IBC Moratorium Nullifies Vicarious Liability Under Section 138 of NI Act: Delhi High Court

Delhi High Court quashed proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) against directors and authorized signatories of a corporate debtor undergoing a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). The Court held that with the imposition of a moratorium under Section 14 of the IBC, directors and authorized signatories cease to have control over the corporate debtor’s accounts, absolving them of liability for cheque dishonor during CIRP.

The petitioners, a suspended director and an authorized signatory, challenged the summoning order issued under Section 138 NI Act for dishonor of two cheques amounting to ₹10,00,000 each. These cheques, issued in compliance with a National Consumer Disputes Redressal Commission (NCDRC) order, were dishonored after the debtor company entered CIRP on October 31, 2019. The dishonor occurred due to "Drawer Signature to operate account not received," a result of the IRP’s exclusive control over the corporate debtor’s accounts during CIRP.

The Court emphasized that the IBC moratorium under Section 14 bars the operation of the debtor’s accounts, vesting exclusive authority with the IRP. Quoting Govind Prasad Todi v. Govt. of NCT of Delhi (2023), it reiterated:

“Once CIRP begins, directors and authorized signatories are no longer ‘in charge of’ or ‘responsible for’ the corporate debtor’s affairs, precluding their vicarious liability under Section 138 NI Act.”

Additionally, the Court held that the essential ingredients of Section 138 NI Act were not satisfied, as the cheques were incapable of being encashed post-moratorium. The dishonor could not be attributed to the petitioners, as their authority over the accounts ceased with the commencement of CIRP.

The Court quashed the summoning order and all consequential proceedings, allowing the petitions. It held:

“The statutory framework of the IBC, including the moratorium under Section 14, nullifies the petitioners’ liability for cheque dishonor during CIRP.”

This judgment underscores the precedence of IBC provisions over penal statutes like the NI Act during insolvency, ensuring fair resolution for creditors while protecting corporate debtors from parallel liabilities.

Decision Date: December 17, 2024