ARC Can Be Substituted In Pending Cheque Bounce Case After Acquiring Loan From Bank: Bombay High Court

The Bombay High Court on 3 August held that an Asset Reconstruction Company (ARC) can seek substitution as the complainant in a pending cheque bounce prosecution under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), after acquiring the underlying financial asset from a bank.

Justice N.R. Borkar dismissed a petition filed by Avarsekar & Sons Pvt Ltd and its directors challenging the substitution of Assets Care and Reconstruction Enterprises Ltd. (ACRE) as complainant in place of Axis Bank, holding that Section 5(5) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) permits such substitution in pending Section 138 proceedings. He held:

“Perusal of Sections 5(4) and 5(5) of the SARFAESI Act would show that they are not restrictive; instead, they are facilitative, enacted to ensure that a proceeding "relating to the said financial asset" does not abate and may be "continued, prosecuted and enforced by or against" the ARC, precisely because the bank or financial institution that instituted or defended it has, by the acquisition, divested itself of the financial asset and the right of action upon them. This Court finds Section 5(5) of the SARFAESI Act expressly permits the ARC to seek substitution before "any court or other authority" in any pending "suit, appeal or other proceeding". This wide language is sufficient to include a criminal court exercising jurisdiction under Chapter XVII of the NI Act.”

The case arose from a Rs. 75 crore overdraft facility availed by Avarsekar & Sons from Axis Bank under a Facility Agreement dated 30 December 2013. Avarsekar & Sons issued three post-dated cheques of Rs. 25 crore each as security. After the cheques were dishonoured, Axis Bank issued a statutory notice on 21 November 2016 and filed a complaint under Section 138 of the NI Act before the Metropolitan Magistrate, Mumbai, on 11 January 2017.

While the complaint was pending, Axis Bank assigned the loan and securities, including the three cheques and the pending complaint, to ACRE under a Deed of Assignment dated 27 March 2017. The Trial Court allowed ACRE's substitution application on 5 September 2018. The Sessions Court subsequently dismissed the borrowers' revision on 11 February 2021.

Before the High Court, the borrowers argued that ACRE was neither the payee nor the holder in due course of the cheques and that Section 5 of the SARFAESI Act could not extend to criminal proceedings. ACRE, on the other hand, contended that the statutory deeming fiction under Section 5 of the SARFAESI Act made it the lender and transferred to it all rights attached to the financial asset.

The Court relied on its decision in Hari Krishnan Selvakumar and Man Singh Tusaria, holding that Section 5(4) of the SARFAESI Act is broad enough to cover proceedings under Section 138 of the NI Act and that such proceedings can continue with an ARC after assignment of the underlying loan.

It also considered Section 142(1)(a) of the NI Act, which permits cognizance of a Section 138 offence only upon a complaint made by the payee or holder in due course. It noted that Section 7 of the NI Act defines “payee” as the person named in the instrument to whom, or to whose order, the money is directed to be paid. It held:

“It is true that Section 142(1)(a) of the NI Act bars a Court from taking cognizance of an offence under Section 138 except upon a complaint in writing made by the “payee” or, as the case may be, the 'holder in due course of the cheque'. "Payee" is defined in Section 7 of the NI Act as "the person named in the instrument to whom, or to whose order, the money is directed to be paid."

Further, the Bench held that although ACRE was not the named payee, it became a holder in due course after acquiring the loan and the cheques for consideration. It therefore held that Sections 9 of the NI Act and 5(2) and 5(3) of the SARFAESI Act enabled ACRE to maintain and prosecute the Section 138 complaint.

Accordingly, the High Court held that ACRE could prosecute the Section 138 complaint and dismissed the petition, upholding the Trial Court's and Sessions Court's orders allowing its substitution as complainant.

For Petitioners: Girish Kulkarni, Sr. Advocate a/w. Prathamesh Parkar, Adv. Atithi Abhay and Shashikala Sharma i/b. Poonam Ankleshwaria

For Respondent: Manaswi Agrawal a/w. Shantanu Ray a/w. Karan Parmar i/b. Meraki Chambers

For State: P.H. Gaikwad / Mr. B.V. Holambe Patil, APP