Director was not guilty u/s 138 of NI Act in view of insolvency proceedings and moratorium

Director was not guilty of offence u/s 138 of NI Act in view of initiation of insolvency proceedings and moratorium order – Supreme Court

In a recent judgment, the Hon’ble Supreme Court quashed the complaint case under Section 138 of Negotiable Instruments Act, 1881 against the director for dishonour of cheques as he was not more incharge of the corporate debtor/company in view of the start of the insolvency proceedings and moratorium order was passed before notice was issued.

ABCAUS Case Law Citation:
4474 (2025) (03) abcaus.in SC

In the instant case, the appellant had challenged the order passed by the Single Judge of the Punjab and Haryana High Court quashing appellant’s petition under section 482 of Criminal Procedure Code, 1973 (‘CrPC’), seeking quashing of proceedings initiated under Section 138 of Negotiable Instruments Act, 1881 (‘NI Act’) against the appellant.

The appellant was the director of a Private Limited Company. Under a contract, the said company had appointed the Respondent firm as a super stockist of the company. The appellant, in his capacity as director of the company, had drawn cheques in favour of the respondent firm of varying amounts.

These cheques got dishonoured. A legal notice under Section 138 of the NI Act was issued to the appellant by the respondent firm as the cheque amounts were not furnished to the respondent by the bank. Consequently, a complaint was filed before the Court of Chief Judicial Magistrate by the respondent firm against the appellant for offences under Section 138 of NI Act.

However, after the bouncing of cheques but before the filing of the complaint, insolvency proceedings started against the said company (corporate debtor), of which the appellant was the director and a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) was imposed. On the same day the interim resolution professional (IRP) was also appointed in regard to the corporate debtor.

Thereafter, the Trial Court issued summons to the appellant in the proceedings initiated by the respondent against the appellant under section 138 of the NI Act. Aggrieved, the appellant approached the High Court challenging the summoning order and further, prayed for the quashing of the section 138 NI Act case against him in view of the moratorium issued under Section 14 of the IBC.

Before the Hon’ble Supreme Court, the appellant’s case was that the corporate debtor was facing insolvency proceedings before the National Company Law Tribunal (NCLT) and a moratorium order was issued under Section 14 of the IBC.

It was submitted that since the moratorium order was imposed and was in operation, therefore, the proceedings under section 138 of the NI Act could not have been initiated against the appellant. It was further submitted that although the cheques were drawn and dishonoured prior to the moratorium date, however, the notice under Section 138 of the NI Act was given post moratorium. Hence, the cause of action for the offence under Section 138 of the NI Act would commence after a period of 15 days but by this time moratorium had already been imposed. 

The Hon’ble Supreme Court observed that the High Court, while dismissing the appellant’s petition, relied upon the judgment of Hon’ble Supreme Court 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 present appellant, who was the Director of the Corporate Debtor. The Hon’ble Supreme Court opined that the High Court erred since the facts of that case were completely different and the present case was distinguishable.

The Hon’ble Supreme Court observed that the return of the cheques dishonoured simpliciter does not create an offence under section 138 NI Act, which provides 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. In other words, the cause of action arises only when the amount remains unpaid even after the expiry of fifteen days from the date of receipt of the demand notice.

The Hon’ble Supreme Court further noted that in the instant case, the moratorium was imposed and management of the corporate debtor was taken over by the interim resolution professional as per section 17 of the IBC. In view of the operation of the section 17 of IBC, 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.

The Hon’ble Supreme Court observed that 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. 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.

The Hon’ble Supreme Court further noted that as informed by the appellant 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 had filed a claim with the IRP. 

The Hon’ble Supreme Court opined that the High Court ought to have quashed the case against the appellant by exercising its power under section 482 of the CrPC.

Accordingly, the Hon’ble Supreme Court allowed the appeal by setting aside the impugned order and quashed the summoning order. Further, the complaint case pending before the Chief Judicial Magistrate Court was also quashed.

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