The Delhi High Court has held that where, prior to the dishonour of the cheque and prior to issuance of the statutory demand notice, a Provisional Liquidator has already been appointed in respect of the company and the directors have been divested of authority over the company’s assets and bank accounts, the directors become functus officio and cannot be said to be maintaining the account within the meaning of Section 138 of the Negotiable Instruments Act, 1881. In such a case, the legal and practical impossibility of operating the account or complying with the demand notice means that the essential ingredients of the offence under Section 138 are not met, and the complaint against such director is not maintainable.
A Single Judge Bench of Justice Vikas Mahajan examined Sections 450, 456 and 457 of the Companies Act, 1956 and observed that appointment of a Provisional Liquidator does not dissolve the company, but it suspends the authority of the Board of Directors and renders them functus officio. The company continues to exist corporately, but its business operations, asset management and contractual dealings thereafter stand under the supervision and formal authority of the Provisional Liquidator, who becomes custodian of the corporate estate.
The Bench noted that once an Official Liquidator is appointed as Provisional Liquidator, the Board of Directors becomes functus officio and the contention that erstwhile directors continue to perform their functions in the company is untenable in law. The Bench specifically noted that it is only the Provisional Liquidator who is empowered under Section 457(2)(iii) of the Companies Act, 1956 to draw, accept, make and endorse negotiable instruments in the name and on behalf of the company.
The Bench reiterated that where a cheque is presented after the company has gone into liquidation and the official liquidator has taken over, the company cannot be said to have committed an offence under Section 138 because payment is legally barred and beyond its control. In such circumstances, the directors, who have ceased to control the affairs of the company, cannot be fastened with liability under Section 141 of the NI Act.
On the language of Section 138 of the NI Act, the Bench emphasized the expression “an account maintained by him” and held that one of the prerequisite ingredients of the offence is that the accused must have control over the account at the relevant time. The Bench observed that “maintained” cannot be understood merely as ownership of an account; it implies an account that is alive and operative, with the account holder being capable of issuing effective instructions to the banker and keeping the account functional for honour of cheques.
Accordingly, the Bench concluded that, since the appointment of the Provisional Liquidator preceded the dishonour of the cheques and issuance of the demand notice, the petitioner was no longer in charge of the affairs of the company and did not maintain the account within the meaning of Section 138 of the NI Act. Therefore, the essential ingredients of the offence were not satisfied, the complaint was legally non-maintainable against the petitioner, and the pending complaint and all proceedings emanating therefrom qua the petitioner were quashed.
Briefly, the petitioner had sought for quashing of a complaint case instituted under Section 138 of the Negotiable Instruments Act. The background was that respondent no. 2/company, M/s P.R.J. Enterprises Ltd., had entered into an agreement with the Deputy Commissioner, MCD/Shahdara South Zone, for arranging 31 auto tippers with hydraulic lifting facilities, and the petitioner was a director of that company.
Pursuant to the said arrangement, the complainant/respondent no. 1 entered into an MOU with respondent no. 2/company under which the complainant was to purchase 18 auto tippers from the company and paid an advance of Rs. 45 lakhs through various cheques and cash payments. On disputes arising between the parties, the complainant sought return of the said amount, whereupon respondent no. 2/company issued two cheques for Rs. 20 lakhs and Rs. 25 lakhs respectively, which were dishonoured for the reason “Funds Insufficient.”
Thereafter, in lieu of the earlier cheques, respondent no. 2/company issued fresh cheques for the same amount, which were again dishonoured with the remarks “Funds Insufficient.” Accordingly, a statutory demand notice under Section 138 of the NI Act was then issued to the company and the petitioner, followed by filing of the complaint, and summons were later issued.
However, before the cause of action under Section 138 crystallized, a winding up petition against respondent no. 2/company had already been admitted by the High Court and the Official Liquidator attached to the Court had been appointed as Provisional Liquidator with directions to forthwith take over the assets and records of the company. By the same order, the company, its directors, officers, employees and authorised representatives were restrained from selling, transferring, alienating, encumbering, parting with possession of assets, and from withdrawing money from the company’s accounts. Subsequently, the company stood dissolved.
The petitioner therefore contended that, since the Provisional Liquidator had already been appointed and the directors had been divested of control over the company’s assets and bank accounts before the dishonour, the complaint under Section 138 of the NI Act was not maintainable.
Appearances:
Sangeeta Jain, Advocate, for Petitioner
Ram Ekbal Roy, Aman Nihal, Shekhar Jha and Sunil Kumar Jha, Advocates, for Respondent
