No S.138 NI Act Case Against Ex-Director Of Company When Cause Of Action Arose After IBC Moratorium Was Declared: Supreme Court

The Supreme Court held that if the cause of action for the offence of cheque dishonour under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) has arisen after the declaration of moratorium with respect to the company as per the Insolvency & Bankruptcy Code, 2016 (IBC), then the proceedings under S.138 NI Act cannot be continued against the ex-director of the company. The Court reasoned that upon imposition of the moratorium, the board of directors' powers are suspended, and management of the corporate debtor is taken over by the Insolvency Resolution Professional (IRP). As a result, directors cannot be held liable for actions they are no longer authorized to take.“When the notice was issued to the appellant (director), 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.”, the Court observed. The bench comprising Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullah heard the case arising out of the Punjab & Haryana High Court where the High Court refused to quash the proceedings initiated against the appellant under the NI Act. Relying on the judgment in P. Mohan Raj vs. M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258, the High Court held that the moratorium under Section 14 of the IBC applies only to the corporate debtor and not to its directors. Setting aside the High Court's decision, the judgment authored by Justice Dhulia distinguished P. Mohan Raj's case with the facts of the present case. The Court noted that in P Mohan Raj's case, the cause of action for initiating a cheque bounce proceedings arose before the imposition of the moratorium, hence the director was not relieved of its liability under the NI Act in P Mohan Raj's case. However, in this case, the cause of action for initiating the cheque dishonour proceedings arose after the moratorium was imposed, which prevented the Appellant-director from assuming any liabilities of the company, as the IRP had taken over the entire management of the corporate debtor. “In P.Mohan Raj, 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 as the cause of action in the present case arose after the commencement of the insolvency process.”, the court observed.Cause of action for S.138 NI Act arises after the lapse of fifteen days following the demand noticeThe Court also explained that the cause of action for S.138 NI Act arises not on the dishonour of the cheque but when the amount remains unpaid after the expiry of fifteen days after the demand notice.In this case, the moratorium was declared on 25.07.2018. The cheque was issued and was dishonoured prior to the declaration of moratorium. However, the demand notice was issued on 06.08.2018, after the moratorium. Hence, the cause of action for the offence under Section 138 of the NI Act would commence after a period of 15 days calculated from 06.08.2018 and it would be 21.08.2018, but by this time moratorium had already been imposed on 25.07.2018."The return of the cheques dishonoured simpliciter does not create an offence under section 138 NI Act...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 Court observed.Accordingly, the Court allowed the appeal and quashed the cheque dishonour case against the appellant.“Keeping in mind the above observations and distinguishing facts and circumstances of this case from that of P. Mohan Raj, 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.”, the Court said.Case Title: VISHNOO MITTAL VERSUS M/S SHAKTI TRADING COMPANYCitation : 2025 LiveLaw (SC) 314Click here to read/download the judgmentAppearance: For Petitioner(s) Mr. Abhishek Anand, Adv. Ms. Mithu Jain, AOR Mr. Karan Kohli, Adv. Mr. Krishna Sharma, Adv. Ms. Vanshika Dhoot, Adv. For Respondent(s) Mr. A D S Jattana, ...

No S.138 NI Act Case Against Ex-Director Of Company When Cause Of Action Arose After IBC Moratorium Was Declared: Supreme Court

Yash Mittal

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Yash Mittal

No S.138 NI Act Case Against Ex-Director Of Company When Cause Of Action Arose After IBC Moratorium Was Declared: Supreme Court

Yash Mittal

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