Moratorium Under IBC Shields Corporate Debtor—But Can It Also Protect Its Directors?"

Supreme Court Quashes Criminal Proceedings Against Director in Section 138 NI Act Case, Once Moratorium Is Imposed, Director Loses Control—How Can He Be Criminally Liable? - In a significant ruling Supreme Court of India quashed criminal proceedings initiated under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) against a director of a company undergoing insolvency proceedings. The Court overruled the Punjab and Haryana High Court’s order and held that when the cause of action for dishonor of a cheque arises after the imposition of a moratorium under the Insolvency and Bankruptcy Code, 2016 (IBC), the director cannot be held liable under Section 138 NI Act.

The case arose when Vishnoo Mittal, director of M/s Xalta Food and Beverages Private Limited (corporate debtor), issued eleven cheques amounting to ₹11,17,326/- in favor of M/S Shakti Trading Company (respondent). These cheques were dishonored on July 7, 2018, leading to a legal notice under Section 138 NI Act.

However, before any legal proceedings could be initiated, insolvency proceedings were triggered against the corporate debtor on July 25, 2018, before the National Company Law Tribunal (NCLT), resulting in a moratorium under Section 14 of IBC and the appointment of an interim resolution professional (IRP). Despite this, the respondent filed a complaint under Section 138 NI Act in September 2018, leading to a summoning order against Mittal on September 7, 2018.

The appellant challenged this before the Punjab and Haryana High Court under Section 482 CrPC, arguing that the moratorium barred criminal proceedings against him. The High Court, however, dismissed his petition on December 21, 2021, relying on the Supreme Court’s earlier judgment in P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258, which held that a moratorium under Section 14 of IBC does not extend to directors and only protects the corporate debtor.

The appellant then approached the Supreme Court, seeking relief.

"Can a Director Be Held Liable for Non-Payment When He Has No Control Over Company’s Accounts?"

The Supreme Court examined whether a director can be prosecuted under Section 138 NI Act when he no longer controls the corporate debtor’s affairs due to a moratorium. The Court emphasized that under Section 17 of IBC, once a moratorium is imposed,

“the management of the affairs of the corporate debtor shall vest in the interim resolution professional.”

The Court further noted that the board of directors loses all financial powers after the IRP’s appointment: “The financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the interim resolution professional.”

This meant that when the respondent issued a legal notice on August 6, 2018, demanding payment, the appellant no longer had any authority to clear the dues.

“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.”

The Court found it illogical to hold a director criminally liable for non-payment when he was legally incapacitated from fulfilling the demand.

Supreme Court Distinguishes P. Mohan Raj—Cause of Action Arose Post-Moratorium

The High Court had dismissed the appellant’s plea by relying on P. Mohan Raj, where the Supreme Court held that while a moratorium bars proceedings against a corporate debtor, it does not extend to natural persons such as directors.

However, the Supreme Court distinguished the two cases. It pointed out that in P. Mohan Raj, the cause of action for dishonor arose before the moratorium was imposed, whereas in the present case, “The cause of action in the present case arose after the commencement of the insolvency process.”

The Court explained that under Section 138 NI Act, an offence is only committed when:

• A cheque is dishonored.

• A legal notice is issued.

• The drawer fails to make payment within 15 days of receiving the notice.

Here, the legal notice was issued on August 6, 2018, and the non-payment period ended on August 21, 2018, both after the moratorium had been imposed on July 25, 2018. Since the appellant had already lost control of the company’s finances by this date,

“The appellant did not have the capacity to fulfill the demand raised by the respondent by way of the notice issued under clause (c) of the proviso to Section 138 NI Act.”

"Once A Creditor Has Filed a Claim Under IBC, Can They Still Initiate Criminal Proceedings?"

The Court also took note of another crucial fact—the respondent had already filed a claim before the IRP in the corporate insolvency resolution process. This meant that the debt was already being dealt with under IBC mechanisms, rendering criminal prosecution unnecessary.

“We have been informed on behalf of the appellant that, after the imposition of the moratorium, the IRP had made a public announcement inviting claims from creditors, and the respondent has filed a claim with the IRP.”

Given that the insolvency process provides for repayment mechanisms, allowing simultaneous criminal prosecution would lead to legal contradiction and harassment of the appellant.

Supreme Court Quashes Criminal Proceedings Against the Director

Based on these findings, the Supreme Court set aside the High Court’s order and quashed the summoning order, declaring that: “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 held that continuing criminal proceedings in such circumstances would be unjustified, as:

• The cause of action arose after the moratorium was imposed.

• The director was no longer in control of the company’s finances.

• The respondent had already filed a claim under the IBC process.

Thus, the Supreme Court ruled: “We allow this appeal by setting aside the impugned order dated 21.12.2021 and quash the summoning order dated 07.09.2018. Further, we hereby quash the complaint case no.15580/2018, pending before the Chief Judicial Magistrate Court, Chandigarh, filed by the respondent against the appellant.”

This judgment strengthens the legal protection available to directors of companies undergoing insolvency, ensuring they are not wrongfully prosecuted under Section 138 NI Act when they lack the power to clear dues. By distinguishing P. Mohan Raj, the Court clarified that if the cause of action for a cheque bounce case arises post-moratorium, criminal proceedings cannot continue against a director.

With this ruling, the Supreme Court has provided crucial relief to corporate directors caught in insolvency battles, reinforcing the intent and integrity of the IBC framework.

Date of decision: 17/03/2025