Personal Liability Remains Unaffected by Company Winding Up: Karnataka High Court Quashes Stay Order in Cheque Bounce Case

Magistrate’s Stay Order Overturned; Proceedings Under Section 138 of Negotiable Instruments Act to Resume The High Court of Karnataka has quashed a stay order by the XXVIII Additional Chief Metropolitan Magistrate, Bengaluru, in a cheque bounce case involving Rajesh Exports Ltd. And K.V. Kishore, former Managing Director of Jewels De Paragon Pvt. Ltd. Justice M. Nagaprasanna emphasized that the personal liability of the accused under Section 138 of the Negotiable Instruments Act remains unaffected by the winding up of the company, thereby directing the resumption and expedited conclusion of the criminal proceedings.

The case dates back to 2007 when Rajesh Exports Ltd. Entered into an agreement with Jewels De Paragon Pvt. Ltd. For the supply of gold jewelry. The respondent, K.V. Kishore, issued a cheque for ₹3 crores to Rajesh Exports Ltd. The cheque was dishonored upon presentation, leading Rajesh Exports to file a criminal complaint under Sections 138, 141, and 142 of the Negotiable Instruments Act. Concurrently, a winding-up order for Jewels De Paragon Pvt. Ltd. Was issued by the Karnataka High Court in 2014, which led the Magistrate to stay the criminal proceedings under Section 446 of the Companies Act.

Justice M. Nagaprasanna noted that the winding up of the company does not absolve personal liability in cases involving Section 138 of the Negotiable Instruments Act. “Personal criminal liability under Section 138 is designed to safeguard the credibility of commercial transactions and prevent the dishonoring of cheques,” the judgment stated.

The High Court highlighted that the initial stay order was erroneously applied. “The proceedings under Section 138 pertain to personal liability, which remains unaffected by the winding up of the company,” Justice Nagaprasanna observed, stressing that such criminal proceedings do not impact the company’s assets and are distinct from civil proceedings under the Companies Act.

The Court referred to several precedents, including the Division Bench judgment of the Bombay High Court in Indorama Synthetics (I) Limited v. State of Maharashtra and the Supreme Court’s ruling in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited. Both judgments clarified that personal liability under Section 138 of the Negotiable Instruments Act is not stayed by company winding-up orders. “Personal penal liability of the directors or guarantors cannot be washed away by winding-up orders under Section 446 of the Companies Act,” the Court reiterated.

Justice M. Nagaprasanna remarked, “The personal liability for the dishonor of a cheque remains intact regardless of the company’s winding up. The stay order was a misapplication of Section 446 of the Companies Act.”

The Karnataka High Court’s decision to quash the stay order and direct the resumption of proceedings in the cheque bounce case underscores the judiciary’s stance on maintaining personal accountability in financial transactions. By affirming that criminal proceedings under Section 138 of the Negotiable Instruments Act are unaffected by the winding-up of a company, the judgment reinforces the legal framework protecting the integrity of commercial dealings. The Magistrate has been instructed to expedite the trial and conclude it within three months, marking a significant step towards resolving long-pending financial disputes.

Date of Decision: June 25, 2024

M/S. Rajesh Exports Ltd. Vs. K.V. Kishore