Supreme Court ruled that cheque bounce proceedings against the director are unsustainable as the cause of action arose after the imposition of the moratorium under the IBC.
On 17-03-2025, the Supreme Court Bench of Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullah reviewed a criminal appeal along with a connected SLP and held that proceedings under Section 138 of the NI Act against the director were unsustainable, as the cause of action arose post-moratorium, at which point he had already been divested of control due to the appointment of an IRP under Section 17 of the IBC, making compliance with the statutory demand notice impossible.
Leave was granted. The appellant challenged the order dated 21.12.2021 of the Punjab and Haryana High Court, which had dismissed his petition under Section 482 of the CrPC seeking quashing of proceedings under Section 138 of the NI Act. The appellant, as the director of M/s Xalta Food and Beverages Private Limited, had drawn eleven cheques in favour of the respondent, M/s Shakti Trading Company, which functioned as a super stockist for the corporate debtor. These cheques, amounting to approximately Rs. 11,17,326/-, were dishonoured on 07.07.2018. A legal notice under Section 138 of the NI Act was issued by the respondent when the cheque amounts were not realized. Subsequently, in September 2018, the respondent filed a complaint before the appropriate court. Meanwhile, insolvency proceedings commenced against the corporate debtor on 25.07.2018, and a moratorium under Section 14 of the IBC was imposed, along with the appointment of an interim resolution professional (IRP) on the same day.
The trial court issued summons to the appellant on 07.09.2018. Aggrieved, he approached the High Court, contending that the moratorium barred proceedings against him. The High Court dismissed his petition, relying on the Supreme Court’s ruling in P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, REEDLAW 2021 SC 03526, which held that the moratorium under Section 14 of the IBC applied only to corporate debtors and not to natural persons, such as directors. The appellant then approached the Supreme Court.
The Supreme Court examined Section 14 of the IBC, which prohibits the institution or continuation of suits and proceedings against the corporate debtor. The appellant argued that since the demand notice under Section 138 of the NI Act was issued post-moratorium on 06.08.2018, the cause of action for the offence arose after 21.08.2018 when the fifteen-day period under Section 138(c) expired. By that time, the moratorium had already come into effect. Distinguishing the present case from P. Mohan Raj, the Court noted that in that case, the cause of action had arisen before the moratorium was imposed, whereas in the present case, it arose afterwards.
The Supreme Court also analyzed Section 138 of the NI Act, emphasizing that mere dishonour of a cheque does not constitute an offence unless the statutory demand notice is issued and payment is not made within fifteen days. Referring to Jugesh Sehgal v. Shamsher Singh Gogi, (2009) 14 SCC 683, the Court reiterated that all elements of Section 138 must be satisfied cumulatively for an offence to be made out.
Furthermore, under Section 17 of the IBC, upon the appointment of the IRP, the powers of the board of directors stood suspended. The appellant, being divested of control, was unable to discharge the liability. The IRP took over management and bank operations, rendering it impossible for the appellant to comply with the demand notice. Consequently, the Supreme Court held that proceedings under Section 138 of the NI Act against the appellant were unsustainable and set aside the High Court’s order, thereby quashing the complaint against him.
Mr. Abhishek Anand, Mr. Karan Kohli, Mr. Krishna Sharma, Advocates and Mr. Mithu Jain, AOR, represented the Appellant.
Mr. Triloki Nath Razdan, AOR appeared for the Respondent.
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