Personal Liability Of Guarantors Or Directors For Cheque Dishonour Can’t Be Washed Away By Winding Up Orders Under Companies Act: Karnataka HC

The Karnataka High Court held that the personal liability of personal guarantors or directors cannot be washed away by the winding up orders under the Companies Act for the offence punishable under Section 138 of the Negotiable Instruments Act, 1881 (NI Act).

The Court held thus in a writ petition preferred by a company against the order of the Additional Chief Metropolitan Magistrate and sought direction to expeditiously dispose of the case.

A Single Bench of Justice M. Nagaprasanna observed, “I deem it appropriate to take a different path following the judgments of the Apex Court, which approves the judgment of the Division Bench of the High Court of Bombay and clearly holds that personal liability of personal guarantors or Directors cannot be seen to be washed away by the winding up orders under Section 446 of the Companies Act for the offences punishable under Section 138 of the Act on a clear interpretation of Section 141 of the Act. Therefore, the order of the learned Magistrate dated 11-11-2014 is on the face of it, erroneous. I deem it appropriate to obliterate the same despite being restored by two coordinate Benches of this Court by following the three Judge Bench of the Apex Court.”

The Bench relied upon the judgment of the Supreme Court in the case of Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited (2023) in which it approved the judgment of the Bombay High Court in the case of Indorama Synthetics (I) Limited v. State of Maharashtra 2016 SCC OnLine Bom.2611.

Advocate Rohan Kothari appeared on behalf of the petitioner while Advocate S.R. Kamalacharan appeared on behalf of the respondent.

In this case, the petitioner (M/s. Rajesh Exports Limited) was a company and the respondent was the ex-Managing Director of another company (M/s. Jewels De Paragon Private Limited). The petitioner entered into an agreement with the respondent’s company for supply of gold jewellery in 2000 and the respondent in his personal capacity gave a cheque of Rs. 3 crores (without indicating the date on the cheque) in favour of the petitioner for repayment of the value of gold received by the company from the hands of the petitioner. After about 7 years, i.e., in 2007, the petitioner presented the cheque only to be dishonoured and returned with an endorsement “account closed” in the concerned Bank. This led the petitioner to issue a demand notice to the respondent seeking payment of the outstanding amount and that having gone unheeded, the petitioner invoked Section 200 of the Criminal Procedure Code (CrPC) by filing a petition before the Magistrate who then registered a criminal case.

The petitioner also filed another complaint against the respondent. Certain analogous developments took place and a company preferred a petition before the High Court seeking winding up of the respondent’s company and the same was allowed. Thus, the company got wound up and it sought stay of further proceedings before the concerned court. In 2014, the Magistrate stayed its own proceedings and in 2018, again on a memo filed, recalled the order and resumed the proceedings. As a result, the respondent’s company approached the High Court and its writ petition was allowed by restoring the order by which the stay was operating. In 2024, the other writ petition was filed and the same was also allowed but the court set aside the 2018 order, reserving liberty to the petitioner to challenge the 2014 order. Hence, the petitioner was before the High Court.

The High Court in the above context of the case noted, “The Apex Court approves INDORAMA SYNTHETICS (I) LIMITED’s case (supra) of the High Court of Bombay and holds that all the findings supra are that if proceedings under Section 138 of the NI Act had already commenced and the Magistrate has taken cognizance and the Company gets dissolved, the signatory Directors of the Company cannot escape from the very penal liability under Section 138 of the NI Act by citing its dissolution. The Apex Court holds that what is dissolved is only Company and not the personal penal liability of the accused covered under Section 141 of the Act.”

The Court said that in the light of the judgment of the Division Bench of the Bombay High Court which gets its imprimatur at the hands of the Apex Court, is what is required to be followed.

“The coordinate Bench while answering Section 446 of the Companies Act was not apprised of the judgment of the Division Bench in INDORAMA SYNTHETICS (I) LIMITED’S case supra and the judgment rendered by the Apex Court in AJAY KUMAR RADHEYSHYAM GOENKA’S case, both of them were rendered long after the judgment of the Apex Court in the case of AJAY KUMAR RADHEYSHYAM GOENKA supra”, it added.

The Court observed that those judgments of the coordinate benches are to be held as per incuriam. It explained that per incuriam is one of those exceptions, to the rule of precedent and a decision rendered by the Apex Court not being followed by the High Court notwithstanding the fact that the judgments of the Apex Court preceded the orders of the High Court for manifold reasons, one of which would be that it was not brought to the notice of the High Court.

“Therefore, those decisions would become per incuriam. It is trite law that an order passed by this Court, without considering the judgment of the Apex Court on the issue, despite the order of the Apex Court preceding the order passed by this Court, the judgment would be rendered per incuriam and lose its precendential value”, it also added.

Accordingly, the High Court allowed the writ petition, quashed the 2014 order of Magistrate, and directed to conclude the proceedings within three months as the issue was close to more than a decade old.

Cause Title- M/s. Rajesh Exports Ltd. v. K.V. Kishore

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