Director Cannot Be Held to Honour Cheques Once IRP Takes Charge; Supreme Court Quashes Section 138 Complaint

A bench of Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullah heard an appeal by a former director challenging the Punjab and Haryana High Court’s refusal to quash proceedings under Section 138 of the Negotiable Instruments Act arising from dishonour of multiple cheques. The appeal questioned whether criminal proceedings against the director could proceed after a moratorium and appointment of an interim resolution professional (IRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).

The Court allowed the appeal, set aside the High Court’s order dated 21.12.2021 and quashed the summoning order dated 07.09.2018 as well as the complaint No.15580/2018 pending before the Chief Judicial Magistrate, Chandigarh. The Court held that where the moratorium under Section 14 IBC had commenced and management vested in the IRP under Section 17, the director lacked the capacity to satisfy a demand made under the proviso to Section 138 NI Act and criminal proceedings were not maintainable against him in those circumstances. The Court distinguished P. Mohan Raj v. Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258 on facts, noting that in that case the cause of action had arisen before the moratorium. The Court, in its reasoning, observed: “The bare reading of the above provision shows that 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. 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 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. Additionally, we have been informed on behalf of the appellant that, 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 has filed a claim with the IRP.” The Court also reiterated that “Clause (c) of the proviso to Section 138 of NI Act makes it clear 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.”

Background

The dispute arose from a commercial relationship between M/s Xalta Food and Beverages Pvt. Ltd. (the corporate debtor) and M/s Shakti Trading Company (respondent), in which the respondent acted as super stockist. The appellant, a director of the corporate debtor, had issued eleven cheques totalling Rs.11,17,326/-, which were dishonoured on 07.07.2018. A demand notice under Section 138 NI Act was served on the appellant on 06.08.2018 and a complaint followed in September 2018. Independently, insolvency proceedings against the corporate debtor commenced on 25.07.2018 before the National Company Law Tribunal and a moratorium under Section 14 IBC was declared the same day, with an IRP appointed and management vesting in the IRP under Section 17.

The appellant filed a Section 482 CrPC petition before the Punjab and Haryana High Court seeking quashing of the criminal proceedings on the ground that the moratorium and appointment of the IRP precluded initiation or continuation of proceedings for recovery and that he lacked capacity to meet the demand. The High Court dismissed the petition relying on this Court’s decision in P. Mohan Raj, which held that moratorium protection applied to the corporate debtor and not to statutory liability of natural persons under Sections 141(1) and (2) NI Act. The Supreme Court, however, differentiated P. Mohan Raj on the key temporal fact: in that case the cause of action (expiry of the 15‑day period after demand) had arisen before the moratorium, whereas in the present matter the demand period and cause of action fell after the moratorium and after the IRP had assumed control. The Court noted that Section 17 suspended the board’s powers, bank accounts were subject to IRP’s instructions, and the respondent had filed its claim with the IRP; on these grounds it exercised its powers under Section 482 CrPC to quash the criminal complaint. The appeal was allowed and pending applications were disposed of.

Case Details: Case No.: Special Leave Petition (CrL) No. 1104 of 2022; citation 2025 INSC 346 Case Title: Vishnoo Mittal v. M/s Shakti Trading Company Appearances: For the Petitioner(s): [Names not indicated in judgment] For the Respondent(s): [Names not indicated in judgment]