Pendency Of Insolvency Proceedings Does Not Absolve Accused From Criminal Liability Under Section 138 NI Act: Madras High Court

"The drawer cannot escape from the criminal liability by putting forward the plea that he is not bound to discharge the liability mentioned in the complaint filed before the criminal court, as he was already declared as an insolvent." Madras High Court, in a important judgment, held that the initiation or pendency of insolvency proceedings does not provide a legal shield to an accused to escape criminal prosecution for the dishonour of a cheque under Section 138 of the Negotiable Instruments Act (NI Act).

Justice N. Senthilkumar observed that proceedings under the NI Act, being quasi-criminal in nature, are distinct from civil proceedings concerning the insolvent's estate.

The petitioner, C. Rajangam, challenged the concurrent findings of the trial court and the appellate court, which convicted him under Section 138 of the NI Act for the dishonour of a cheque worth Rs. 10 lakhs. The petitioner contended that as he had initiated insolvency proceedings in I.P. No. 3 of 2019, he could not be subjected to trial or conviction for the cheque transaction. He argued that the courts below failed to consider the legal impediment created by the insolvency process.

The primary question before the court was whether the pendency of insolvency proceedings under the relevant Insolvency Act bars the continuation or initiation of criminal proceedings under Section 138 of the NI Act against a natural person. The court was also called upon to determine if the doctrine of lex non cogit ad impossibilia (the law does not compel the impossible) could be invoked by an insolvent to avoid criminal liability.

The court meticulously examined the distinction between civil liability regarding an insolvent's property and the personal criminal liability of the drawer of a cheque. Relying on established precedents, the court clarified that the vesting of an insolvent’s property in an Official Assignee under insolvency statutes does not grant immunity for criminal acts.

Criminal Liability Remains Distinct

The bench observed that the phrase "suit or other legal proceedings" in insolvency laws relates strictly to the insolvent’s property. It does not extend to personal actions or criminal prosecutions initiated for the commission of an offence under the NI Act. The court emphasized that the penal provisions of the NI Act are designed to ensure the sanctity of financial transactions, which remains unaffected by the status of the accused as an insolvent.

"The wordings 'any suit or other legal proceedings' would mean the suit or other legal proceedings relating to the property of the insolvent and not with reference to the personal act committed by the accused constituting the offence liable to be proceeded in a criminal Court."

Applicability of Existing Precedents

Addressing the petitioner's reliance on the referral order in Dineshchand Surana vs. UCO Bank, the court clarified that a mere reference of a legal question to a larger bench does not suspend the operation of existing binding law. Until a reference is answered, the law as it stands remains the governing precedent. Consequently, the court held that the view established in P. Mohanraj vs. Shah Brothers Ispat Pvt. Ltd. continues to hold the field.

No Shelter in Pending References

The court reiterated that the legal position regarding the liability of natural persons under Chapter XVII of the NI Act remains robust. A debtor cannot avoid criminal consequences simply because they have sought shelter under insolvency laws. The court underscored that the statutory presumptions under Sections 139 and 140 of the NI Act further reinforce this position, effectively precluding a defence based solely on the initiation of insolvency proceedings.

"It is a settled principle that till the reference is answered the law which was declared either by the Court or by the Hon’ble Supreme Court will be taken as precedent and the reference by itself will not give any shelter or protection to the petitioner."

Finding no merit in the revision petition, the High Court confirmed the conviction and sentence imposed by the courts below. The court's ruling reinforces the principle that criminal liability for dishonoured cheques is independent of insolvency status, ensuring that the remedial objective of the NI Act is not defeated by the insolvency of the drawer.

Date of Decision: 21 September 2026