Supreme Court Quashes Criminal Proceedings Against Director of Insolvent Company in Dishonoured Cheque Case
CORPORATE LAW
In a significant ruling, the Supreme Court of India quashed the criminal proceedings initiated against Vishnoo Mittal, the director of a company undergoing insolvency proceedings, for dishonouring cheques under Section 138 of the Negotiable Instruments Act (NI Act). The Court held that the proceedings could not continue in light of the moratorium imposed on the corporate debtor under the Insolvency and Bankruptcy Code (IBC).
Background of the Case
The appellant, Vishnoo Mittal, was the director of M/s Xalta Food and Beverages Private Limited, which was involved in a business contract with M/s Shakti Trading Company. As part of their business dealings, Mittal had issued eleven cheques totalling Rs. 11,17,326/- in favour of the respondent, Shakti Trading Company. These cheques were dishonoured on July 7, 2018, due to insufficient funds, prompting the respondent to issue a legal notice under Section 138 of the Negotiable Instruments Act. A complaint was filed against Mittal in September 2018 for the dishonoured cheques.
However, on July 25, 2018, the company entered insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), and a moratorium was imposed under Section 14 of the IBC, effectively halting any legal action or suits against the corporate debtor. At the same time, an interim resolution professional (IRP) was appointed to take over the management of the company.
Legal Issue
The crux of the matter centered on whether the criminal proceedings under Section 138 of the NI Act, which were initiated after the moratorium had been imposed, could continue against Vishnoo Mittal, the director of the insolvent company. Mittal argued that since the moratorium had been imposed, no legal action could be pursued against him as an individual, relying on Section 14 of the IBC, which prohibits the institution or continuation of suits against the corporate debtor during the insolvency process.
The appellant's contention was that although the cheques were drawn and dishonoured before the insolvency proceedings, the demand notice under Section 138 of the NI Act was issued on August 6, 2018, which was after the moratorium had been imposed. Therefore, the cause of action under Section 138 did not arise until the expiry of 15 days from the date of the notice, which would be August 21, 2018 — by which time the moratorium was already in effect.
High Court’s Decision
Mittal approached the Punjab and Haryana High Court, seeking the quashing of the complaint, citing the ongoing insolvency proceedings and the imposition of the moratorium. However, the High Court dismissed his petition on December 21, 2021, relying on a 2021 Supreme Court judgment in the case of P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd., which had held that the immunity granted by a moratorium under Section 14 of the IBC applied only to the corporate debtor and not to natural persons such as directors. The High Court, therefore, ruled that the criminal proceedings under Section 138 of the NI Act could proceed against Mittal.
Supreme Court's Judgment
In a detailed judgment delivered by Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullah, the Supreme Court disagreed with the High Court's interpretation. The bench distinguished the present case from the P. Mohan Raj case, pointing out that in that case, the cause of action under Section 138 of the NI Act had arisen before the moratorium was imposed. However, in the present case, the cause of action arose after the imposition of the moratorium, as the demand notice was issued on August 6, 2018, and the statutory period for payment was not over until August 21, 2018 — well within the period of the moratorium.
The Court also observed that the return of dishonoured cheques alone does not constitute an offense under Section 138 of the NI Act. The offense is only completed when the drawer of the cheque fails to make payment within 15 days of receiving the demand notice, as stipulated under Section 138. Since the notice was issued after the insolvency moratorium, and the appellant no longer had control over the corporate debtor's accounts, the proceedings against him were deemed untenable.
Furthermore, the Court referred to Section 17 of the IBC, which specifies that upon the appointment of an interim resolution professional (IRP), the management of the corporate debtor’s affairs passes to the IRP, and the powers of the company’s board, including the director, are suspended. The IRP had control over the company’s financial matters, including the bank accounts, rendering Mittal unable to fulfil the financial obligations arising from the dishonoured cheques.
Conclusion
In light of these observations, the Supreme Court allowed Mittal's appeal, quashing the High Court's decision and setting aside the summons issued by the Magistrate Court. The Court further quashed the criminal complaint filed by the respondent against Mittal, holding that the moratorium under the IBC provided immunity to the appellant, as he was no longer in charge of the company’s financial matters during the insolvency proceedings.
This ruling has significant implications for directors and individuals associated with companies undergoing insolvency proceedings, as it clarifies the extent of the protection offered by a moratorium under the IBC against criminal proceedings initiated under Section 138 of the Negotiable Instruments Act.
The Supreme Court’s decision brings clarity to the relationship between insolvency law and criminal liability, particularly in cases where the corporate debtor's management is transferred to an interim resolution professional during the insolvency process. The judgment underscores the need for a nuanced approach when dealing with such cases, especially where a moratorium has been imposed, limiting the ability of directors to respond to legal actions in their personal capacity.
Key Takeaways:
The Supreme Court ruled that the moratorium under Section 14 of the Insolvency and Bankruptcy Code protects directors from criminal proceedings under Section 138 of the NI Act if the cause of action arises after the imposition of the moratorium.
The judgment distinguishes between the protection afforded to the corporate debtor and natural persons, with the moratorium not extending to directors once they are suspended from their roles during insolvency proceedings.
The Court’s interpretation reinforces the importance of the timing of legal actions in relation to the imposition of a moratorium and the transfer of management control to an interim resolution professional.