Karnataka High Court says Personal Liability of Guarantors and Directors Cannot be Washed Away by Winding Up Orders
The Karnataka High Court recently made a ruling regarding the personal liability of personal guarantors or directors in cases related to the offence punishable under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). The court held that the personal liability of these individuals cannot be absolved by winding up orders under the Companies Act.
The court made this ruling in response to a writ petition filed by a company against an order issued by the Additional Chief Metropolitan Magistrate. The company sought a direction to expedite the disposal of the case.
The court referred to judgments of the Apex Court and the Division Bench of the High Court of Bombay to support its decision. It stated that personal liability cannot be washed away by winding up orders under Section 446 of the Companies Act for offences punishable under Section 138 of the NI Act, as per the interpretation of Section 141 of the Act.
The court relied on the Supreme Court’s judgment in the case of Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited (2023), which approved the judgment of the Bombay High Court in the case of Indorama Synthetics (I) Limited v. State of Maharashtra 2016 SCC OnLine Bom.2611.
In the case before the court, the petitioner, a company called Rajesh Exports Limited, had entered into an agreement with the respondent’s company, Jewels De Paragon Private Limited, for the supply of gold jewelry. The respondent, in his personal capacity, issued a cheque of Rs. 3 crores to the petitioner for the repayment of the value of gold received by his company. However, the cheque was dishonored, leading the petitioner to file a complaint under Section 138 of the NI Act.
The court noted that the judgments of the coordinate benches in this case were rendered without considering the judgments of the Apex Court and the Division Bench of the Bombay High Court. Therefore, those decisions were held to be per incuriam, meaning they were rendered without considering the relevant judgments and lost their precedential value.
Based on these findings, the High Court allowed the writ petition, quashed the 2014 order of the Magistrate, and directed the conclusion of the proceedings within three months.
In summary, the Karnataka High Court held that personal guarantors or directors cannot escape personal liability for offences under Section 138 of the NI Act through winding up orders under the Companies Act. The court based its decision on judgments of the Apex Court and the Division Bench of the Bombay High Court, which clarified the interpretation of Section 141 of the Act.
