The Supreme Court of India, in a significant ruling, has held that a restraint order passed by the Board of Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) does not automatically bar criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881, for cheque dishonour. A bench comprising Justice Manoj Misra and Justice Ujjal Bhuyan allowed appeals filed by Shree Nagani Silk Mills Pvt. Ltd., setting aside orders of the Bombay High Court and a lower revisional court that had discharged L.D. Industries Ltd. and its directors from a cheque bounce case. The Court restored the criminal complaints, directing the Magistrate to proceed with the trial.
Case Background
The appellant, Shree Nagani Silk Mills Pvt. Ltd., had filed seven separate criminal complaints under Section 138 read with Section 141 of the N.I. Act against the respondent company, L.D. Industries Ltd., and its directors. The complaints pertained to the dishonour of multiple cheques issued in 2001, amounting to over ₹1.6 crore, for “insufficient funds.” The cheques were allegedly issued towards part payment for supplies made by the appellant.
After the Magistrate issued summons, the accused company filed an application seeking to recall the process. They argued that the company had been declared ‘SICK’ by the BIFR under SICA and a restraint order was in place preventing the disposal of its assets. They contended that this legal embargo made it impossible to honour the demand notice, rendering the Section 138 proceedings unsustainable.
While the learned Magistrate dismissed this application, the accused successfully challenged the order in a revision petition before the Court of Session, which discharged them. The appellant’s subsequent writ petitions against this discharge were dismissed by the High Court of Judicature at Bombay, leading to the present appeals before the Supreme Court.
Arguments of the Parties
The appellant argued before the Supreme Court that a Magistrate has no power to recall a summoning order, as established in the case of Adalat Prasad vs. Rooplal Jindal. It was further contended that the High Court had misconstrued the law laid down in M/s. Kusum Ingots & Alloys Ltd. vs. M/s. Pennar Peterson Securities Ltd. and others, which clarified that Section 22 of SICA does not bar criminal proceedings under the N.I. Act. The appellant highlighted that the BIFR restraint order in this case, dated 21.08.2000, was not absolute and permitted the company to draw on current assets for “day-to-day operations.” Since the cheques were issued in 2001, presumably for such operations, the proceedings could not be stifled at the threshold.
Conversely, the respondent-accused supported the High Court’s judgment, submitting that the cheques were post-dated and the complaint was rightly quashed due to the company being declared ‘SICK’ and the BIFR’s restraint order.
Supreme Court’s Analysis and Decision
The Supreme Court bench conducted a detailed analysis of the legal provisions and precedents. The Court noted that under Section 118(b) of the N.I. Act, there is a legal presumption that a cheque was drawn on the date it bears, and this presumption can only be rebutted through evidence during a trial.
The Court examined the specific BIFR restraint order, which stated: “The company/promoters were directed u/s. 22-A of the Act not to dispose of any fixed or current assets of the company without the consent of the BIFR. In case the company was running, the current assets could be drawn to the extent required for day-to-day operations, proper account of which should be maintained.”
The bench observed that this order did not impose an absolute embargo on using company assets for daily operations. Whether the dishonoured cheques were issued for such operations was a question of fact to be determined during the trial.
The Court extensively quoted its previous decision in Kusum Ingots (supra), emphasizing the key findings from that judgment. It reiterated that “section 22 SICA does not create any legal impediment for instituting and proceeding with a criminal case on the allegations of an offence under section 138 of the NI Act against a company or its Directors.” Regarding a restraint order under Section 22A of SICA, the Kusum Ingots judgment had clarified that whether a criminal case can be instituted “will depend on the facts and circumstances of the case.”
The bench concluded that the legal position deducible from precedents is that there is no bar to filing a complaint under Section 138 against a ‘sick’ company, and the effect of a BIFR restraint order must be considered based on the specific facts and the nature of the order, typically after evidence has been presented.
The judgment stated, “In the instant case, the restraint order under Section 22A of SICA did not restrain the accused-company to draw on its assets to meet its day-to-day operations… In such circumstances, the revisional court fell in error by recalling the processes and discharging the accused at the threshold of the proceeding and the High Court erred in not correcting the error so committed.”
Furthermore, the Court held that the initial application to the Magistrate to recall the summons was fundamentally flawed. It observed, “…the prayer to recall the processes was not maintainable in view of the decision of this Court in Adalat Prasad (supra), which has been affirmed by a Constitution Bench of this Court In Re: Expeditious Trial of Cases under Section 138 of NI Act, 1881 (supra).”
For these reasons, the Supreme Court allowed the appeals, set aside the orders of the High Court and the revisional court, and restored the criminal complaints to the file of the learned Magistrate to be decided in accordance with the law.
