Landmark Judgment on Proceedings u/s 138 NI Act after the Company has been declared Sick

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Title of the Case – Rules for Filing a Case u/s 138 NI Act after a Company has been Declared Sick

Name of the case – Kusum Ingots & Alloys Ltd vs. Pennar Peterson Securities Ltd. Crl.A. Nos. 212-216 of 2000 (Supreme Court)  

Date of Judgment – 23rd Feb 2000

Judges: Justice D. P. Mohapatra

Subject and sections involved – Section 138 of Negotiable Instruments Act, 1881


  1. Whether a company and its Directors can be proceeded against for having committed an offence u/s 138 of NI Act after the company has been declared sick under the provisions of The Sick Industrial Companies (Special Provisions) Act, 1985 before the expiry of the period for payment of the cheque amount?

Fact of the Case:

Post-dated cheques were issued on behalf of the company in favour of the complainant in course of business of (he company. When the complainant presented the cheques in the bank they were returned without payment. Then the complainant issued notice to the company and/or its Directors stating the facts of dishonour of the cheques and demanding payment. Since no payment was made within the period of 15 days stipulated under the NI Act the payee filed complaint against the company and/or its Directors alleging inter-alia that they had committed an offence under section 138 of the NI Act. Before the cheques were presented in the bank or after the bank declined to honour the cheques the drawer company was declared sick under the provisions of the SICA by the Board of Industrial and Financial Reconstruction (for short 'BIFR').

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Ratio of the Case:

The Supreme Court while allowing the appeal in favour of appellant held that in section 22 A of SICA provision is made enabling the Board to make an order in writing to 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. This exercise of the power by the Board is conditioned by the prescription that the Board is of the opinion that such a direction is necessary in the interest of the sick industrial company or its creditors or shareholders or in the public interest. In a case in which the BIFR has submitted its report declaring a company as 'sick' and has also issued a direction under section 22-A restraining the company or its directors not to dispose of any of its assets except with consent of the Board then the criminal case for the alleged offence under section 138 NI Act cannot be instituted during the period in which the restraint order passed by the BIFR remains operative cannot be rejected outright. Whether the contention can be accepted or not will depend on the facts and circumstances of the case. Take for instance, before the date on which the cheque was drawn or before expiry of the statutory period of 15 days after notice, a restraint order of the BIFR under Section 22-A was passed against the company then it cannot be said that the offence under section 138 NI Act was completed. In such a case it may reasonably be said that the dishonouring of the cheque by the bank and failure to make payment of the amount by the company and/or its Directors is for reasons beyond the control of the accused. It may also be contended that the amount claimed by the complainant is not recoverable from the assets of the company in view of the ban order passed by the BIFR. In such circumstances it would be unjust and unfair and against the intent and purpose of the statute to hold that the Directors should be compelled to face trial in a criminal case.