No absolute embargo to file complaint u/s 138 of N.I. Act against SICK company – SC

Complaint u/s 138 of N.I. Act against SICK company was valid when restraint order allowed it to draw to meet its day-to-day operations

In a recent judgment, the Hon’ble Supreme Court has held that there was no embargo on filing a complaint u/s 138 of N.I. Act against the SICK company when restraint order allowed the accused company to draw on its assets to meet its day-to-day operations.

ABCAUS Case Law Citation:
4733 (2025) (09) abcaus.in SC

In the instant case, the appellant (the original complainant) had lodged separate complaints, under Section 138 read with Section 141 of Negotiable Instrument Act, 1881 (NI Act) against the accused company and four others in respect of dishonour of cheques issued by the accused company towards part payment for supplies made by the complainant.

When those cheques were presented for payment, they returned for “insufficient funds” in the drawer’s account; The complainant thereafter served notice on all the accused calling upon them to pay to the complainant the cheque amount. However, despite service of notice, the amount was not paid. Therefore, the accused company including others who were in-charge of and responsible for day-to-day business affairs of the accused company, were made liable to be punished for offence punishable under Section 138 read with Section 141 of N.I. Act. 

On being summoned by the Magistrate, it was submitted that the accused company was not only declared ‘SICK’ by the Board of Industrial and Financial Reconstruction under provisions of Sick Industrial Companies (Special Provisions) Act, 1985 but it was restrained from disposing of any of its assets without the consent of BIFR. In such circumstances, when a legal embargo was imposed on disposal of its assets, it could not have responded to the demand notice.

The Magistrate dismissed the application seeking recall of the processes. Against which, the accused filed a revision before the Court of Session. The revisional court allowed the revision and set aside the order of the learned Magistrate thereby discharging the accused of offences punishable under Section 138 read with Sections 141 and 142 of N.I. Act.

Against the order of the Sessions Court, the appeal of the complainant was dismissed by the Hon’ble High Court.

Before the Hon’ble Supreme Court the complainant submitted that the whether the proceedings under Section 138 of N.I. Act are barred on account of restraint order of BIFR, is a mixed question of law and fact which has to be decided on the facts of each case based on the evidence led by the parties.

The Hon’ble Supreme Court observed that as per the restraint order passed by BIFR, there was no embargo on drawing from the assets of the company to the extent required for day-to-day operations.

The Hon’ble Supreme Court further observed that according to the complaint allegations, the complainant company had made supplies and in lieu thereof the cheques in question were issued after the BIFR order. In such circumstances, there would be a presumption regarding the date on which those cheques were issued, the question as to whether those cheques were issued for running day-to-day operations of the company is an issue, which would have to be addressed on the basis of evidence led in trial.

The Hon’ble Supreme Court observed that in view of the several judgments of the Court, there is no embargo on filing a complaint under Section 138 of N.I. Act against a ‘SICK’ company and even if there is a restraint order under Section 22A of SICA, the nature of the restraint order and the facts of that case would have to be considered before taking a decision whether the proceeding under Section 138 could continue or not and the appropriate stage for taking such a decision would, ordinarily, be after parties have led their evidence.

The Hon’ble Supreme Court opined that 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 and, according to the complaint allegations, the cheques in question were issued to discharge the liability of the accused-company against supplies made by the complainant company. 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 by wrongly relying on the judgment of the Court. Further, the Hon’ble Supreme Court stated that the prayer to recall the processes was not maintainable in view of the decision of the Court.

Accordingly, the impugned judgment(s) and order(s) of the High Court as well as of the revisional court were set aside. The proceeding(s) on the complaints of the appellant, under Section 138 read with Section 141 of N.I. Act, were restored on the file of the Magistrate. 

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