hospitality Private Limited’ have filed this Appeal against impugned order dated 13.11.2019 passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench) in M.A. No. 3439/2019 in CP No. 1973/ 2018. By the Impugned Order, the Adjudicating Authority allowed the Application filed by Respondent No.3- Resolution Professional seeking approval of the Resolution Plan approved by the Committee of Creditors which plan was submitted by Respondent No.1-‘Sanidhya Industries LLP’. Aggrieved by the approval of the Resolution Plan, the Appellants have filed this Appeal mainly on the ground that the Resolution Plan has provision to transfer personal properties of the Appellants who had given their personal properties as security in favour of the Corporate Debtor, whom Corporate Debtor took loan.

 

# 2. The Appeal claims and it is argued on behalf of the Appellants that the Resolution Plan approved made provision of transfer of personal properties of the Appellants. It is claimed that the personal properties of the Shareholders/ Directors cannot form part of the Resolution Plan under Regulation 37 of the CIRP Regulations. Resolution Plan has to be with respect to the property of the Corporate Debtor and cannot enforce action against the properties of Shareholders/ Directors or Guarantors without proceeding against them. If the Creditor desires the Creditor has to proceed against the Guarantor under SARFAESI Act, 2002, Indian Contract Act, 1972 or the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, which proceedings could have been filed before the DRT as Part III of the Insolvency and Bankruptcy Code, 2016 (“IBC” for short) which has not yet been notified. The Appellants alleged that the Information Memorandum published by Respondent No.3-Resolution Professional did not show the personal properties of the Appellants as properties of the Corporate Debtor. . . . 

 

# 4. Before proceeding further, it needs to be noted here that in this matter the Resolution Plan was approved on 13.11.2019 and Section 2(e) and provisions of Part-III of IBC came to be notified on 15.11.2019 enforcing Part-III of IBC to limited extent of making it possible to enforce Resolution relating to personal Guarantors of the Corporate Debtor. Notification was issued by Government and a judgment was passed by Hon’ble Supreme Court in the matter of ‘Lalit Kumar Jain vs. Union of India & Ors.’-[Transferred Case (Civil) No. 245/2020] in this context. In the present matter thus, the disputes raised are on the basis of as to how the law stood (before making Part III of IBC applicable to Personal Guarantors of Corporate Debtor) at the time of approval of Resolution Plan by the Committee of Creditors and then by the Adjudicating Authority.

 

# 7. Respondent Nos. 4 and 5, the Financial Creditors have also filed reply and it is argued by these Respondents that the Appellants are the Promoters of the Corporate Debtor and they had mortgaged the subject properties to these Respondents vide Mortgaged Deed dated 20th October, 2014. It is claimed that the Appellants had executed personal guarantees in order to secure the advances given to the Corporate Debtor and that the properties concerned are commercial in nature (The documents show the properties on personal names of Appellants- See Schedule of Annexure-B- Joint Mortgage Deed dated 20.10.2014). It is claimed that these Respondents had proceeded to take action under Section 13(2) of the SARFAESI Act on 17.09.2018 and 28.07.2017 respectively and that the possession was taken by notice dated 19.02.2018 under the SARFAESI Act. The CIRP got initiated on 03.09.2018. Para 4 of Reply Diary No.23074 shows that these Respondents got the secured assets valued on 08.02.2019. These Respondent Nos.4 and 5 had 91.31% voting shares in the CoC. These Respondents are relying on para 22 of the judgment in the matter of “State Bank of India v. V. Ramakrishnan & Anr.” [Civil Appeal No.3595 of 2018] passed by the Hon’ble Supreme Court on 14th August, 2018. The said paragraph reads as under:-

• “22. Section 31 of the Act was also strongly relied upon by the Respondents. This Section only states that once a Resolution Plan, as approved by the Committee of Creditors, takes effect, it shall be binding on the corporate debtor as well as the guarantor. This is for the reason that otherwise, under Section 133 of the Indian Contract Act, 1872, any change made to the debt owed by the corporate debtor, without the surety’s consent, would relieve the guarantor from payment. Section 31(1), in fact, makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor. This is perhaps the reason that Annexure VI(e) to Form 6 contained in the Rules and Regulation 36(2) referred to above, require information as to personal guarantees that have been given in relation to the debts of the corporate debtor. Far from supporting the stand of the Respondents, it is clear that in point of fact, Section 31 is one more factor in favour of a personal guarantor having to pay for debts due without any moratorium applying to save him.”

 

# 8. These Respondents lay stress on the observations of the Hon’ble Supreme Court that the Resolution Plan ‘may well include provisions as to payments to be made by such guarantor’. On such basis, these Respondents claim that the Adjudicating Authority rightly approved the Resolution Plan and that the Appeal should be dismissed.

 

# 10. Thereafter, the Adjudicating Authority referred to Sections 30 and 31 of the IBC as well as Regulations 38 & 39 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016’ (“CIRP Regulations” for short) and concluded in Para 21 that mandatory contents of Resolution Plan have been complied with, inter alia Adjudicating Authority went on to give direction in Para 26 of the impugned order as under:-

• “26. It is directed that Mrs. Megha Nitin Naik and Mr. Nitin Chandrakant Naik, the owners of the premises as mentioned above and the Corporate Debtor, shall enter into Tripartite Agreements (with the Financial Creditors), for transfer of the premises (as mentioned in paragraph 18 of this Order) to the Resolution Applicant in compliance with the decision of CoC.”

 

# 13. We have heard learned Counsel for the parties. When CIRP is initiated, in the first step, Interim Resolution Professional (IRP) is required under Section 18(1) to collect all information relating to the assets, finances and operations of the Corporate Debtor for determining the financial position of the Corporate Debtor. He has to make a list of assets and liabilities of Corporate Debtor. Regulation 36 of the CIRP Regulations provides as to what is required to be incorporated in the Information Memorandum which is to be issued by the Resolution Professional. Here also the Information Memorandum requires including details of the assets and liabilities of the Corporate Debtor as per Regulation 36(2) (a). Sub-clause (f) of Regulation 36(2) provides that the Information Memorandum should give details of guarantees that have been given in relation to the debts of the Corporate Debtor by other persons, specifying which of the guarantors is a related party. Thus reference to details of Guarantees given by Related Party has to be there. That reference does not make property of Guarantor a property of Corporate Debtor for which Section 36(2) (a) is there.

 

# 20. The Hon’ble Supreme Court observed that Section 31 is one more factor in favour of the fact that a personal guarantor is required to pay for debts due without any moratorium applying to save him. What is clear is that Section 31 does not absolve the personal guarantor from liability. But then the Respondents are trying to rely on para 22 of the judgment of the Hon’ble Supreme Court to say that in the Resolution Plan itself there can be provision to move against personal guarantor. We do not agree with these submissions. It appears Resolution Plan can have jurisdiction as to right of payment to be received from Personal Guarantor. To us, it does not appear that the Judgment lays down that in the Resolution Plan of the Corporate Debtor itself provision could be made to consume property of Personal Guarantor without recourse to appropriate proceedings which were, earlier as per Acts then applicable (and now without recourse to Part III of IBC). Before Part-III was enforced against personal guarantors of the Corporate Debtor, the provisions under which one could move against the personal guarantors are as mentioned by the Hon’ble Supreme Court in para 15 of the judgment in the matter of “State Bank of India v. V. Ramakrishnan & Anr.”. After coming into force of Part-III, now one would have to proceed as per Chapter III of Part-III of IBC. If the arguments of the Respondents were to be accepted, there would have been no need of the earlier provision being maintained. After Part-III is enforced there would be no need of Part-III if properties of the Personal Guarantors could be simply included in the Resolution Plan and disposed directing them to sign the transfer deed as is being done in the present matter.

 

# 23. Going back to the judgment in the matter of “State Bank of India v. V. Ramakrishnan & Anr.”, if Moratorium under Section 14 of the IBC during CIRP did not apply to Personal Guarantors of the Corporate Debtor, personal properties of the Corporate Debtor cannot be realised by sale/ transfer etc. in the CIRP of the Corporate Debtor without resorting to proceeding before appropriate authority/ Court under the existing enactment before portion of Part-III has been applied to the Personal Guarantors of Corporate Debtor. Now, after portion of Part-III has been applied to Personal Guarantors of Corporate Debtor, one would have to resort to those provisions under IBC if Personal Guarantors of Corporate Debtor are to be proceeded against. In Resolution Plan of Corporate Debtor provision relating to right of Financial Creditor to proceed against Personal Guarantor can be there, but enforcement of such right has to be as per provisions of law as discussed.

 

# 24. For the above reasons, we hold under Section 61(3) of the IBC that the Resolution Plan as approved by the Adjudicating Authority is in contravention of the provisions of law as discussed above and there have been material irregularities in exercise of powers by the Adjudicating Authority when it directed the Appellants (in para 26 of the impugned order (referred supra)), that the owners of the premises as mentioned in the judgment shall enter into Tripartite Agreements for transfer of the premises (as mentioned in para 18 of impugned order). In fact, if para 18 is seen, after describing the properties in the chart there is also portion added which says that the Financial Creditors shall be at liberty to proceed against the properties of the Promoters erstwhile Directors/ Guarantors “other than those mentioned above to recover their balance”. This, in the Resolution Plan would be blank cheque given to proceed even with regard to any other property also of the Personal Guarantors. In our view, without resorting to appropriate proceedings against the Personal Guarantors of Corporate Debtor this is irregular exercise of powers.

 

# 25. For the above reasons, we pass the following order:-

ORDER

The Appeal is allowed. The impugned order is quashed. The Resolution Plan approved by the Adjudicating Authority is rejected. All actions taken in consequence of the impugned order approving the Resolution Plan shall stand set aside. As the Insolvency Resolution Process period under Section 12 of the IBC is already over, the matter is remitted back to the Adjudicating Authority to pass appropriate order of liquidation under Section 33 of the IBC.

 

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The Central Board of Trustees, EPF Vs. The Liquidator M/s. Bunt Solar India Pvt. Ltd. - Therefore, keeping in view of the aforesaid facts we cannot pass any directions against a non- existence entity.

NCLAT (16.08.2021) in The Central Board of Trustees, EPF Vs. The Liquidator (Sri. Gorur Narasimhamurthy Venkataraman) M/s. Bunt Solar India Pvt. Ltd.  [Company Appeal (AT) (CH) (INS) No. 10 of 2021] held that; 

• “However, as no provisions of the ‘Employees Provident Funds and Miscellaneous Provisions Act, 1952’ is in conflict with any of the provisions of the ‘I&B Code’ and, on the other hand, in terms of Section 36 (4) (iii), the ‘Provident Fund’ and the ‘gratuity fund’ are not the assets of the ‘Corporate Debtor’, there being specific provisions, the application of Section 238 of the ‘I&B Code’ does not arise”. 

• In view of the nil value and keeping in view of the dissolution of the company there being no other source to pay to the Employees Provident Fund, being a Government Agency, we are of the view that since the Corporate Debtor was dissolved, the company is no more in existence in the eye of law. Therefore, keeping in view of the aforesaid facts we cannot pass any directions against a non- existence entity. The appeal is devoid of merits and liable to be dismissed, accordingly the same is ‘Dismissed’.

Excerpts of the order;

The present ‘Appeal’ filed against the Order of the Learned ‘Adjudicating Authority’ dated 06.01.2021 passed in IA No. 02 of 2021 in CP (IB) No. 72/BB/2019, whereby the ‘Adjudicating Authority’ (National Company Law Tribunal, Bengaluru Bench, Bengaluru) dissolved the Corporate Debtor company. 

 

Appellants Submissions’: - 

# 1. The Learned Counsel for the ‘Appellant’ submitted that the ‘Appellant’ was not party to the proceedings before the ‘Adjudicating Authority’ and they have never been informed about the Impugned Order. It is submitted that the ‘Appellant’ is a Statutory Organisation comes under Ministry of Labour and Employment, Government of India and it has to act in accordance with law and procedure vested with power to overlook the implementation of the Employees Provident Fund and Miscellaneous Provisions Act, 1952. The ‘Appellant’ is custodian of interest of the poor workers and the Employees Provident Fund Organisation is a Social Welfare Legislation. 

 

# 2. The Learned Counsel for the ‘Appellant’ submitted that M/s. Bunt Solar India Pvt. Ltd., under liquidation has defaulted in payment of Employees Provident Fund and allied dues to the tune of Rs. 2,34,10,240/- and the details have been (extracted from Page: 08) of Appeal Paper Book. 

 

# 9. The Learned Counsel submitted that the claim of the ‘Appellant’ was rejected by the IRP at the time of CIRP proceeding on technical grounds for not having notarized the Claim Form. The IRP advised the ‘Appellant’ to rectify and submit the claim which was not done, hence, the ‘Appellant’ was not a claimant during CIRP proceedings. While so the Committee of Creditors (CoC) of Corporate Debtor i.e. M/s. Bunt Solar India Pvt. Ltd., have recommended for liquidation of Corporate Debtor. In view of Liquidation value of Corporate Debtor being nil and accordingly, the Hon’ble ‘Adjudicating Authority’ ordered for liquidation of Corporate Debtor under Section 33 of IBC 2016. 

 

#10. During liquidation process, the Liquidator called for claims through public announcement, one in English newspaper and one in Regional language (Kannada). The Liquidator, considering the ‘Appellant’ as a Government Department, requested them to submit the proper claim referring to the public announcement. It is submitted that in spite of the request, the ‘Appellant’ has not submitted a proper claim and hence, he was not included as Stakeholder under the liquidation process. As the claim of the ‘Appellant’ has been rejected by the liquidator as the claim was defective (not Notarized) and Finalised the list of claim and stakeholders as per regulation 31 of (Liquidation Process Regulation). It is submitted that the ‘Appellant’ has lost the opportunity to become Operational Creditor during CIRP and Stakeholder during Liquidation process and he did not participate any of the proceedings, before the ‘Adjudicating Authority’ during these two years’ of time and now, the Corporate Debtor was dissolved vide Impugned Order dated 06.01.2021 of the Hon’ble ‘Adjudicating Authority’. The Learned Counsel submitted that in view of the reasons the ‘Appellant’ has no Locus Standi to file this appeal before this ‘Tribunal’ also for the reason that the ‘Appellant’ is not an aggrieved party, as defined under Section 61 of IBC 2016. 

 

# 11. The Learned Counsel for the Respondent also submitted that one of the Operational Creditor namely M/s. Rashmika Info Technologies Pvt. Ltd. had filed the application initiating Corporate Insolvency Resolution Process, against M/s. Bunt Solar India Pvt. Ltd., vide application no. CP (IB No. 72/BB/2019) under Section 9 of the IBC 2016. The said application was admitted by the Hon’ble ‘Adjudicating Authority’ on 14.06.2019, and appointed the Respondent as IRP. 

 

# 12. The IRP constituted Committee of Creditors (CoC). The Corporate Debtor does not own any Assets/Properties. As such the liquidation value being nil and (CoC) recommended for liquidating Corporate Debtor through Resolution Professional. The ‘Adjudicating Authority’ passed order for liquidation of Corporate Debtor as per Section 33 of IBC in IA 408 of 2019 in CP 72 of 2019, vide order dated 05.09.2019. The ‘Appellant’ should have filed an appeal within thirty days from the date of receipt of the copy of the Order, but, did not participate in any of the proceedings before the ‘Adjudicating Authority’. It is submitted that the liquidation value of Corporate Debtor is being nil and as such, the liquidation estate is also nil value. The liquidator took action as per liquidation order and followed rules and regulations as prescribed under law. 

 

# 13. In view of the submissions, the Learned Counsel for the Respondent prays this Bench to dismiss the appeal. 

 

Analysis/Appraisal: - 

# 14. Heard the Learned Counsel appearing for the Respective Parties, perused that the pleadings documents and the ‘Citations’ relied upon by parties. 

 

# 15. It is an admitted fact that M/s. Bunt Solar India Pvt. Ltd., has been dissolved by Impugned Order dated 06.01.2021 passed by the ‘Adjudicating Authority’ (NCLT Bengaluru Bench, Bengaluru), the point for considering is whether the ‘Appellant’ can seek a direction as prayed in this appeal, when the Corporate Debtor was dissolved and there being nil value. 

 

# 16. Before going into the crux of the issue, the facts for consideration are that M/s. Bunt Solar India Pvt. Ltd., Corporate Debtor was under Corporate Insolvency at the behest of M/s. Rashmika Info Technologies Pvt. Ltd. who filed an application under Section 9 of the IBC before the ‘Adjudicating Authority’. Thereafter, the Insolvency Resolution Professional followed due procedure with regard to post CIRP and followed due process of law. Having nil value,` the Committee of Creditors recommended for liquidation of the Corporate Debtor and in pursuance thereof, the IRP filed an application for liquidation of the Corporate Debtor, accordingly the ‘Adjudicating Authority’ ordered commencement of liquidation of the Corporate Debtor on 05.09.2019. The liquidator issued public announcement on 05.10.2019 in English newspaper inviting claims from the stakeholders of the Corporate Debtor on or before 30.10.2019. 

 

# 17. The ‘Appellant’ during CIRP process filed claim in Form ‘F’ dated 03.07.2019 (Annexure-2 of the Paper Book). From the perusal of the claim, it is seen that the ‘Appellant’ claimed a sum of Rs. 2,34,10,240/-. The IRP vide letter dated 06.07.2017 asked the ‘Appellant’ to submit claim in Form ‘E’ and stated that the claim which was made on 03.07.2019 in Form ‘F’ is a wrong submission. The ‘Appellant’ forwarded Form ‘E’ on 08.07.2019 to the IRP and stated that the EPF dues as claimed in Form ‘E’ be remitted in priority to all other dues by way of Demand Draft drawn in favour of the Regional Provident Fund Commissioner, RR Nagar, Bangalore. As stated supra, the IRP made public announcement of the liquidation of the Corporate Debtor in Form ’B’ in Kannada (Vernacular language) as well as English Newspaper, inviting claims from stakeholders. Since the company was liquidated by the Hon’ble ‘Adjudicating Authority’. The ‘Appellant’ submitted their claim in Form ‘F’ dated 11.10.2019. 

 

# 18. The stand of The Liquidator / Respondent is that the claim which was submitted in Form ‘E’ has not been Notarized and requested the ‘Appellant’ to resubmit the Form ‘E’ duly notarized as per the regulations. Further, after the public announcement made on 05.10.2019 in English Newspaper and Kannada (Vernacular language), the Respondent vide letter dated 16.10.2019 stated that as per the public announcement, the last date of filing of the claims by Operational Creditor is on 30.10.2019, and all the Operational Creditors have to submit proof of claim, in respect of liquidation forms that is in Form ‘C’ duly Notarized, as per regulations of IBC 2016. Further it is also stated by the Respondent in their letter dated 16.10.2019 that “Considering you are Government Department and you had made claims earlier with respect to IRP, this mail is sent to you for your necessary action”. Further, the Respondent vide e-mail dated 23.10.2020 addressed to the ‘Appellant’ whereby it is stated that “Dear employer as per our records, you have failed to remit contributions of your employees due for Twenty Three wage months. This prima facie shows wilful default on your part failure to remit the contributions and interest due of such belated remittances within fifteen days may cause and invoke after the provisions of prosecution, complaint under Section 406/409/IPC and coercive actions for recovery of dues”. Even the Respondent also addressed e-mail on 23.09.2020 stating that the ‘Appellant’ failed to remit contributions of its employees due for Twenty Two wage months. After passing of the dissolution order, the Respondent herein vide letter dated 01.02.2021 addressed to the ‘Appellant’ whereby it is stated that referring to the dissolution of the Corporate Debtor and also enclosed the copy of the dissolution order for their information. From the records, it is seen that the ‘Appellants’ though made their claims during CIRP, however, the claims have not been notarized as per the procedure. However, prima facie, the value of the assets of the Corporate Debtor being nil, the Liquidator may not be able to pool the funds, distribute the same(sum) in pursuance of Section 53 of the I&B Code 2016. 

 

# 19. The main contention of the ‘Appellant’ is that Section 53 of the IBC is not applicable in the case of EPF. Since the Employees Provident Fund Act is a special Act and prevails over all other acts and submits that the dues which are payable to the employees cannot be treated as part of the asset of the Corporate Debtor. 

 

# 20. There is no dispute with regard to that and we are in agreement with the said position of law. Even Section 36(4(a) (iii)) of I&B Code 2016 states that the following shall not be included in the ‘Liquidation Assets’ and shall not be used for recovery in the liquidation Sub Section:(4) of Section:36 of IBC reads as 

• “The following shall not be included in the Liquidation Estate assets and shall not be used for recovery in the Liquidation. Sub Clause (iii) of clause (b) of sub-Section (4) of Section 36 reads as under, “All sums due to any Workman or employee from the provident fund, the pension fund and the gratuity fund”. 

 

From reading of this provision, it is clear that a liquidation estate does not include the sums due to any workman or employee from the Provident Fund etc. The Learned Counsel for the ‘Appellant’ also relied upon the Judgment of this Bench, whereby this ‘Tribunal’ is also of the view that “Para 44” of the said Judgment, reads as:- 

• “However, as no provisions of the ‘Employees Provident Funds and Miscellaneous Provisions Act, 1952’ is in conflict with any of the provisions of the ‘I&B Code’ and, on the other hand, in terms of Section 36 (4) (iii), the ‘Provident Fund’ and the ‘gratuity fund’ are not the assets of the ‘Corporate Debtor’, there being specific provisions, the application of Section 238 of the ‘I&B Code’ does not arise”. 

• “Para 45” – Therefore we direct the ‘Successful Resolution Applicant’, 2 nd Respondent (‘Kushal Limited’) to release full provident fund and interest thereof in terms of the provisions of the ‘Employees Provident Funds and Miscellaneous Provisions Act 1952’ immediately, as it does not include as an asset of ‘Corporate Debtor’. The Impugned Order dated 27.02.2019 approving the ‘Resolution Plan’ stands modified to the extent above.” 

 

# 21. We completely agree with the Judgment of this ‘Tribunal’. In the above Judgment of this ‘Tribunal’, the Company was under Resolution Process and the plan was submitted and this ‘Tribunal’ is directed to modify the plan further directed to release, the Provident Fund and interest therefor, since the Provident Fund does not include as an asset of the Corporate Debtor. However, in the present case, the Corporate Debtor value is nil and the ‘Adjudicating Authority’ in its Liquidation Order clearly mentioned that except two fixed deposits amounting Rs.1,41,129/- and Rs.1,00,000/- which would be matured on 09.02.2020 and 06.02.2022 respectively, there is no other assets of the Corporate Debtor. 

 

# 22. Further, from the statement of Account maintained by the Liquidator of the Corporate Debtor, the Receipts of amounts shown as Rs. 2,72,862/-. Even the Liquidator claimed more amount than the amounts to be received by the Corporate Debtor. Being nil value of the Corporate Debtor. Apart from the liquidation asset being nil, there are no other assets or receivables by the Corporate Debtor which was under liquidation and now the same was dissolved. 

 

Findings: - 

# 23. In view of the nil value and keeping in view of the dissolution of the company there being no other source to pay to the Employees Provident Fund, being a Government Agency, we are of the view that since the Corporate Debtor was dissolved, the company is no more in existence in the eye of law. Therefore, keeping in view of the aforesaid facts we cannot pass any directions against a non- existence entity. The appeal is devoid of merits and liable to be dismissed, accordingly the same is ‘Dismissed’. No Orders as to Cost. 

 

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Rangappa Vs. Sri Mohan - The presumption referred to in Section 139 of the N.I. Act is a mandatory presumption and not a general presumption, but the accused is entitled to rebut the said presumption.

 Supreme Court (07.05.2010) in Rangappa Vs. Sri Mohan [Criminal Appeal No. 1020 of 2010] held that; 

• Once the cheque relates to the account of the accused and he accepts and admits the signatures on the said cheque, then initial presumption as contemplated under Section 139 of the Negotiable Instruments Act has to be raised by the Court in favour of the complainant. The presumption referred to in Section 139 of the N.I. Act is a mandatory presumption and not a general presumption, but the accused is entitled to rebut the said presumption.

• But the fact remains that a mere plausible explanation is not expected from the accused and it must be more than a plausible explanation by way of rebuttal evidence. In other words, the defence raised by way of rebuttal evidence must be probable and capable of being accepted by the Court. 

• . . it must be clarified that contrary to the trial court’s finding, Section 138 of the Act can indeed be attracted when a cheque is dishonoured on account of ‘stop payment’ instructions sent by the accused to his bank in respect of a post-dated cheque, irrespective of insufficiency of funds in the account.

• If the accused shows that in his account there was sufficient funds to clear the amount of the cheque at the time of presentation of the cheque for encashment at the drawer bank and that the stop payment notice had been issued because of other valid causes including that there was no existing debt or liability at the time of presentation of cheque for encashment, then offence under Section 138 would not be made out. The important thing is that the burden of so proving would be on the accused. …”

• In the absence of compelling justifications, reverse onus clauses usually impose an evidentiary burden and not a persuasive burden. Keeping this in view, it is a settled position that when an accused has to rebut the presumption under Section 139, the standard of proof for doing so is that of ‘preponderance of probabilities’. Therefore, if the accused is able to raise a probable defence which creates doubts about the existence of a legally enforceable debt or liability, the prosecution can fail. 

• As clarified in the citations, the accused can rely on the materials submitted by the complainant in order to raise such a defence and it is conceivable that in some cases the accused may not need to adduce evidence of his/her own.

• “ Since the accused did admit that the signature on the cheque was his, the statutory presumption comes into play and the same has not been rebutted even with regard to the materials submitted by the complainant.”

Excerpts of the order;

# 2. In the present case, the trial court had acquitted the appellant-accused in a case related to the dishonour of a cheque under Section 138 of the Negotiable Instruments Act, 1881 [Hereinafter ‘Act’]. This finding of acquittal had been made by the Addl. JMFC at Ranebennur, Karnataka in Criminal Case No. 993/2001, by way of a judgment dated 30-5-2005. On appeal by the respondent-complainant, the High Court had reversed the trial court’s decision and recorded a finding of conviction while directing that the appellant-accused should pay a fine of Rs. 75,000, failing which he would have to undergo three months simple imprisonment (S.I.). Aggrieved by this final order passed by the High Court of Karnataka [in Criminal Appeal No. 1367/2005] dated 26-10-2005, the appellant-accused has approached this Court by way of a petition seeking special leave to appeal. The legal question before us pertains to the proper interpretation of Section 139 of the Act which shifts the burden of proof on to the accused in respect of cheque bouncing cases. More specifically, we have been asked to clarify the manner in which this statutory presumption can be rebutted.

 

# 5. The appellant-accused had raised the defence that the cheque in question was a blank cheque bearing his signature which had been lost and that it had come into the hands of the complainant who had then tried to misuse it. The accused’s case was that there was no legally enforceable debt or liability between the parties since he had not asked for a hand loan as alleged by the complainant.

 

# 6. The trial judge found in favour of the accused by taking note of some discrepancies in the complainant’s version. As per the trial judge, in the course of the cross-examination the complainant was not certain as to when the accused had actually issued the cheque. It was noted that while the complaint stated that the cheque had been issued in December 2000, at a later point it was conceded that the cheque had been handed over when the accused had met the complainant to obtain the work completion certificate for his house in March 2001. Later, it was stated that the cheque had been with the complainant about 15-20 days prior to the presentation of the same for encashment, which would place the date of handing over of the cheque in January 2001. Furthermore, the trial judge noted that in the complaint it had been submitted that the complainant had paid Rs. 45,000 in cash as a hand loan to the accused, whereas during the cross-examination it appeared that the complainant had spent this amount during the construction of the accused’s house from time to time and that the complainant had realised the extent of the liability after auditing the costs on completion of the construction. Apart from these discrepancies on part of the complainant, the trial judge also noted that the accused used to pay the complainant a monthly salary in lieu of his services  as a building supervisor apart from periodically handing over money which was used for the construction of the house. In light of these regular payments, the trial judge found it unlikely that the complainant would have spent his own money on the construction work. With regard to these observations, the trial judge held that there was no material to substantiate that the accused had issued the cheque in relation to a legally enforceable debt. It was observed that the accused’s failure to reply to the notice sent by the complainant

did not attract the presumption under Section 139 of the Act since the complainant had failed to prove that he had given a hand loan to the accused and that the accused had issued a cheque as alleged. Furthermore, the trial judge erroneously decided that the offence made punishable by Section 138 of the Act had not been committed in this case since the alleged dishonour of cheque was not on account of insufficiency of funds since the accused had instructed his bank to stop payment. Accordingly, the trial judge had recorded a finding of acquittal.

 

# 7. However, on appeal against acquittal, the High Court reversed the findings and convicted the appellant-accused. The High Court in its order noted that in the course of the trial proceedings, the accused had admitted that the signature on the impugned cheque (No. 886322, dated 8-2-2001) was indeed his own. Once this fact has been acknowledged, Section 139 of the Act mandates a presumption that the cheque pertained to a legally enforceable debt or liability. This presumption is of a rebuttal nature and the onus is then on the accused to raise a probable defence. With regard to the present facts, the High Court found that the defence raised by the accused was not probable. In respect of the accused’s stand that he had lost a blank cheque bearing his signature, the High Court noted that in the instructions sent by the accused to his Bank for stopping payment, there is a reference to cheque No. 0886322, dated 20-7-1999. This is in conflict with the complainant’s version wherein the accused had given instructions for stopping payment in respect of the same cheque, albeit one which was dated 8-2-2001. The High Court also noted that if the accused had indeed lost a blank cheque bearing his signature, the question of his mentioning the date of the cheque as 20-7-1999 could not arise. At a later point in the order, it has been noted that the instructions sent by the accused to his bank for stopping payment on the cheque do not mention that the same had been lost. However, the correspondence does refer to the cheque being dated 20-7-1999. Furthermore, during the cross-examination of the complainant, it was suggested on behalf of the accused that the complainant had the custody of the cheque since 1998 This suggestion indicates that the accused was aware of the fact that the complainant had the cheque, thereby weakening his claim of having lost a blank cheque. Furthermore, a perusal of the record shows that the accused had belatedly taken up the defence of having lost a blank cheque at the time of his examination during trial. Prior to the filing of the complaint, the accused had not even replied to the notice sent by the complainant since that would have afforded an opportunity to raise the defence at an earlier stage. All of these circumstances led the High Court to conclude that the accused had not raised a probable defence to rebut the statutory presumption. It was held that:

• ‘6. Once the cheque relates to the account of the accused and he accepts and admits the signatures on the said cheque, then initial presumption as contemplated under Section 139 of the Negotiable Instruments Act has to be raised by the Court in favour of the complainant. The presumption referred to in Section 139 of the N.I. Act is a mandatory presumption and not a general presumption, but the accused is entitled to rebut the said presumption. What is required to be established by the accused in order to rebut the presumption is different from each case under given circumstances. But the fact remains that a mere plausible explanation is not expected from the accused and it must be more than a plausible explanation by way of rebuttal evidence. In other words, the defence raised by way of rebuttal evidence must be probable and capable of being accepted by the Court. The defence raised by the accused was that a blank cheque was lost by him, which was made use of by the complainant. Unless this barrier is crossed by the accused, the other defence raised by him whether the cheque was issued towards the hand loan or towards the amount spent by the complainant need not be considered. …’

 

Hence, the High Court concluded that the alleged discrepancies on part of the complainant which had been noted by the trial court were not material since the accused had failed to raise a probable defence to rebut the presumption placed on him by Section 139 of the Act. Accordingly, the High Court recorded a finding of conviction.

 

# 8. In the course of the proceedings before this Court, the contentions related to the proper interpretation of Sections 118(a), 138 and 139 of the Act. Before addressing them, it would be useful to quote the language of the relevant provisions:

• 118. Presumptions as to negotiable instruments. –

• Until the contrary is proved, the following presumptions shall be made:

• (a) of consideration: that every negotiable instrument was made or drawn for consideration, and that every such instrument when it has been accepted, endorsed, negotiated or transferred, was accepted, endorsed, negotiated or transferred for consideration;

• 138. Dishonour of cheque for insufficiency, etc., of funds in the account. – Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both: 

• Provided that nothing contained in this section shall apply unless-

• (a)the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.

• (b)the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

• (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

• Explanation. – For the purposes of this section, ‘debt or other liability’ means a legally enforceable debt or other liability.

• 139. Presumption in favour of holder.- It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque, of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt, or other liability.

 

# 9. Ordinarily in cheque bouncing cases, what the courts have to consider is whether the ingredients of the offence enumerated in Section 138 of the Act have been met and if so, whether the accused was able to rebut the statutory presumption contemplated by Section 139 of the Act. With respect to the facts of the present case, it must be clarified that contrary to the trial court’s finding, Section 138 of the Act can indeed be attracted when a cheque is dishonoured on account of ‘stop payment’ instructions sent by the accused to his bank in respect of a post-dated cheque, irrespective of insufficiency of funds in the account. This position was clarified by this Court in Goa Plast (Pvt.) Ltd. v. Chico Ursula D’Souza, (2003) 3 SCC 232, wherein it was held:

• “  . . . . The presumption can be rebutted by adducing evidence and the burden of proof is on the person who wants to rebut the presumption. This presumption coupled with the object of Chapter XVII of the Act leads to the conclusion that by countermanding payment of a post-dated cheque, a party should not be allowed to get away from the penal provision of Section 138. A contrary view would render S. 138 a dead letter and will provide a handle to persons trying to avoid payment under legal obligations undertaken by them through their own acts which in other words can be said to be taking advantage of one’s own wrong. …”

 

# 11. With respect to the decision cited above, counsel appearing for the respondent-claimant has submitted that the observations to the effect that the ‘existence of legally recoverable debt is not a matter of presumption under Section 139 of the Act’ and that ‘it merely raises a presumption in favour of a holder of the cheque that the same has been issued for discharge of any debt or other liability’ [See Para. 30 in Krishna Janardhan Bhat (supra)] are in conflict with the statutory provisions as well as an established line of precedents of this Court. It will thus be necessary to examine some of the extracts cited by the respondent-claimant. For instance, in Hiten P. Dalal v. Bratindranath Banerjee, (2001) 6 SCC 16, it was held (Ruma Pal, J. at Paras. 22-23):

• “22. Because both Sections 138 and 139 require that the Court ‘shall presume’ the liability of the drawer of the cheques for the amounts for which the cheques are drawn, …, it is obligatory on the Court to raise this presumption in every case where the factual basis for the raising of the presumption has been established. It introduces an exception to the general rule as to the burden of proof in criminal cases and shifts the onus on to the accused (…). Such a presumption is a presumption of law, as distinguished from a presumption of fact which describes provisions by which the court may presume a certain state of affairs. Presumptions are rules of evidence and do not conflict with the presumption of innocence, because by the latter all that is meant is that the prosecution is obliged to prove the case against the accused beyond reasonable doubt. The obligation on the prosecution may be discharged with the help of presumptions of law or fact unless the accused adduces evidence showing the reasonable probability of the non-existence of the presumed fact.

• 23. In other words, provided the facts required to form the basis of a presumption of law exists, the discretion is left with the Court to draw the statutory conclusion, but this does not preclude the person against whom the presumption is drawn from rebutting it and proving the contrary. A fact is said to be proved when, after considering the matters before it, the Court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists. Therefore, the rebuttal does not have to be conclusively established but such evidence must be adduced before the Court in support of the defence that the Court must either believe the defence to exist or consider its existence to be reasonably probable, the standard of reasonability being that of the prudent man.” (emphasis supplied)

 

# 13. With regard to the facts in the present case, we can also refer to the following observations in M.M.T.C. Ltd. and Anr. v. Medchl Chemicals & Pharma (P) Ltd., (2002) 1 SCC 234 (Para. 19)

• “… The authority shows that even when the cheque is dishonoured by reason of stop payment instruction, by virtue of Section 139 the Court has to presume that the cheque was received by the holder for the discharge in whole or in part, of any debt or liability. Of course this is a rebuttable presumption. The accused can thus show that the ‘stop payment’ instructions were not issued because of insufficiency or paucity of funds. If the accused shows that in his account there was sufficient funds to clear the amount of the cheque at the time of presentation of the cheque for encashment at the drawer bank and that the stop payment notice had been issued because of other valid causes including that there was no existing debt or liability at the time of presentation of cheque for encashment, then offence under Section 138 would not be made out. The important thing is that the burden of so proving would be on the accused. …” (emphasis supplied)

 

# 14. In light of these extracts, we are in agreement with the respondent-claimant that the presumption mandated by Section 139 of the Act does indeed include the existence of a legally enforceable debt or liability. To that extent, the impugned observations in Krishna Janardhan Bhat (supra) may not be correct. However, this does not in any way cast doubt on the correctness of the decision in that case since it was based on the specific facts and circumstances therein. As noted in the citations, this is of course in the nature of a rebuttable presumption and it is open to the accused to raise a defence wherein the existence of a legally enforceable debt or liability can be contested. However, there can be no doubt that there is an initial presumption which favours the complainant. Section 139 of the Act is an example of a reverse onus clause that has been included in furtherance of the legislative objective of improving the credibility of negotiable instruments. While Section 138 of the Act specifies a strong criminal remedy in relation to the dishonour of cheques, the rebuttable presumption under Section 139 is a device to prevent undue delay in the course of litigation. However, it must be remembered that the offence made punishable by Section 138 can be better described as a regulatory offence since the bouncing of a cheque is largely in the nature of a civil wrong whose impact is usually confined to the private parties involved in commercial transactions. In such a scenario, the test of proportionality should guide the construction and interpretation of reverse onus clauses and the accused/defendant cannot be expected to discharge an unduly high standard or proof. In the absence of compelling justifications, reverse onus clauses usually impose an evidentiary burden and not a persuasive burden. Keeping this in view, it is a settled position that when an accused has to rebut the presumption under Section 139, the standard of proof for doing so is that of ‘preponderance of probabilities’. Therefore, if the accused is able to raise a probable defence which creates doubts about the existence of a legally enforceable debt or liability, the prosecution can fail. As clarified in the citations, the accused can rely on the materials submitted by the complainant in order to raise such a defence and it is conceivable that in some cases the accused may not need to adduce evidence of his/her own.

 

# 15. Coming back to the facts in the present case, we are in agreement with the High Court’s view that the accused did not raise a probable defence. As noted earlier, the defence of the loss of a blank cheque was taken up belatedly and the accused had mentioned a different date in the ‘stop payment’ instructions to his bank. Furthermore, the instructions to ‘stop payment’ had not even mentioned that the cheque had been lost. A perusal of the trial record also shows that the accused appeared to be aware of the fact that the cheque was with the complainant. Furthermore, the very fact that the accused had failed to reply to the statutory notice under Section 138 of the Act leads to the inference that there was merit in the complainant’s version. Apart from not raising a probable defence, the appellant-accused was not able to contest the existence of a legally enforceable debt or liability. The fact that the accused had made regular payments to the complainant in relation to the construction of his house does not preclude the possibility of the complainant having spent his own money for the same purpose. As per the record of the case, there was a slight discrepancy in the complainant’s version, in so far as it was not clear whether the accused had asked for a hand loan to meet the construction-related expenses or whether the complainant had incurred the said expenditure over a period of time. Either way, the complaint  discloses the prima facie existence of a legally enforceable debt or liability since the complainant has maintained that his money was used for the construction-expenses. Since the accused did admit that the signature on the cheque was his, the statutory presumption comes into play and the same has not been rebutted even with regard to the materials submitted by the complainant.

 

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