Case Note & Summary
Background: The petitioner, a director of Giga Networks Private Limited, approached the High Court under Section 482 of the Code of Criminal Procedure, 1973 seeking to quash proceedings in C.C.No.263/2018 pending before the IV Additional Senior Civil Judge and ACMM, Bengaluru, for the offence punishable under Section 138 of the Negotiable Instruments Act, 1881. Nature of the dispute concerned a dishonoured cheque of ₹60 lakhs allegedly issued by the company in favour of the respondent complainant. Facts: The company was incorporated in 2003 and carried on business of providing turnkey services. On 31 August 2010, an application for closure was submitted, and the company was struck off and dissolved on 16 March 2011 under Section 560(5) of the Companies Act, 1956. In November 2014, the petitioner allegedly obtained a hand loan of ₹60 lakhs from the respondent with an assurance of repayment within 30 months. On 30 July 2017, a cheque dated that day for ₹60 lakhs drawn on the company’s account was issued to the respondent. When presented on 8 August 2017, the cheque was dishonoured with the endorsement ‘account closed’. Statutory demand notice was issued, followed by a private complaint under Section 200 CrPC, upon which cognizance was taken and the case was registered as C.C.No.263/2018. Legal Issues: The core issue was whether criminal prosecution under Section 138 of the Negotiable Instruments Act can be sustained against a director when the company on whose account the cheque was drawn had been dissolved years before the cheque was issued. Arguments: The petitioner contended that since the company was dissolved in 2011, no legally recoverable debt existed, and the director could not be held liable. Reliance was placed on Vishnoo Mittal v. Shakti Trading Company. The petitioner also submitted that he was in Dubai when the cheque was allegedly issued, making his personal involvement impossible. The respondent argued that the complainant was unaware of the company’s closure, and that the director remained personally liable under Section 141 of the NI Act. He relied on Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Limited. Court’s Analysis: The court noted that the undisputed facts established that the company had been dissolved well before the cheque was issued. Referring to the legal effect of dissolution under the Companies Act and the reasoning in Vishnoo Mittal (where the Supreme Court held that proceedings under Section 138 could not continue during a moratorium under the IBC because the director lacked capacity to meet the demand), the court analogized the situation of a dissolved company. The Delhi High Court decision in Krishan Lal Gulati v. State of NCT of Delhi was also quoted, which held that once a company is dissolved, it ceases to operate and its directors become ex-directors without authority to operate bank accounts, and criminal proceedings based on a cheque of such a company are not maintainable. Decision: The High Court allowed the petition and quashed the entire proceedings in C.C.No.263/2018, holding that continuation would be an abuse of process of court.
Headnote
A) Negotiable Instruments - Dishonour of Cheque - Liability after dissolution of company - Negotiable Instruments Act, 1881, Section 138; Companies Act, 1956, Section 560(5); Companies Act, 2013, Sections 248(5), 250 - A cheque issued on behalf of a company that was already dissolved cannot form the basis of a legally enforceable debt, and proceedings under Section 138 against a director are not maintainable. The company ceased to exist as a legal entity upon dissolution, and the director could not have had the capacity to meet the demand raised in the statutory notice. Reliance placed on Vishnoo Mittal v. Shakti Trading Company wherein similar principle applied in moratorium context. Held that continuation of proceedings would be an abuse of process of court, and the petition was allowed, quashing C.C.No.263/2018. (Paras 7-8)
Issue of Consideration
Whether criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881 can continue against a director of a company that was dissolved before the issuance of the cheque?
Final Decision
Petition allowed; proceedings in C.C.No.263/2018 quashed as continuation would be an abuse of process of court
Law Points
- Prosecution under Section 138 NI Act cannot be maintained against a director of a company dissolved prior to cheque issuance
- as the company ceases to exist and no legally enforceable debt arises
- and continuing proceedings would be an abuse of process under Section 482 CrPC
