Case: Pankaj Mehra  Vs. State Of Maharashtra

A Division Bench of the Bombay High Court held that the company cannot avert its liability on the mere ground that such a petition was presented prior to the company being called upon by a notice to pay the amount of the cheque. By holding so, the Division Bench dismissed a batch of writ petitions filed by different companies challenging the criminal proceedings initiated against them in different criminal Courts for the offence under Section 138 of the NI Act. We have now to deal with the same question in this batch of appeals filed by specialdifferent cases now before us have differing facts we are not bothering ourselves with such differences. The common features in all the appeals, which alone are relevant for dealing with the aforesaid question, can be culled out from one of the appeals. The company involved in the said sample appeal will be referred to as "the Company". The cheque which the company issued bore the date 30.10.1996 and the amount covered by the cheque was Rs. 5,72,432/-. (There is a contention that the cheque was actually drawn much before that date). When the cheque was presented for encashment the drawee bank dishonoured it on 26.12.1996. The payee of the cheque issued a notice to the Company on 21.12.1996 calling upon it to pay the amount. As the Company failed to pay the amount a complaint was filed before the magistrate on 29.1.1997 against the Company and two of its directors for the offence under Section 138 of the NImagistrate who took cognizance of the offence issued process to all the accused. It was then that the accused challenged the criminal proceedings by means of a writ petition filed before the Bombay High Court, on the premise that a petition for winding up of the Company has been filed on 27.5.1996 before the Court concerned and a provisional liquidator was appointed by that Court two years later i.e. onthe facts stated above were not substantially disputed the Division Bench of the High Court proceeded to hear the writ petition along with the other writ petitions in the batch, on the limited question whether the Company can avert the penal liability on that premise. The main footing on which the Company resisted the prosecution was that under Section 536(2) of the Companies Act any disposition of the property of the Company shall be void if it was made after the commencement of winding up proceedings by the Court. To bolster up the said ground the Company relied on Section 441(2) of the Companies Act which says that winding up of a company by the Court shall be deemed to commence at the time of presentation of the petition for winding up. The Division Bench of the High Court noticed the common features in all the cases in the following sentences :"In all these matters, a petition for winding up had been filed either before the cheques were issued (in some cases) and in any event before the period of 15 days, after receipt of notice, expired. Thus the question for consideration is whether merely by reason of a winding up petition being presented there was a bar or legal disability in makingJudges proceeded to consider the question on the aforesaid admitted premise and, therefore, examined the contention whether disposition of any property by the company would become "void" immediately on presentation of the petition for winding up, or it would become void only when an order of winding up has been passed, or at least when a provisional liquidator has been appointed. Section 536(2) of the Companies Act was sought to be interpreted in a wide dimension so as to render all transactions void merely because a petition for winding up was presented - whether or not it was succeeded by an order of winding up or appointment of a provisional liquidator. The Division Bench of the High Court repelled the said contention on the following reasoning. :"If this argument is accepted, persons who purchased shares in the open market through the Stock Exchange without any knowledge of a petition for winding up having been presented, would also get affected as all such transactions would be void. Therefore, if this wide proposition were to be accepted then once a petition for winding up is presented, even without an order for winding up, there would be for all practical purposes closure of the company. All activities of the company would have to come to a standstill. If this were the law then unscrupulous parties could blackmail/pressurize all companies to succumb to unjustified demands by merely threatening to or presenting petitions for winding up. Conversely unscrupulous companies could avoid payment/discharge of its liabilities by having their own parties present bogus petitions for winding up. After one is dismissed another could be filed. In this manner, the company could avoid discharging its liabilities indefinitely if not permanently. If the law was that merely on the filing of a petition for winding up all dispositions were void, it would lead to absurd or catastrophic results. In our view that can never be the legalwas then argued before the Division Bench that the words "in the winding up" appearing in Section 536(2) of the Companies Act should mean "during winding up proceedings". Reliance was placed on the decision in Kamani Matallic Oxides Ltd. v. Kamani Tubes Ltd., 1984 Company Cases page 19 wherein it was held that the words "in the winding up" do not mean "after or upon the passing of the winding up order". Learned Judges of the Division Bench of the High Court pointed out the distinguishing context in the said case in which such a view was taken and then expressed the view that merely because a petition for winding up has been presented all transactions for dispositions undertaken during the period cannot become ab initio void. The following reasoning of the Division Bench for repelling the said contention is worthy to be extracted :"If they were to be void ab initio i.e. immediately on their being entered into, then on the petition being withdrawn or dismissed, they would not revive. It is clear that if the petition is withdrawn or dismissed then the transactions would never have been void. This clearly shows that the transactions/dispositions are not void ab initio but become void on the passing of an order for winding up or on appointment of a Provisional Liquidator. What Section 536(2) read with Section 441(2) provides for is to convert what was otherwise valid into void by virtue of the legal fiction. Thus the voidness takes effect on the passing of the order of winding up or appointment of Provisional Liquidator. By virtue of the legal fiction, in Section 441(2), it then relates back to the date of presentation of the petition for winding up."

Court's reasoning:
14. In the above backdrop alone we can consider the impact of the legislative direction in Section 536(2) that any disposition of the property of the company made after the commencement of the winding up (i.e. after the presentation of a petition for winding up) shall be void. There are two important aspects here. First is that the word "void" need not automatically indicate that any disposition should be ab initio void. The legal implication of the word "void" need not necessarily by a stage of nullity in all contingencies. Blacks Law Dictionary gives the meaning of the word "void" as having different nuances in different connotations. One of them is of course "null, or having no legal force or binding effect". And the other is "unable in law, to support the purpose for which it wasThus, when a cheque is received by a holder the Court has to presume that (1) it is a cheque of the nature referred to in Section 138; and (2) such cheque was received for the discharge of a legally enforceable debt or liability. It is a legislative mandate that the Court should proceed with the assumption that such cheque was received for the discharge of a legally enforceable debt or other liability until the drawer proves that it is not so. Learned counsel contended that the burden of proof cast on the drawer of the cheque would stand discharged and the presumption would stand rebutted when it is shown that the company has been brought into winding up proceedings, as then no debt can be legally enforced against the company.26. There is no provision in the Companies Act which prohibits enforcement of the debt due from a company. When a company goes into liquidation, enforcement of debt due from the company is only made subject to the conditions prescribed therein. But that does not mean that the debt has become unenforceable altogether. Perhaps due to want of sufficient assets for the company the realisation of a debt would be difficult. But that is no premise to hold that the debt is legally unenforceable. Enforceability of a debt is not to be tested on the touchstone of the modality or the procedure provided for its realisation or recovery. Hence the contention that the provision incorporated in the Companies Act regarding the debts and liabilities due from the company will render the debt unenforceable, cannot be accepted.27. The alternative approach is this : Even assuming that any disposition of the property made by a company after commencement of the winding up proceedings is null and void, how that is an escape ground from the offence under Section 138 of the NI Act ? That Section created a statutory offence which on the confluence of the various factors enumerated therein, commencing with the drawing of the cheque and ending with the failure of the drawer of the cheque to pay the amount covered by it within the time stipulated, ripens into a penal liability.28. The last factor for constituting the offence under Section 138 of the NI Act is formulated in clause (c) of the proviso to the Section which reads thus : "the drawer of such cheque fails to make the payment of the said amount of money to the payees the case may be, to the holder in due course of the cheque within fifteen days of the receipt of the said notice."29. The words "the drawer of such cheque fails to make the payment" are ostensibly different from saying "the drawer refuses to make payment". Failure to make payment can be due to the reasons beyond the control of the drawer. An illustrative case is, if the drawer is not a company but individual who has become so pauper or so sick as he cannot raise the money to pay the demanded sum. Can he contend that since failure to make payment was on account of such conditions he is entitled to be acquitted ? The answer cannot be in the affirmative though the aforesaid conditions can be put forth while considering the question of sentence.30. We therefore feel that legislature has thoughtfully used the word "fails" instead of other expressions as failure can be due to variety of reasons including his disability to pay. But the offence would be complete when the drawer "fails" to make payment within the stipulated time, whatever be the cause for such failure.31. The drawer of the cheque can have different explanations for the failure to pay the amount covered by the cheque. But no such explanations would be sufficient to extricate him from the tentacles of the offence contemplated in the Section. Perhaps some kind of explanations would be sufficient to alleviate the rigour of the offence which may be useful to mitigate the quantum of sentence to be imposed. But that is no ground for consideration at this stage.