SC Quashes NI Act Case Against Director Due to Insolvency and Bankruptcy Code Moratorium

The Supreme Court of India in the case relating to NI Act and Moratorium, disposed of the Punjab and Haryana High Court's order, thus reversing the proceedings initiated against the appellant under Section 138 of the Negotiable Instruments Act, 1881 ('NI Act'). The High Court had dismissed the appellant's petition for quashing the proceedings under Section 482 CrPc.

Background:
A business relationship between Ms Xalta Food and Beverages Private Limited (the 'corporate debtor') and having the appellant as a director, and the respondent, Ms Shakti Trading Company, as a super stockist. The appellant, as a director, had drawn eleven cheques from the corporate debtor in favour of the respondent, which were later dishonoured on 07.07.2018. Accordingly, the respondent sent a legal notice under Section 138 of the NI Act to the appellant on 06.08.2018, since the cheque amounts had not been paid. Consequently, a complaint was filed against the appellant in September 2018 under Section 138 of the NI Act. Notably, prior to the expiry of the fifteen-day period for payment after the notice, on 25.07.2018, insolvency proceedings commenced against the corporate debtor, and a moratorium under Section 14 of the The Insolvency and Bankruptcy Code, 2016 (‘IBC’) (Click to Download) was imposed, with the appointment of an Interim Resolution Professional (‘IRP’) on the same day.

The appellant approached the High Court seeking to quash the proceedings, arguing that the moratorium under Section 14 of the IBC, which came into effect on 25.07.2018, should bar the initiation of proceedings under Section 138 of the NI Act against him. The High Court, relying on the judgment in P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd. (Click to Download), held that the moratorium applied only to the corporate debtor and not to its directors, thus dismissing the appellant’s petition.

Furthermore, the Apex Court highlighted that upon the commencement of the insolvency proceedings and the appointment of the IRP under Section 17 of the IBC on 25.07.2018, the management of the corporate debtor vested with the IRP, and the powers of the Board of Directors, including the appellant, stood suspended. Consequently, the appellant lacked the capacity to make the payment demanded in the notice. The Court also noted that the respondent had filed a claim with the IRP. Taking these factors into consideration, the Supreme Court was of the considered view that the High Court had erred in not quashing the case against the appellant.

Important Observations:
The cause of action for an offence under Section 138 of the NI Act arises only when the drawer of the cheque fails to make the payment within fifteen days of the receipt of the demand notice.

The moratorium under Section 14 of the IBC prohibits the institution or continuation of proceedings against the corporate debtor.

Upon the appointment of the Interim Resolution Professional (IRP) under Section 17 of the IBC, the management of the corporate debtor vests in the IRP, and the powers of the Board of Directors are suspended.

In the present case, the cause of action under Section 138 of the NI Act arose after the imposition of the moratorium under Section 14 of the IBC and the appointment of the IRP under Section 17 of the IBC.

After the imposition of the moratorium and the vesting of management in the Interim Resolution Professional (‘IRP’), the appellant, being a suspended director, did not have the capacity to make the payment demanded under Section 138 of the NI Act as the corporate debtor's financial affairs were under the control of the IRP.

Thus, the Supreme Court distinguished the present case from P. Mohan Raj (Supra) and observed that in P. Mohan Raj case the cause of action under Section 138 of the NI Act had arisen before the imposition of the moratorium, whereas in the present case, the crucial fifteen-day period for making payment after the demand notice expired after the moratorium had already been imposed. The Court reiterated that an offence under Section 138 NI Act is constituted only when the drawer of the cheque fails to make payment within fifteen days of the receipt of the demand notice.

Coram: Justice Sudhanshu Dhulia and Justice Ahsanuddin Amandullah
Between: VISHNOO MITTAL VS MS SHAKTI TRADING COMPANY 2025 INSC 346
Date of Judgment: 17-03-2025