The Supreme Court of India ("SC"), in the case of Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited [Criminal Appeal No. 172 of 2023], while deciding the ongoing proceedings under Negotiable Instruments Act, 1881 ("NI Act") as well as the ongoing Corporate Insolvency Resolution Proceedings ("CIRP") held that the scope of the proceedings under the NI Act and Insolvency and Bankruptcy Code, 2016 ("IBC") are very different and would not conflict with one another.


Tourism Finance Corporation of India Limited ("Respondent") granted a loan of INR 30 Crores to Rainbow Papers Limited ("Corporate Debtor") and subsequently entered into a loan agreement dated March 27, 2012 ("Loan Agreement"). Mr. Ajay Kumar Radheyshyam Goenka ("Appellant") was the promoter as well as the managing director of the Corporate Debtor.

The Corporate Debtor issued a post-dated cheque for the purpose of paying one of the instalments under the Loan Agreement which was rejected upon its presentation with the note 'Account Closed'. A demand-cum-legal notice in accordance with Section 138 (Dishonour of cheque for insufficiency, etc., of funds in the account) of the NI Act was issued by the Respondent after the cheque was dishonoured, wherein the Respondent requested the Corporate Debtor as well as the Appellant to make the necessary payment of the debt that had been advanced. An acknowledgment was given on the part of the Corporate Debtor and the Appellant in respect to their responsibility to the obligation pertaining to the debt but no payments were made by them. Hence, the Respondent filed criminal proceedings under Section 190 (Cognizance of offences by Magistrate) of the Code of Criminal Procedure, 1973 ("CrPC") read with Sections 138, 141(Offences by companies) and 142 (Cognizance of offences) of the NI Act.

The Corporate Debtor was admitted into CIRP while the proceedings under NI Act were pending before the metropolitan magistrate ("Magistrate"), by the virtue of an application filed under Section 9 (Application for initiation of corporate insolvency process by operational creditor) of the IBC before the National Company Law Tribunal, Ahmedabad ("NCLT"). The NCLT admitted the said application and accordingly, the moratorium in terms of Section 14 (Moratorium) of the IBC came into effect.

Further, the Appellant filed an application for discharge with the Magistrate in the proceedings under the NI Act. However, the Magistrate denied the said application by an order dated November 1, 2019. Further, the Appellant approached the Delhi High Court ("HC") via a Criminal Revision Petition, which the HC dismissed. Thus, being aggrieved by the order of HC, the Appellant challenged the said order and preferred the present appeal before the SC.


Whether the proceedings under NI Act can continue during the pendency of the proceedings under IBC.


Contentions of the Appellant:

As per the Appellant, the criminal proceedings under NI Act purports due to the failure of payment of debt. It was contended by the Appellant that basis of Section 138 proceedings stands eliminated in a situation wherein the debt itself gets vanished owing to the CIRP being admitted.

Additionally, the Appellant contended that the proceedings under Section 138 of NI Act's is primarily compensatory in character, but it includes a punitive element for the sole purpose of enforcing the compensation provisions.

According to the Appellant, his liability arises from his position as a managing director and authorised signatory of the Corporate Debtor since the debt was taken by the Corporate Debtor as a corporate loan. Therefore, once the proceedings against the Corporate Debtor have gone into abeyance under Section 14 of IBC, the liability of the Appellant also stands discharged.

Contentions of the Respondent:

The Respondent put forth the contention that that there would be no instance of the offence being compounded retroactively under Section 138 of the NI Act resulting from the resolution plan as the commencement of the CIRP took place later than the commencement of the criminal proceedings under the NI Act.

Further, according to the Respondent the restrictions imposed under IBC do not prevent the moving forward of the criminal proceedings against the Corporate Debtor, its directors, or its officials. A Corporate Debtor's criminal responsibility may be discharged if it is dissolved during the insolvency process but not its directors, or its officials.

Observations of the SC

The SC observed that Section 32A (Liability for prior offences, etc.) of IBC categorically discharges a Corporate Debtor of its pre-existing civil and criminal liabilities after the initiation of CIRP. However, it also states that the officials of Corporate Debtor having a direct or indirect role in commission of an offence prior to initiation of CIRP shall continue to be liable for prosecution for those offences. Consequently, the Appellant's liability under section 138 of NI act would not be discharged.

SC also noted that the NI Act and IBC are two fundamentally different legislations in respect to their scope and nature. Further, SC held that the actions taken against signatories or directors under the NI Act are not subject to the moratorium provided under Section 14 of the IBC. Additionally, the termination of debts extinguished under Section 31 or Sections 38 to 41 of the IBC would imply that the criminal proceedings also stand terminated.

SC relied upon the Shah Brothers Ispat Private Limited v. P. Mohan Raj and Others [Company Appeal (AT) Insolvency No. 306 of 2018], and held that the actions which are brought under the Section 138 of the NI Act are of a penal nature as it calls for a fine and imprisonment rather than money recovery. The proceedings under NI Act are not comparable to suit procedures or recovery proceedings because the accused may be subject to imprisonment or fine, or both. Therefore, the said procedure of insolvency is not the same as a suit case. Hence, the liability of Appellant as per the Section 138 of the NI Act is not discharged merely by an initiation of CIRP under IBC.

In a nutshell, the Appellant's participation in CIRP through the submission of its claim and membership in the committee of creditors for the purpose of approval of the resolution plan does not result in the compounding of the offence under Section 138 of the NI Act and hence, the Appellant is not discharged of his liability.

Decision of the SC

The SC held that the proceedings under IBC and NI Act would not intercede each other as they are quite different in their scope. The SC observed that the moratorium under Section 14 of the IBC does not apply to the proceedings initiated against signatories/directors under the NI Act. In the similar context, SC held that the extinguishment of debt under Section 31 or Sections 38 to 41 of the IBC would not ipso facto apply to the extinguishment of any criminal proceeding.

The SC held that the resolution plan must comply the laws which are in force and the laws in force cannot be controlled by the clauses contained in the resolution plan. For this, the SC referred to the Section 30(2)(e) of the IBC which requires that a resolution plan be approved only if it does not violate any provisions of the law for the time being in force. Therefore, the SC observed that: "the clauses as contained in the resolution plan referred to above, only extinguishes the liability of the corporate debtor and not the natural persons."

VA View:

The present judgement settles the question of the impact of subsequent insolvency of the defaulting company upon the pending criminal proceedings under the NI Act as well as the extent and continuation of the liability of directors of the said defaulting company. SC has rightly highlighted the distinct nature of the proceedings under IBC and NI Act, as a result of which, the criminal proceedings under NI Act does not vanish due to the extinguishment of debt under a CIRP proceeding under IBC.

In a nutshell, the judgment is a milestone which has addressed the issue keeping in consideration the spirit as well as the nature of the IBC as it preserves the rights of the creditors and the financial institution with respect to the recovery of debt.


The Hon'ble Bombay High Court ("High Court") has, by the judgment pronounced on February 2, 2023, in the matter of Percept Finserve Private Limited v. Edelweiss Financial Services Limited [Commercial Appeal (L) No.284 0f 2019 in Commercial Arbitration Petition No. 220 of 2014] ("Impugned Order"), held that a contract containing put option for securities does not amount to derivative contract and hence, not prohibited under the Securities Contracts (Regulation) Act, 1956 ("SCRA").


Edelweiss Financial Services Limited ("Respondent") entered into a share purchase agreement dated December 8, 2007 ("SPA") with Percept Finserve Private Limited ("Appellant 1") which was subsequently amended via a deed of rectification dated April 21, 2008 ("Deed") as well as an amendment agreement dated April 23, 2008 ("Amendment Agreement") through which 2,28,374 shares of Percept Limited ("Appellant 2") were purchased by the Respondent from Appellant 1 for a total consideration of INR 20 Crore.

The SPA had certain conditions subsequent setout therein, first of which required Appellant 1 to require Appellant 2 to accomplish restructuring of the entire group companies by December 31, 2007 and provide proof of completion of the restructuring to the Respondent.

A dispute was raised by the Respondent on the grounds that there was a failure/negligence on the part of Appellant 1 pertaining to the completion of the restructuring of the group companies within the period stipulated in the SPA, that is, December 31, 2007, and therefore, a breach of the SPA. Owing to the breach of SPA, Respondent was entitled to resell the shares of INR 20 Crore to Appellant 1 for an amount that would yield internal rate of return of 10% of the consideration paid to Appellant 1 under the SPA.

Thereafter, the parties entered into an Amendment Agreement whereby the Respondent extended the timeline for completion of the restructuring to June 30, 2008, failing which the Respondent was entitled to the following remedies as per clause 8.5 of SPA ("Investor Rights Clause"):

"8.5. In the event of non-fulfillment of the first Condition Subsequent, the Investor shall have the right to:

8.5.1. Re-sell the Shares held by it to the Seller or its Affiliates and the Seller is bound to purchase the same, at a price which would give the Investor an internal rate of return of 10% on the Purchase Consideration; or......

Appellant 1 failed to fulfill the conditions subsequent within the extended time period. Thereafter, the Respondent initiated arbitration proceeding and invoked the Investor Rights Clause and sought the remedies contained therein.

The sole arbitrator by an award dated June 6, 2013 rejected the Respondent's claim on the ground that transaction (specifically the Investor Rights Clause) was illegal/ unenforceable being in breach of SCRA. This gave an option to the Respondent to demand repurchase of the shares from Appellant 1 as it constituted forward contract which is prohibited under Section 16 (Power to prohibit contracts in certain cases) of SCRA as read with the circular by Securities and Exchange Board of India ("SEBI") dated March 1, 2000. Further, it was held that Investor Rights Clause was also illegal because it contains an option concerning future purchase of shares, thus a contract in derivatives and not being traded on a recognized stock exchange was illegal under Section 18A (Exclusion of spot delivery contracts from sections 13, 14, 15 and 17) of SCRA.

Aggrieved by the said award, Respondent filed an application under Section 34 (Application for setting aside arbitral awards) of Arbitration and Conciliation Act, 1996 ("Act"). The learned single judge overturned the arbitrator's conclusion, stating that the aforementioned Investor Rights Clause is entirely legal and does not contravene any of the provisions of SCRA. Hence, this appeal was filed under Section 37 (Appealable orders) of the Act.


Whether the Investor Rights Clause containing option to resell the shares amounts to derivative/future contract and thereby violates the provisions of SCRA.


Submission made by the Appellants:

It was contended by the Appellants that the Investor Rights Clause being contract in derivatives attracted the rigors of Section 18A of SCRA, that is, such an option must be traded on a recognized stock exchange and settlement on the clearing house of the recognized stock exchange. Therefore, the clauses being in breach of Section 18A of SCRA were illegal and unenforceable. The option derived its value from the underlying shares of Appellant 2 and, therefore, was a derivative. A derivative in the present case, being an option attached to the shares of an unlisted public company, was not permitted, and would fall foul of the public policy under Section 18A of SCRA.

Further, the Appellants relied on SEBI notification dated October 3, 2013 issued under Section 16 of SCRA ("Notification") which inter alia permitted contracts in shareholders agreements or articles of association of group companies, for purchase or sale of securities pursuant to the exercise of an option contained therein to buy or sell the securities, on the terms and conditions set out therein. The Notification clarifies that option contracts as in the present case, entered prior to the date of the Notification attracted the rigors of Section 18A of SCRA and hence were prohibited and contravenes the provisions of SCRA.

Contentions raised by the Respondent:

The Respondent had put forth his contention that contract in derivatives or options contract are distinct from the contract between two shareholders containing an option to buy or sell the shares owned by them. The Respondent substantiated his argument by stating that this distinction between a contract in derivatives and a contract for sale or purchase of Securities, pursuant to the exercise of an option contained in a shareholders agreement, is also apparent from the Notification, according to which the contracts in derivatives are distinct and different from a contract for sale or purchase of securities pursuant to the exercise of an option contained in a shareholders agreement.

Further, the Respondent submitted that Section 18A of SCRA deals only with contracts in derivatives, that is, options contract, which can be traded, bought, sold and settled. Therefore, Section 18A of SCRA would not be applicable to a contract existing between two shareholders containing an option for sale or purchase of their own shares.

The Respondent relied on the judgment of the High Court in the case of Banyan Tree Growth Capital L.L.C. v. Axiom Cordages Limited and Others [2020 SCC Online Bom 781] and another judgement of the Calcutta High Court in the case of EIG (Mauritius) Limited v. McNally Bharat Engineering Company Limited [2021 SCC Online Cal 2915].

Observations of the High Court

The High Court observed that a contract for sale or purchase of shares would come into being only at a future point of time. Further, as per the Investor Rights Clause, it is evident that there was no contract of sale or purchase of shares at a future date as of the day the SPA was signed. A contract that grants the buyer the right to demand that his vendor repurchase securities upon the occurrence of a certain contingency would only indicate that there was no obligation at the time the contract was signed and that the obligation only developed as a result of the occurrence of the contingency. The contract would come into being, if at all, at a future point of time, after the satisfaction of the below mentioned two conditions:

  1. failure of condition subsequent attributable to Appellant 1; and
  2. exercise of option by the Respondent to require repurchase of shares by Appellant 1 upon such failure.

Entering into a call or a put option for sale is not prohibited under the provisions of Section 18A of SCRA to be read with Section 16 of SCRA. However, it prohibits trading or dealing in such option by treating it as a security.

Decision of the High Court

The High Court while upholding the Impugned Order held that the contract cannot be termed as a trade or contract in derivatives if it merely contains a put in option pertaining to the securities. Therefore, having a put option concerning a security cannot be termed as illegal as per Section 18A of SCRA. The Investor Rights Clause is not contract for sale or purchase of securities, but merely an option which the promisee may exercise and further, such option does not amount to making of a contract in a derivative.

VA View:

The High Court in the instant case interpreted the term "derivative contract" by making it amply clear that each contract/agreement cannot be automatically termed as derivative contract/trade, merely because it contains a put option of securities.

It is pertinent to note that, unless such option is being traded by treating it as a "security" in contravention of Section 18A of SCRA, that is, traded otherwise than on a recognised stock exchange, the same is not in violation of SCRA.

From the above, it may be concluded that there is no bar to enter into shareholders' agreement which merely provides an option to either of the parties to interse purchase/ sell the shares.

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