Proceedings under Section 138 of the Negotiable Instruments Act deemed non-maintainable as the company had ceased to exist before the cheque was issued.
In a significant ruling, the Karnataka High Court has quashed proceedings against Rakesh Ramakanth, former director of the dissolved Giga Networks Private Limited, concerning a cheque bounce case. The court found that proceedings under Section 138 of the Negotiable Instruments Act, 1881, cannot be sustained if the cheque is issued on behalf of a company that had already been dissolved, as the company ceases to exist as a legal entity, rendering the cheque void ab initio.
The case revolved around a cheque of Rs. 60 lakhs issued by Giga Networks Private Limited to Somashekara Gowda R.G., which was dishonored with the endorsement 'account closed.' The Karnataka High Court, led by Justice M. Nagaprasanna, emphasized that once a company is struck off and dissolved, it ceases to operate as a legal entity, and any act purportedly done in its name, including the issuance of cheques, is void from the outset.
The court further highlighted that directors cannot be held liable for cheques issued after the dissolution of the company unless specific legal exceptions apply. The judgment referenced several precedents, including the Supreme Court's decision in Vishnoo Mittal v. Shakti Trading Company and rulings by the High Court of Delhi, reinforcing the position that a dissolved company loses its juristic personality, making any subsequent actions legally impermissible.
This ruling underscores the importance of company status in legal proceedings and clarifies the liabilities of directors in cases involving dissolved entities. The court's decision also provides clarity on the interpretation of Sections 138 and 141 of the Negotiable Instruments Act concerning dissolved companies.
The court concluded by allowing the criminal petition and quashing the proceedings in C.C.No.263 of 2018 against Rakesh Ramakanth, providing him relief from the ongoing legal battle.
Bottom line:-
Proceedings under Section 138 of the Negotiable Instruments Act, 1881, are not maintainable if the cheque is issued after the company has been dissolved, as the company ceases to exist as a legal entity, rendering the cheque void ab initio. Directors cannot be held liable in such circumstances unless specific legal exceptions apply.
Statutory provision(s): Section 138, Section 141 of the Negotiable Instruments Act, 1881; Section 560 of the Companies Act, 1956.
Rakesh Ramakanth v. Somashekara Gowda R.G., (Karnataka) : Law Finder Doc id # 2933298
