RE- M/S CATMOSS RETAIL PVT. LTD. vs ….

* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 30th January 2024
Judgment pronounced on: 7th February 2024
+ CO.PET. 36/2013
RE- M/S CATMOSS RETAIL PVT. LTD. ….. Petitioner
Through:
versus
…. ….. Respondent
Through: Mr. Sangram Patnaik and Ms.
Shankari Mishra, Advs. for
applicant in CA No. 58/2024
Mr. Ruchir Mishra, Mr.
Mukesh Kumar Tiwari, Ms.
Poonam Shukla and Ms. Reba
Jena Mishra, Advs. for UOI
Ms. Ruchi Sindhwani, Sr.
Standing Counsel with Ms.
Megha Bharara, Adv. for OL
CORAM:
HON’BLE MR. JUSTICE DHARMESH SHARMA
J U D G M E N T
CO.APPL. 58/2024 (application moved on behalf of Ex-
Management seeking stay on proceedings)

1. This application is moved on behalf of the applicant Mr.
Ashwani Chawla, Ex-Management/Director under Sections 446 and
447 of the Companies Act, 19561 seeking stay of the proceedings
initiated against the company under liquidation as well as the
applicant in various Courts exercising criminal jurisdiction in Delhi
under Section 138 of the Negotiable Instrument Act 18812.

1 The Act
2 NI Act

2. Shorn of unnecessary details, it is stated that the company in
question has been ordered to be wound up vide order dated
28.02.2013 and a Provisional Liquidator has been ordered to take over
the assets and other records of the company (in liquidation) vide order
dated 27.03.2014 passed by this Court.
3. The grievance of the applicant/Ex-Management is that certain
complaints have been instituted under Section 138 of the NI Act
against the company as well as directors, which cannot be allowed to
continue in view of Sections 446 and 447 of the Act.
4. Advance notice of the present application has not been served
upon the Official Liquidator. However, a copy of the same is ordered
to be supplied to learned Senior Standing Counsel for the Official
Liquidator. No reply is called for since only a question of law is
involved.
5. Learned counsel for the applicant has vehemently urged that all
legal proceedings which have been filed against the director after the
winding up order dated 28.02.2013 cannot continue without the leave
of this Court and there is a serious handicap in a director representing
the company in such proceedings since all the records are now
available with the Official Liquidator.
6. Learned counsel for the applicant has relied on decisions in
Davi V. Thattil and Anr. v. Rosy Joseph and Ors3; Shashikant
Patel v. Swadhyay Flex Pack Pvt. Ltd.4; Davi V. Thattil and Ors v.

3 2020 SCC OnLine Ker 13838
4 2020 SCC OnLine MP 4643

O.R. Sekharan and Ors.5; Vijay Steel Tubes & Fittings v. Apollo
Pipes Ltd.6; Ranjit Sham Chougle v. State of Haryana & Anr.7;
Ratan Lal Garera and Ors. v. State (NCT of Delhi) and Ors.8; ML
Gupta & Ors. v. Ceat Financial Services Ltd.9 and Govind Prasad
Todi and Another v. Govt. of NCT of Delhi and Another10.
7. Learned Senior Standing Counsel for the Official Liquidator has
also relied upon the decisions in Krishna Texport Industries Ltd. v.
DCM Limited11 and D.K. Kapur v. Reserve Bank of India and
Ors.12.

5 Crl. Rev. Pet. No. 1070/2014, Kerala
6 MANU/DE/4485/2015
7 Crl.Misc.No. M-36819/2013 (O&M)
8 2006 SC OnLine Del 1442
9 MANU/DE/9842/2006
10 2023 SCC OnLine Del 3717
11 MANU/DE/0787/2008
12 MANU/DE/0038/2001

ANALYSIS & DECISION:

8. Having given my thoughtful consideration to the submissions
advanced by the learned counsel for the parties and on perusal of the
record, the decisions in D.K. Kapur (supra) and Krishna Texport
Industries Ltd. (supra) cited by the learned Senior Standing Counsel
for the Official Liquidator are per incuriam in view of several
pronouncements on the subject by the Supreme Court in subsequent
cases. Suffice to state that the view taken in such decisions that
expressions „suit” or „other legal proceedings” in Section 446(1) of the
Act does not envisage complaint cases under Section 138 of the NI
Act, are no longer the law. The same have not even been followed in

the subsequent decisions of this Court in ML Gupta & Ors. (supra),
Ratan Lal Garera (supra) and Vijay Steel Tubes & Fittings (supra).
9. The meaning assigned to the aforesaid expressions has come to
be discussed in several decisions of the Supreme Court and avoiding
the temptation to go into a long academic discussion, reference can be
invited to decisions in P. Mohanraj & Others v. Shah Brothers
Ispat Private Limited13 and Ashok Shewakramani & Others v.
State of Andha Pradesh14. The issue is a simple one, which is no
longer res integra as to whether the proceedings against the corporate
debtor and its directors or those in-charge of control or affairs of the
corporate debtor can continue after moratorium comes to set in terms
of Section 14 of the The Insolvency and Bankruptcy Code, 201615 or
for that matter upon admission of the winding up proceedings, has
been addressed in P.Mohanraj (supra) and it has been categorically
laid down as under:-

13 (2021) 6 SCC 258
14 (2023) 8 SCC 473
15 IBC

“Whether natural persons are covered by Section 14 IBC
101. As far as the Directors/persons in management or control of
the corporate debtor are concerned, a Sections 138/141 proceeding
against them cannot be initiated or continued without the corporate
debtor-see Aneeta Hada. This is because Section 141 of the
Negotiable Instruments Act speaks of persons in charge of, and
responsible to the Company for the conduct of the business of the
Company, as well as the Company. The Court, therefore, in
Aneeta Hada held as under: (SCC pp. 686-88, paras 51, 56 & 58-
59)

“51. We have already opined that the decision in
Sheoratan Agarwal runs counter to the ratio laid down in
C.V. Parekh which is by a larger Bench and hence, is a
binding precedent. On the aforesaid ratiocination, the
decision in Anil Hada has to be treated as not laying down

the correct law as far as it states that the Director or any
other officer can be prosecuted without impleadment of
the Company. Needless to emphasise, the matter would
stand on a different footing where there is some legal
impediment and the doctrine of lex non cogit ad
impossibilia gets attracted.
***
56. We have referred to the aforesaid passages only to
highlight that there has to be strict observance of the
provisions regard being had to the legislative intendment
because it deals with penal provisions and a penalty is not
to be imposed affecting the rights of persons, whether
juristic entities or individuals, unless they are arrayed as
accused. It is to be kept in mind that the power of
punishment is vested in the legislature and that is absolute
in Section 141 of the Act which clearly speaks of
commission of offence by the Company. The learned
counsel for the respondents have vehemently urged that
the use of the term “as well as” in the section is of
immense significance and, in its tentacle, it brings in the
Company as well as the Director and/or other officers who
are responsible for the acts of the Company and, therefore,
a prosecution against the Directors or other officers is
tenable even if the Company is not arraigned as an
accused. The words “as well as” have to be understood in
the context.
***
58. Applying the doctrine of strict construction, we are of
the considered opinion that commission of offence by the
Company is an express condition precedent to attract the
vicarious liability of others. Thus, the words “as well as
the Company” appearing in the section make it absolutely
unmistakably clear that when the Company can be
prosecuted, then only the persons mentioned in the other
categories could be vicariously liable for the offence
subject to the averments in the petition and proof thereof.
One cannot be oblivious of the fact that the Company is a
juristic person and it has its own respectability. If a finding
is recorded against it, it would create a concavity in its
reputation. There can be situations when the corporate
reputation is affected when a Director is indicted.

59. In view of our aforesaid analysis, we arrive at the
irresistible conclusion that for maintaining the prosecution
under Section 141 of the Act, arraigning of a company as
an accused is imperative. The other categories of offenders

can only be brought in the dragnet on the touchstone of
vicarious liability as the same has been stipulated in the
provision itself. We say so on the basis of the ratio laid
down in C.V. Parekh which is a three-Judge Bench
decision. Thus, the view expressed in Sheoratan Agarwal
does not correctly lay down the law and, accordingly, is
hereby overruled. The decision Anil Hadals is overruled
with the qualifier as stated in para 51. The decision in
Modi Distillery has to be treated to be restricted to its own
facts as has been explained b us hereinabove.”
102. Since the corporate debtor would be covered by the
moratorium provision contained in Section 14 IBC, by which
continuation of Sections 138/141 proceeding against the corporate
debtor and initiation of Sections 138/141 proceedings against the
said debtor during the corporate insolvency resolution process are
interdicted, what is stated in paras 51 and 59 in Aneeta Hada
would then become applicable. The legal impediment contained in
Section 14 IBC would make it impossible for such proceeding
continue or be instituted against the corporate debtor. Thus, for the
period of moratorium since no Sections 138/141 proceeding can
continue or be initiated against the corporate debtor because of a
statutory bar, such proceedings can be initiated or continued again
the persons mentioned in Sections 141(1) and (2) of the Negotiable
Instruments Act. This being the case, it is clear that the moratorium
provision contained in Section 14 IBC would apply only to the
corporate debtor, the natural persons mentioned in Section 141
continuing to be statutorily liable under Chapter XVII of the
Negotiable Instruments Act.
Conclusion
103. In conclusion, disagreeing with the Bombay High Court and
the Calcutta High Court judgments in Tayal Cotton (P) Ltd. v.
State of Maharashtra and MBL Infrastructions Ltd. v. Manik
Chand Soman, respectively, we hold that a Sections 138/141
proceeding against a corporate debtor is covered by Section
14(1)(1) IBC.
104. Resultantly, the civil appeal is allowed and the judgment
under appeal is set aside. However, the Sections 138/141
proceedings in this case will continue both against the Company as
well as the appellants for the reason given by us in paras 101 and
102 above as well as the fact that the insolvency resolution process
does not involve a new management taking over. We may also
note that the moratorium period has come to an end in this case.”

10. In a subsequent case of Ashok Shewakramani (supra) on an
issue as to how the expressions „was in-charge of” and „was
responsible to the company for the conduct of business of the
company” have to be interpreted in terms of Section 141(1) of the NI
Act, it was observed as under:-

“21. Section 141 is an exception to the normal rule that there
cannot be any vicarious liability when it comes to a penal
provision. The vicarious liability is attracted when the ingredients
of sub-section (1) of Section 141 are satisfied. The section provides
that every person who at the time the offence was committed was
in charge of, and was responsible to the Company for the conduct
of business of the Company, as well as the Company shall be
deemed to be guilty of the offence under Section 138 of the NI Act.
22. In the light of sub-section (1) of Section 141, we have
perused the averments made in the complaints subject-matter of
these three appeals. The allegation in Para 1 of the complaints is
that the appellants are managing the Company and are busy with
day-to-day affairs of the Company. It is further averred that they
are also in charge of the Company and are jointly and severally
liable for the acts of Accused 1 Company. The requirement of sub-
section (1) of Section 141 of the NI Act is something different and
higher. Every person who is sought to be roped in by virtue of sub-
section (1) of Section 141 of the NI Act must be a person who at
the time the offence was committed, was in charge of an was
responsible to the Company for the conduct of the business of the
Company. Merely because somebody is managing the affairs of the
Company, per se, he does not become in charge of the conduct of
the business of the Company or the person responsible for the
Company for the conduct of the business of the Company. For
example, in a given case, a manager of a Company may be
managing the business of the Company. Only on the ground that he
is managing the business of the Company, he cannot be roped in
based on sub-section (1) of Section 141 of the NI Act.”

11. All said and done, what needs to be emphasized is that it has
been a consistent legal proposition that if the demand notice and the
cognizance of complaint under Section 138 of the NI Act is taken after
initiation of winding up proceedings and/or IBC proceedings, the

proceedings under Section 138 of the NI Act cannot continue not only
against the corporate debtor but also its directors. It is pertinent to
mention that this Court in an earlier case titled Govind Prasad Todi
& Another v. Govt. of NCT of Delhi16 rightly distinguished the
aspect in the case P. Mohanraj (supra), wherein 51 cheques were
issued by the company in favour of the respondent towards the
amounts payable from 21.09.2015 to 11.11.2016 and it was a case
where statutory notice of demand under Section 138 read with Section
141 of the NI Act was issued on 21.03.2017 while the commencement
of Corporate Insolvency Resolution Process17 under Section 14 of the
IBC came to be enforced on 06.06.2017. It was a case where the
cheques had got dishonoured and even demand notices were issued
prior to the moratorium kicking in. In other words, if the statutory
demand notice is issued before the moratorium sets in or winding up
proceedings are initiated and cognizance of the offence is taken
subsequent to the moratorium or winding up proceedings kicking in,
the prosecution against the corporate debtor and its directors cannot be
allowed to be continued. Incidentally, the same view had been taken
in the decisions of ML Gupta & Ors. (supra); Ratan Lal Garera
(supra); and Vijay Steel Tubes & Fittings (supra) decided by this
Court.
12. Hence, the present application is disposed of with the directions
that all complaints under Section 138 of the NI Act instituted against
the corporate debtor and its directors after the company has been

16 2023 SCC OnLine Del 3717
17 CIRP

ordered to be wound up vide order dated 28.02.2013, shall not be
continued and shall remain in abeyance. The reasons are not far to
seek since in such matters when the IRP or for that matter the Official
Liquidator has taken over the entire records of the case, it would be
impossible for the directors of the corporate debtor or company (in
liquidation) to defend themselves in such criminal matters.
13. The application is, therefore, decided accordingly.

DHARMESH SHARMA, J.
FEBRUARY 07, 2024
Sadique