No Automatic SICA Shield: Section 22A restraint orders do not bar Section 138 NI Act prosecutions; summoning orders cannot be recalled

Introduction

In SHREE NAGANI SILK MILLS PVT. LTD v. L.D. INDUSTRIES LTD & Ors (2025 INSC 1064), a two-judge Bench of the Supreme Court of India (Manoj Misra, J. and Ujjal Bhuyan, J.) resolved seven connected criminal appeals arising out of cheque dishonour complaints under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). The appellant–complainant alleged that the respondent–accused company (L.D. Textile/Industries Ltd.) issued multiple cheques in 2001 towards part payment for supplies, which were dishonoured for insufficient funds. Statutory notices were issued but not complied with, leading to prosecutions under Sections 138 and 141 NI Act.

The accused had been declared a “sick” industrial company by the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), and a restraint order under Section 22A SICA prohibited disposal of assets without BIFR’s consent, while expressly permitting drawings from current assets to the extent required for day-to-day operations. On that basis, the accused sought recall of the summoning orders and discharge at the threshold.

The Magistrate rejected the recall applications. The Sessions Court, in revision, set aside the summoning orders and discharged the accused; the High Court, in supervisory jurisdiction under Article 227, sustained that outcome. The Supreme Court has now allowed the complainant’s appeals, restored the prosecutions, and clarified the correct approach to the interplay between SICA restraint orders and prosecutions under Section 138 NI Act, and to the impermissibility of recalling process once issued.

Key issues included:

Whether SICA Sections 22/22A operate as a legal bar to proceedings under Section 138 NI Act.
Whether the effect of a Section 22A BIFR restraint order on a Section 138 prosecution is a threshold question capable of being decided without evidence, or a fact-dependent inquiry for trial.
Whether a Magistrate (or a revisional court) can recall a summoning order in light of Adalat Prasad v. Rooplal Jindal and the Constitution Bench in In Re: Expeditious Trial of Cases under Section 138 of NI Act, 1881.
The role of the presumption under Section 118(b) NI Act that a negotiable instrument bearing a date is made or drawn on that date.

Summary of the Judgment

The Supreme Court allowed all seven appeals, set aside the High Court’s and Sessions Court’s orders, and restored the complaints to the Magistrate’s file for trial. The Court held:

There is no general legal impediment under Section 22 SICA to instituting or proceeding with criminal complaints under Section 138 NI Act against a sick company or its directors (reaffirming Kusum Ingots).
Where a restraint order under Section 22A SICA exists, its effect on a Section 138 prosecution is fact-specific and depends on (a) the nature of the restraint, (b) the timing of the cheque/notice, and (c) whether the transaction falls within any exception (such as drawings for day-to-day operations). It is not an automatic bar to prosecution.
In the present case, the BIFR order expressly permitted utilization of current assets to the extent required for day-to-day operations. Given the complaint allegations that the cheques were issued against supplies, and the statutory presumption under Section 118(b) NI Act as to the date on the cheques (2001), whether the cheques were tied to day-to-day operations is a question for trial, not for threshold discharge.
Applications to recall summoning orders are not maintainable. Adalat Prasad and the Constitution Bench decision in In Re: Expeditious Trial of Cases under Section 138 of NI Act have conclusively held that trial courts have no inherent power to recall or review the issue of process. The revisional court therefore erred in recalling process and discharging the accused at the inception.

Resultantly, the complaints under Sections 138 and 141 NI Act stood restored for trial before the Magistrate, to be taken to their logical conclusion according to law.

Analysis

Precedents Cited and How They Shaped the Decision

1) Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd. (2000) 2 SCC 74

Kusum Ingots is the seminal authority on the interface between SICA and Section 138 NI Act. The Supreme Court in Kusum Ingots held that Section 22 SICA (which suspends proceedings like suits for recovery, execution, and winding up) does not bar criminal prosecutions under Section 138. Regarding Section 22A SICA (BIFR’s power to restrain disposal of assets), the Court recognized a nuanced position: if a restraint order is in force before the cheque is drawn or before the expiry of the 15-day notice period, and the order legally disables the company from paying, it may be contended that the offence under Section 138 is not complete—because failure to pay is for reasons beyond the accused’s control. Yet this is not a universal rule; whether the bar applies depends on the facts, the nature of the restraint, and the timing.

The present judgment faithfully applies Kusum Ingots but clarifies that the inquiry is evidence-driven, especially where the BIFR order contains carve-outs (as here, permitting use of current assets for day-to-day operations).

2) Southern Steel Ltd. v. Jindal Vijayanagar Steel Ltd. (2008) 5 SCC 762

In Southern Steel, after the company was declared sick, it made purchases and issued cheques that were dishonoured. The Supreme Court refused to quash Section 138 proceedings, observing that sickness did not automatically shield the company from criminal liability, particularly where the company continued commercial dealings and issued cheques representing an acknowledged debt. The Court underscored that Section 138 prosecutions serve a distinct public purpose and cannot be neutralized by invoking SICA as a blanket defence.

The present case echoes this principle: mere “sickness” or existence of a SICA restraint does not itself defeat a Section 138 prosecution; the factual matrix—especially the nature of the transaction and any permissible exception in the restraint—is crucial.

3) Adalat Prasad v. Rooplal Jindal (2004) 7 SCC 338, reaffirmed by the Constitution Bench in In Re: Expeditious Trial of Cases under Section 138 of NI Act, 1881 (2021) 16 SCC 116

Adalat Prasad laid down that a Magistrate, after issuing process/summons, has no power to recall or review that order. The Constitution Bench later reiterated this rule and clarified that while trial courts cannot recall process, Section 322 CrPC allows a limited revisiting of process only if the court discovers it lacks jurisdiction to try the complaint. Otherwise, challenges to summoning are to be addressed via appropriate superior court jurisdiction (e.g., Section 482 CrPC/Articles 226–227) rather than by recall applications before the trial court.

In the present case, the Sessions Court allowed recall/discharge at the threshold—contrary to Adalat Prasad and the Constitution Bench. The Supreme Court corrected this, underscoring that threshold recall is impermissible, and that the fact-laden SICA/Section 138 interaction must be examined at trial.

Legal Reasoning

Presumption under Section 118(b) NI Act: Every negotiable instrument bearing a date is presumed to have been made or drawn on that date, unless the contrary is proved. The accused’s plea that the cheques were “post-dated” could not be accepted at the threshold; rebuttal requires evidence. This presumption also anchors the timeline analysis central to Kusum Ingots.
Distinction between SICA Sections 22 and 22A:
- Section 22 SICA stays suits for recovery, execution, winding up etc., but does not bar criminal prosecutions under Section 138 NI Act. A cheque dishonour prosecution is not a suit for recovery or execution; it is penal in nature.
- Section 22A allows BIFR to restrain disposal of assets. Its effect on a Section 138 prosecution is contextual. If the restraint order precedes the cheque or the expiry of the statutory notice period, and if the order legally prevents payment, the accused may argue the offence is not complete because non-payment is involuntary or legally disabled. But if the restraint order contains exceptions—like permitting drawings for day-to-day operations—the defence is not automatic and must be proved.
The specific BIFR order (21.08.2000) contained a clear carve-out: while disposal of assets required consent, current assets could be drawn to the extent required for day-to-day operations if the company was running, with proper accounts maintained. The complaints alleged cheques were issued in 2001 towards supplies made by the complainant. Whether such payments fall within “day-to-day operations” is a factual question requiring evidence. Therefore, quashing or discharge at the inception was unwarranted.
Procedural bar on recalling process: In light of Adalat Prasad and the Constitution Bench in In Re: Expeditious Trial, the Magistrate correctly declined to recall process. The revisional court’s interference to recall and discharge at the threshold was erroneous; the High Court compounded the error by sustaining it. The appropriate course is to proceed to trial, allowing the defence to establish, if it can, that payment was legally disabled by the BIFR order in a manner that negates the completion of the Section 138 offence as per Kusum Ingots.

Impact and Future Implications

Reaffirmed limits on SICA-based defences: This judgment squarely reiterates that SICA does not per se shield companies/directors from Section 138 NI Act prosecutions. Even where Section 22A restraint orders exist, their effect must be evaluated on evidence, and any express exceptions (like day-to-day operations) diminish the scope of an “automatic” defence.
Trial-centric adjudication of SICA-Section 138 interplay: The Court emphasizes that the “SICA defence” is a mixed question of law and fact, ordinarily unsuited for threshold discharge or quash, except in clear cases demonstrable on the face of the record (e.g., where a restraint unequivocally precludes payment and predates the cheque/notice).
Procedural discipline: No recall of summons. Accused persons cannot seek to recall summoning orders before the trial court. Their remedies lie in invoking supervisory or inherent jurisdiction of higher courts, and even then, success is contingent on demonstrating a clear legal bar—not on factual disputes requiring evidence.
Commercial consequences: Companies under financial stress or regulatory moratoria must calibrate their commercial conduct carefully. If they issue cheques in the ordinary course to suppliers, they risk Section 138 exposure unless they can show that payment was legally impossible notwithstanding any “day-to-day operations” exception. The judgment discourages use of protective statutes as broad shields against cheque dishonour liability.
Evidentiary focus at trial: Parties should be prepared to lead evidence on:
- Purpose of the cheques (e.g., procurement of inputs, utilities, wages, or other operational expenses).
- The precise terms and timing of the BIFR order, and whether the transaction falls within any permitted exception.
- Corporate control and responsibility (for Section 141 vicarious liability).
- Chronology vis-à-vis the statutory notice period under Section 138.
Consistency with earlier jurisprudence: The decision harmonizes Kusum Ingots and Southern Steel, refines the approach to SICA’s Section 22A vis-à-vis Section 138, and reaffirms the procedural bar in Adalat Prasad and the Constitution Bench ruling.

Complex Concepts Simplified

Section 138 NI Act: Criminalizes dishonour of cheques for insufficiency of funds when certain statutory steps are followed (presentation of cheque, dishonour, notice of demand within 30 days, and failure to pay within 15 days of receipt).
Section 141 NI Act: Vicarious liability provision that holds persons in charge of and responsible to the company for the conduct of its business liable along with the company, subject to specific averments and proof.
Section 142 NI Act: Governs cognizance and limitation for Section 138 complaints.
SICA Section 22: Suspends civil proceedings like suits for recovery, execution, and winding up against a sick company—does not bar criminal cases under Section 138 NI Act.
SICA Section 22A: BIFR’s power to restrain disposal of assets, sometimes with exceptions (e.g., permitting drawings for day-to-day operations). Its effect on Section 138 prosecutions is fact-specific.
BIFR restraint with “day-to-day operations” exception: Allows use of current assets for running expenses. If cheques are for such expenses, a blanket bar on prosecution is unlikely.
Presumption under Section 118(b) NI Act: A cheque bearing a date is presumed to be drawn on that date, unless proven otherwise.
“Recall of process”: An accused’s request to the trial court to undo its summoning order. Indian law, per Adalat Prasad and the Constitution Bench, does not permit trial courts to recall or review process once issued (save for the Section 322 CrPC situation where the court lacks jurisdiction).
“Mixed question of law and fact”: An issue that cannot be resolved purely by applying legal principles; it requires evidence about the factual context (e.g., purpose of the cheque, the scope and timing of a restraint order).

Conclusion

The Supreme Court’s decision in Shree Nagani Silk Mills Pvt. Ltd. v. L.D. Industries Ltd. crystallizes two important principles. First, a BIFR restraint under SICA Section 22A does not automatically stifle a Section 138 NI Act prosecution. Whether such a restraint disables payment so as to negate the offence is a matter of evidence, particularly where the order itself allows withdrawals for day-to-day operations. Second, trial courts cannot recall summoning orders; threshold discharge on fact-intensive defences is impermissible. The ruling restores doctrinal clarity established in Kusum Ingots and Southern Steel, while enforcing procedural discipline per Adalat Prasad and the Constitution Bench’s reiteration.

Key takeaways:

No blanket SICA bar to Section 138 prosecutions; the Section 22A defence is fact-dependent and typically triable.
Where BIFR orders permit “day-to-day” drawings, cheques issued for operational transactions are unlikely to be immune from Section 138 solely by invoking SICA.
Trial courts lack power to recall summoning orders; challenges must be pursued in superior courts, and even there, quashing is reserved for clear legal bars evident on the face of the record.
Evidence on the purpose of cheques, the timing of restraint vis-à-vis the statutory notice, and the scope of any BIFR exceptions will often prove decisive.

By directing that the prosecutions proceed to trial, the Court ensures that protective corporate rehabilitation regimes are not misused to evade penal accountability for cheque dishonour, while preserving a fair opportunity for accused companies to demonstrate genuine legal disability where it truly exists.