IBC Moratorium No Shield Against Personal Criminal Liability Under Section 138 NI Act: Supreme Court Directs Director to Pay 25% Cheque Amount or Face Jail

“Liquidation of Company Does Not Extinguish Criminal Prosecution for Cheque Bounce Against Its Director”— Supreme Court dismissed two appeals arising from a dishonoured cheque prosecution under Section 138 of the Negotiable Instruments Act, 1881. The appellant, a director of a company under liquidation, had defaulted on compliance with a Gujarat High Court order requiring him to deposit 25% of the cheque amount (₹2.5 crore). A bench comprising Justices Dipankar Datta and Prashant Kumar Mishra ruled:

“There is no reason to hold that because the company has been liquidated, the appellant has no liability… The appellant was convicted even before the insolvency process was initiated.”

The Court granted a final window of eight weeks to deposit the requisite amount, warning that failure would result in custody.

The appellant had been convicted on 3 April 2017 by the NIA Court, Ahmedabad, for issuing dishonoured cheques and sentenced to two years’ imprisonment, along with a direction to pay ₹2.5 crore in compensation. During the pendency of his appeal, the National Company Law Tribunal (NCLT) ordered liquidation of the appellant’s company on 19 March 2018.

Although liquidation proceedings were underway, the conviction was upheld by the Sessions Court on 26 July 2018. An application to suspend sentence was allowed by the High Court on 13 August 2018, but subject to a specific condition: 25% of the cheque amount had to be deposited within three months. The appellant failed to comply, prompting the complainant to seek cancellation of bail, which was granted on 25 September 2019.

Does the IBC Moratorium Shield a Director from Section 138 NI Act Prosecution?
The crux of the appellant’s argument was that the company’s liquidation under the Insolvency and Bankruptcy Code (IBC) immunized him from criminal prosecution, or at least from the bail conditions imposed by the High Court. The Supreme Court resoundingly rejected this proposition.

Referring to its own recent ruling in Rakesh Bhanot v. Gurdas Agro (P) Ltd. (2025 SCC OnLine SC 728), the Court emphasized: “The moratorium under Sections 96 and 101 of the IBC is not intended to shield individuals from personal criminal liabilities arising from their actions outside the scope of corporate debt restructuring.”

“The proceedings under Section 138 NI Act pertain to dishonour of cheques issued in personal capacity… and aim to uphold the integrity of commercial transactions.”

The Court clarified that while the IBC moratorium offers protection against civil debt recovery, it does not bar prosecution under penal provisions like Section 138. It further held: “Statutory liability under Section 138 is personal and continues to bind natural persons irrespective of any moratorium applicable to the corporate debtor.”

Failure to Comply with High Court Order Is Inexcusable
The Court found the appellant’s defiance of the High Court’s order to be unjustifiable. His argument of lacking financial resources due to liquidation was deemed insufficient: “His position is that of a personal guarantor… He cannot now claim protection by urging that proceedings under Section 138 cannot be carried forward.”

Still, showing limited indulgence, the Court gave the appellant eight weeks to deposit 25% of the cheque amount in the High Court Registry. It held: “Till that time, the appellant’s liberty shall not be curtailed… However, if payment is not made within the period, the appellant shall expose himself to be taken into custody.”

It also allowed the High Court to consider any amount already paid, based on documentary proof, and to give opportunity to the complainant and official liquidator to respond.

Upholding the sanctity of criminal liability under Section 138 NI Act, the Supreme Court declared that liquidation proceedings under IBC cannot be misused to evade prosecution. It reaffirmed the personal liability of directors and signatories of dishonoured cheques, even when their companies undergo insolvency.

“Acceptance of a resolution plan or company liquidation has no bearing on personal prosecution under the NI Act… A director cannot hide behind the corporate veil when statutory liability attaches to him personally.”

Date of Decision: 23 April 2025