No 138 NI Act Case Against Director Post Insolvency Start

If cause of action u/s 138 of the NI Act arises after the commencement of Insolvency process, proceedings u/s 138 cannot be initiated against director/ natural person, even if the cheque was dishonored before the moratorium u/s 14 of IBC was imposed.

In the matter of Vishnoo Mittal Vs. Shakti Trading Company [Criminal Appeal No. ..of 2025 @ Special Leave Petition (CRL) No. 1104 of 2022, judgment dated 17.03.2025, SC], it was held that in cheque bouncing case, if Notice under section 138 of NI Act was issued after order of insolvency commencement date (i.e. cause of action arises after commencement of CIRP), immunity granted by moratorium order issued u/s 14 of the IBC shall also be available to director and no proceedings against the director/natural person can be instituted under 138 of NI Act.

Reason: When notice was issued to the director, he was not in charge of the CD as he was suspended from his position as the director of the CD as soon as IRP was appointed. Therefore, the power vested with the BOD were to be exercised by IRP. All bank accounts of CD were operating under instructions of IRP, hence it was not possible for director to repay the amount in light of Section 17 of IBC. Additionally, after the imposition of moratorium, IRP had made a public announcement inviting claims from the creditors of CD and respondent has filed a claim with IRP.

The facts are as under-

While dismissing the petition, the High Court relied upon the judgment of Hon’ble Supreme Court in P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258 where it was held that the immunity granted by the moratorium order issued under Section 14 of the IBC can only be obtained by a Corporate Debtor and not by a natural person such as the Director of the Corporate Debtor. In para 102 of the said judgement, the Apex Court had noted:

“… for the period of moratorium, since no Sections 138/141 proceeding can continue or be initiated against the corporate debtor because of a statutory bar, such proceedings can be initiated or continued against the persons mentioned in Sections 141(1) and (2) of the Negotiable Instruments Act. This being the case, it is clear that the moratorium provision contained in Section 14 IBC would apply only to the corporate debtor, the natural persons mentioned in Section 141 continuing to be statutorily liable under Chapter XVII of the Negotiable Instruments Act.”

In the present matter Vishnoo Mittal (supra), the Hon’ble Supreme Court stated that in our opinion, the High Court erred in relying on P. Mohan Raj (supra) since the facts of that case were completely different and the present case is thus distinguishable from it. In P. Mohan Raj (supra), certain cheques drawn by the appellants therein were dishonoured on 03.03.2017 and 28.04.2017. Thereafter, demand notices dated 31.03.2017 and 05.05.2017 were issued by the complainant. The moratorium was imposed on 06.06.2017, which is clearly after the lapse of 15 days from the date of demand notices. In other words, in that case, the cause of action under section 138 NI Act arose before the imposition of the moratorium and on these facts, this Court had held that section 14 of IBC bars or stays proceedings only against the corporate debtor and proceedings can be continued or initiated against the natural persons. The case at hand is totally different from P. Mohan Raj (supra) as the cause of action in the present case arose after the commencement of the insolvency process.

Further, the return of the cheques dishonoured simpliciter does not create an offence under section 138 NI Act. Clause (c) of the proviso to Section 138 of NI Act makes it clear that cause of action arises only when demand notice is served and payment is not made pursuant to such demand notice within the stipulated fifteen-day period.

The bare reading of the provisions of Section 17 of IBC (Management of affairs of Corporate Debtor by Interim Resolution Professional), shows that the appellant did not have the capacity to fulfil the demand raised by the respondent by way of the notice issued under clause (c) of the proviso to Section 138 NI Act. When the notice was issued to the appellant, he was not in charge of the corporate debtor as he was suspended from his position as the director of the corporate debtor as soon as IRP was appointed on 25.07.2018. Therefore, the powers vested with the board of directors were to be exercised by the IRP in accordance with the provisions of IBC. All the bank accounts of the corporate debtor were operating under the instructions of the IRP, hence, it was not possible for the appellant to repay the amount in light of section 17 of the IBC. Additionally, we have been informed on behalf of the appellant that, after the imposition of the moratorium, the IRP had made a public announcement inviting the claims from the creditors of the Corporate Debtor and the respondent has filed a claim with the IRP.

The Hon’ble Supreme Court held that keeping in mind the above observations and distinguishing facts and circumstances of this case from that of P. Mohan Raj (supra), we are of the considered view that the High Court ought to have quashed the case against the appellant by exercising its power under section 482 of the CrPC.