Section 138 NI Act Liability Of Directors Subsists Despite Initiation Of Liquidation Proceedings Against Company: Supreme Court

"Liability under S.138 of the NI Act would subsist despite the initiation of proceedings under the Insolvency and Bankruptcy Code, 2016," Supreme Court, in a significant affirmation of corporate accountability, has held that the criminal liability of directors under Section 138 of the Negotiable Instruments Act, 1881, remains unaffected by the subsequent initiation of liquidation proceedings against the accused company.

A bench comprising Justice B.V. Nagarathna and Justice Ujjal Bhuyan, in an order dated April 16, 2026, refused to interfere with a Bombay High Court judgment which had set aside the discharge of directors in a cheque bounce case. The Court emphasized that once the offence is completed, the subsequent change in the company's status under the Insolvency and Bankruptcy Code (IBC) does not absolve the individuals responsible for the company's conduct.

The matter originated from a loan of ₹15,00,000 taken by the petitioners from Ortho Relief Hospital and Research Centre, which was allegedly sought to be repaid through a post-dated cheque dated December 12, 2018. Following the dishonour of the cheque on December 14, 2018, a complaint under Section 138 of the NI Act was filed in February 2019. Crucially, an order of liquidation was passed against the accused company only later, on April 8, 2019, leading the Trial Court to discharge the directors on the grounds that they had lost their positions post-liquidation.

The primary question before the court was whether the directors of a company can be discharged from criminal proceedings under the NI Act solely because the company entered liquidation after the cheque was dishonoured. The court was also called upon to determine if the protections or moratoriums under the Insolvency and Bankruptcy Code, 2016, extend to the individual criminal liability of the authorized signatories and directors.

The Supreme Court upheld the view that the statutory liability under the Negotiable Instruments Act is triggered at the time of the dishonour of the cheque and the subsequent failure to make payment within the notice period. The bench noted that the subsequent liquidation of the company does not provide a "safe haven" for directors who were in charge of the company's affairs at the time the offence was committed.

Offence Under Section 138 Completed Prior To Liquidation

The High Court of Judicature at Bombay, Nagpur Bench, whose order the Supreme Court affirmed, had observed that the criminal proceedings were already set in motion before the liquidation order was passed. The High Court found that the Trial Court had erred in its 2025 order by discharging the petitioners based on their loss of directorship post-liquidation.

IBC Proceedings Do Not Extinguish Individual Criminal Liability

The court reiterated the settled legal position that while the company itself might undergo a moratorium or liquidation under the IBC, the natural persons—the directors and authorized signatories—remain liable under Section 141 of the NI Act. This principle ensures that the corporate veil is not used to shield individuals from criminal consequences arising from the dishonour of cheques issued during the active management of the company.

"Liability under S.138 of the NI Act would subsist despite the initiation of proceedings under the Insolvency and Bankruptcy Code, 2016."

Supreme Court Refuses To Interfere With High Court Findings

Upon hearing the counsel for both sides at length, the Supreme Court bench stated that it found no reason to interfere with the impugned order passed by the High Court. By dismissing the Special Leave Petition, the apex court has effectively cleared the path for the trial to proceed against the directors, regardless of the company’s current status in liquidation.

Contentions Left Open For Trial

While dismissing the petition, the bench clarified that all other contentions on the merits of the case remain open for both parties to advance before the Trial Court. The Court’s decision focused specifically on the maintainability of the criminal prosecution against the directors despite the intervening insolvency proceedings of the corporate entity.

The dismissal of the Special Leave Petition reinforces the judicial stance that insolvency or liquidation of a corporate entity does not grant immunity to its directors for past criminal acts under the NI Act. The ruling ensures that the objective of Section 138—to maintain the credibility of negotiable instruments—is not frustrated by subsequent corporate restructuring or dissolution processes.

Date of Decision: 16 April 2026