March 22, 2025 In Legal Support, Real Estate Law, Team

SUPREME COURT RULES ON DIRECTOR’S LIABILITY FOR CHEQUE BOUNCE DURING INSOLVENCY

The Judgment in the Case of Vishnoo Mittal v. M/s Shakti Trading Company CRIMINAL APPEAL NO. OF 2025 @ SPECIAL LEAVE PETITION (CRL) NO.1104 OF 2022was delivered by a Division Bench of the Supreme Courtof India comprising Hon’ble Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullahon March 17, 2025.The case primarily deals with the interplay between Section 138 of the Negotiable Instruments Act 1881 and the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016. It examines whether criminal proceedings for dishonored cheques can be initiated against a director of a corporate debtor when insolvency proceedings are underway.

Brief Facts of the Case

The Appellant, Vishnoo Mittal, was the director of M/s Xalta Food and Beverages Private Limited (Corporate Debtor). A business agreement existed between the Corporate Debtor and M/s Shakti Trading Company, under which the Appellant issued eleven cheques totaling Rs.11,17,326/- in favor of the Respondent. These cheques were dishonored on 7th July 2018. TheRespondent issued a legal notice under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). Following non-payment, a Complaint was filed against the Appellant. Meanwhile, on 25th July 2018 insolvency proceedings were initiated against the Corporate Debtor, leading to the imposition of a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). Despite this, the Trial Court summoned the Appellant, prompting him to seek quashing of the proceedings under Section 482 of the Criminal Procedure Code, 1973 (CrPC) before the Punjab and Haryana High Court, which dismissed his plea. The Appellant then Appealed before the Supreme Court.

Issues Raised

  • Whether the proceedings under Section 138 of the NI Act could be initiated against the Appellant despite the imposition of a Moratorium under Section 14 of the IBC?
  • Whether the Appellant, as a director of the Corporate Debtor, could be held liable for the dishonored cheques when the Corporate Debtorwas undergoing insolvency proceedings
  • Whether the High Court erred in dismissing the Appellant’s plea for quashing the complaint under Section 482 of the CrPC?

Contentions by Both Parties

Contentions by the Appellant

  1. The moratorium under Section 14 of the IBC, imposed on 25th July, 2018 prohibited any proceedings against the Corporate Debtor.

2. Since the demand notice under Section 138 of the NI Act was served after the moratorium was in effect, the cause of action itself arose during the   period of the moratorium.

3. As per Section 17 of the IBC, once insolvency proceedings commence, the management and financial control of the Corporate Debtorare vested in the interim resolution professional (IRP), making it impossible for the Appellant to make payments.

4.  The High Court erred in relying on the Supreme Court’s decision in P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258 since the factual circumstances were different.

Contentions by the Respondent

  1. The moratorium under Section 14 of the IBC applies only to the Corporate Debtorand not to individuals such as directors of the company.

 

  1. As per P. Mohan Raj case (Supra), the bar under Section 14 does not extend to natural persons who are responsible for issuing cheques on behalf of the Corporate Debtor.

 

  • The dishonored cheques were drawn before the moratorium and the Appellant remained liable under Section 138 of the NI Act.

Supreme Court

The Supreme Court ruled in favor of the Appellant, holding that the High Court erred in dismissing the Petition. The Court distinguished the case from P. Mohan Raj (Supra), noting that in the present case, the cause of action under Section 138 of the NI Act arose after the moratorium was imposed. Since the Appellant had been suspended from his position due to the initiation of insolvency proceedings, he lacked the authority to fulfill the payment demand.

Conclusion

The Court emphasized that under Section 17 of the IBC, financial control of the Corporate Debtor was transferred to the IRP, making it impossible for the Appellant to make payments. Consequently, the Supreme Court allowed the Appeal, quashed the High Court’s order and set aside the Complainant’s case pending before the Chief Judicial Magistrate Court, Chandigarh, filed by the Respondent against the Appellant.

 

Baddam Parichaya Reddy

Associate

The Indian Lawyer & Allied Services

 

Please find below the YouTube Link for” Civil Trials in India” (Episode 60: The Indian Lawyer Legal Tips)

https://www.youtube.com/watch?v=yVQy72-nzMU

 

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