Corporate insolvency proceedings can be initiated for dishonour of post-dated cheques

Key Points:

• Issuance of post-dated cheques to any person will amount to acknowledgement of legally enforceable liability;
• Dishonour of post-dated cheques would amount to “default” under the Insolvency and Bankruptcy Code, 2016 (“Code”) and can be used as a ground for initiation of corporate insolvency resolution proceedings of the corporate debtor.

Facts:

The Applicant was awarded a contract by the Corporate Debtor, which was completed to the satisfaction of Corporate Debtor.

In consideration of the performance of above contract, the Corporate Debtor issued seven post-dated cheques of Rs. 5,23,016 each towards final settlement of the claim of the Applicant.

Six out of seven post-dated cheques issued by the Corporate Debtor were dishonoured.

Contentions:

The Applicant relied on the judgment of Kerala High Court in the case of Dr. K.K. Ramakrishnan Vs. Dr. K.K. Parthasaradhy & another [see end note 1] wherein it was held that “execution of the cheque is an acknowledgment of a legally enforceable liability and when it is dishonoured the consequences of prosecution and punishment follow” Therefore, dishonour of cheque would be covered within the definition of “default” as provided in Section 2(12) of the Code and the Applicant would be treated as “Operational Creditor” under Section 5(20) of the Code.

Order of the Tribunal:

The National Company Law Tribunal also relied on the judgement of Kerala High Court in Ramakrishnan’s case and accepted the contention that issuance of cheque would amount to acknowledging the liability to pay and a failure to pay such liability would amount to “default” under the Code.

The Tribunal also satisfied itself of the requirements of Section 9 of the Code for initiation of insolvency resolution proceedings by an operational creditor, inter-alia being submission of documents by the Applicant such as, a copy of invoice demanding payment by the Applicant from the Corporate Debtor, affidavit to the effect that there is no dispute between the Corporate Debtor and the Applicant in relation to the outstanding debt, etc. 

Analysis:

Unlike the recent decision of the Tribunal in the matter of Col. Vinod Awasthy v. AMR Infrastructure Limited [see end note 2], the Tribunal did not deliberate much on what may be considered as “operational debt” under the Code as the Corporate Debtor had already accepted it’s liability of making payment to the Applicant by issuing post-dated cheques in favour of the Applicant.

The contract between the Applicant and the Corporate Debtor was also in nexus of the business of the Corporate Debtor, therefore, the Tribunal was satisfied that the Applicant would be an “operational creditor” under the Code. 

In view of the same, the Tribunal admitted that it is a case fit for filing an application for insolvency resolution process.