INTRODUCTION
The intersection between the Insolvency and Bankruptcy Code, 2016 (“IBC”), and the Negotiable Instruments Act, 1881 (“NI Act”), has caused significant judicial deliberation, particularly concerning creditor rights, financial discipline, and the resolution of financial distress. Section 138 of the NI Act holds the drawer of the cheque liable in case of dishonour of cheque due to insufficient funds. The provision imposes penal consequences on the drawer, serving as a deterrent against indiscriminate issuances of cheques and safeguarding creditors’ interests.[1]
Conversely, Section 14 of the IBC prescribes a moratorium mechanism once corporate insolvency resolution process (“CIRP”) has commenced against a Corporate Debtor (“CD”), effectively halting legal proceedings against it. The object of Section 14, as laid down by the Hon’ble Supreme Court (“SC”)[2], is to protect the CD’s assets during the CIRP, prevent any further dissipation and ensure a structured resolution process, without interference from individual creditor actions. A moratorium curtails concurrent legal proceedings and minimises the risk of conflicting outcomes in the process.[3]
The effect and fallout of the application of Section 14 of the IBC on pending proceedings under Section 138 of the NI Act has led to legal complexities, with courts grappling to balance the objectives of insolvency resolution with the deterrent function of cheque dishonour proceedings.
This article examines the impact of moratorium on proceedings under the NI Act, judicial interpretations addressing this conflict and potential issues arising therefrom. It further explores the vicarious liability of directors and signatories and emerging concerns surrounding individual insolvency.
I. Scope and Object of Section 14 of the IBC vis-a-vis Section 138 of the NI Act
Under the IBC, although the term ‘moratorium’ does not have an explicit definition, it signifies a period when there is complete prohibition against (i) initiation or continuation of any judicial proceedings against corporate debtor, (ii) transfer of corporate debtor’s assets, (iii) enforcement of security interest created by corporate debtor, (iv) recovery proceedings against corporate debtor, and (v) termination of contracts for supply of essential goods or services to the corporate debtor.[4] This ensures an orderly resolution process, preventing piecemeal recoveries that may frustrate the objectives of insolvency resolution.
In this context, it is also important to examine the nature of the offence of cheque bouncing under the NI Act. The SC has observed that the gravity of a complaint under the NI Act cannot be equated with an offence under the criminal law. An offence under Section 138 of the NI Act, is almost in the nature of a civil wrong, which has been given criminal overtones.[5] Further, offence under Section 138 was termed as a regulatory offence. It was also noted that the nature of the offence under Section 138 is primarily related to a civil wrong and the 2002 Amendment specifically made it compoundable.[6]
Against this backdrop, the key question that arises is whether moratorium under IBC, which primarily ensures providing a period of calmness to the CD and applies to civil and recovery proceedings, extends to cheque dishonour proceedings, which have a penal element.
II. Position of law – Pre-Mohanraj judgment
Before the SC’s definitive ruling in P. Mohanraj v. Shah Bros. Ispat (P) Ltd.[7], courts were divided on whether Section 14 of the IBC applied to proceedings under Section 138 of the NI Act.
The issue first arose in Tayal Cotton Pvt. Ltd. v. State of Maharashtra[8], wherein the Bombay High Court was examining the issue of imposition of moratorium upon Section 138 proceedings under the NI Act. The High Court did not take into consideration the nature of cheque bounce cases, i.e., it being quasi-criminal. While placing reliance on Indorama Synthetics India Limited Nagpur v. State of Maharashtra and Others[9] (in this case, the Court was looking into interplay between the IBC and the Companies Act), it was held that the phrase “suits or proceedings” appearing in Section 14 of the IBC, is not inclusive of proceedings under Section 138 of the NI Act.
Similarly, the Calcutta High Court in MBL Infrastructure Ltd. v. Manik Chand Somani[10], was dealing with a situation wherein during the pendency of proceedings under Section 138 of the NI Act, the magistrate took cognisance and issued process despite an existing CIRP against the company herein. It was held that the declaration of moratorium does not create any bar for continuation of criminal proceedings against the company or its directors under Section 138 and 141 of the NI Act.
III. Position of law – Mohanraj Decision and subsequent rulings
The SC in P. Mohanraj v. Shah Bros. Ispat (P) Ltd.[11], was examining the issue of whether any proceedings can be initiated against a company under Section 138 of the NI Act, if the National Company Law Tribunal (“NCLT”) has already passed an order of moratorium under IBC against a company.
The SC held that Section 14 of the IBC is wide and includes within its ambit a moratorium on institution, continuation, passing of judgment, and execution of suits and proceedings against a CD. The word “proceedings” used in Section 14 in the phrase “proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority” would also cover within its ambit proceedings under Section 138 of the NI Act. It is a proceeding in a court of law in respect of a transaction, which relates to a debt owed by the CD. However, the Court held that the proceedings against the directors would continue even if the proceedings against the CD are halted on account of moratorium.
Thus, the SC overruled the decisions of the Bombay and Calcutta High Courts in Tayal Cotton (supra.)and MBL Infrastructure (supra.),respectively.
Subsequent rulings have reinforced this stance. In Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corpn. of India Ltd.[12], the SC was posed with a question similar to P. Mohanraj (supra.). The Court was looking into the facts wherein proceedings under the NI Act had begun, and cognizance of the complaint had been taken. During the pendency of this case, the accused company faced CIRP. In this context,relying on P. Mohanraj (supra.), it was held that if proceedings under Section 138 of the NI Act had already commenced before the magistrate and during the pendency the company gets dissolved, the signatories/ directors remain liable under Section 138 of the NI Act despite the dissolution of the company.
Recently, the SC in Vishnoo Mittal v. M/s. Shakti Trading Company[13] was looking into facts wherein cheques issued by a director, although were dishonoured before the imposition of moratorium on account of initiation of CIRP against the corporate debtor, the cause of action arose only after such moratorium was imposed. The SC referred to clause (c) of the proviso to Section 138 of the NI Act and held that cause of action arises only when demand notice is served and payment is not made pursuant to such demand notice within the stipulated fifteen-day period. The return of cheques dishonoured simpliciter does not create an offence under Section 138 of the NI Act. Thus, distinguishing the facts of this case from P. Mohanraj (supra.), the SC held that the cause of action having arisen after commencement of insolvency process, the director did not have the capacity to fulfil the demand raised by way of notice, since he was not in charge of the corporate debtor upon appointment of IRP by virtue of Section 17 of the IBC.
IV. Vicarious liability – Aneeta Hada Judgement and its implications
Section 141 of the NI Act deals with vicarious liability of individuals in cases of cheque dishonour. The SC recently observed that there are twin requirements for an offence to fall under Section 141, i.e. it must be alleged that the person, who is sought to be held liable by virtue of vicarious liability, at the time when the offence was committed, was in charge of, and was responsible for the conduct of the business of the company.[14]
The SC in Aneeta Hada & Ors. v. Godfather Travels and Tours Pvt. Ltd. and Ors.[15] was dealing with a case wherein the appellant issued a cheque in favour of the respondent, which was dishonoured. The respondent filed a complaint under Section 138 of the NI Act wherein the company was not arrayed as an accused. However, the magistrate took cognizance of the offence against the accused appellant.
The SC looked into the issue of whether any person/ employee can be prosecuted without the company being made a party to the proceedings as an accused. It was held that if the person committing the offence under Section 138 of the NI Act is a company, then the company as well as every person in charge of and responsible to the company for the conduct of business of the company at the time of commission of offence is deemed to be guilty of the offence. Where the law requires a guilty mind as a condition of a criminal offence, the guilty mind of the directors or the managers will render the company itself guilty. Thus, arraigning of the company as the accused under Section 141 is mandatory.
Thus, there cannot be any vicarious liability unless there is prosecution against the company. In the event moratorium against a company has already been imposed pursuant to the commencement of CIRP, but the cheque was presented subsequently, proceedings under Section 138 can continue against the director. However, in light of Aneeta Hada (supra), the proceedings under Section 138 will first have to be initiated against both the company and the director, and then such proceedings qua the company may be stayed by the court.
In light of decisions in P. Mohanraj (supra.) and Ajay Kumar Radheyshyam Goenka (supra.), it has been held that proceedings under Section 138 of the NI Act will stand terminated only in relation to the CD if the same is taken over by a new management. Section 138 NI Act proceedings in relation to the signatories/ directors, who are liable, will continue in accordance with law. A pertinent question that arises is — how can directors of a dissolved company be prosecuted for cheques that were issued on behalf of and in the name of the company, once CIRP has been completed. In such a case, the requirement of impleadment of company becomes infructuous.
Further, in the recent Shri Gurudatta Sugars Marketing Pvt. Ltd. Versus Prithviraj Sayajirao Deshmukh & Ors.[16], the SC has held that an authorised signatory of the company could not be considered as a ‘drawer’ of cheque, and therefore, could not be directed to pay interim compensation to the complainant under Section 143A of the NI Act.
V. Stay of 138 proceedings if moratorium imposed under Section 96 of the IBC
The applicability of moratorium provisions to individual insolvency remains contentious. In this regard, it would be relevant to refer to the following two High Court judgments:
i. Sandeep Gupta vs. Shri Ram Steel Traders & Anr.[17] adjudicated by the Delhi High Court on May 15, 2023
In this case, Sandeep Gupta, the Managing Director of Richa Industries Limited, faced proceedings under Section 138 of the NI Act due to dishonour of a cheque amounting to INR 6 crore, which was issued to Shri Ram Steel Traders. The cheque was signed by him for and on behalf of Richa Industries Limited.
During the pendency of the proceedings under Section 138, Sandeep Gupta filed an application under Section 94 of the IBC for personal insolvency resolution process, on account of his mounting liabilities, especially since two creditors of Richa Industries Limited invoked guarantees that were given by Sandeep Gupta (as surety).
Accordingly, he sought to quash Section 138 proceedings, contending that his application for personal insolvency under Section 94 of the IBC before the NCLT triggered an interim moratorium under Section 96 of the IBC, thereby staying all legal actions against him.
The Delhi High Court examined whether the interim moratorium under Section 96 of the IBC applies to individuals facing criminal proceedings under Section 138 of the NI Act. It referred to the SC’s decision in P. Mohanraj (supra.), which clarified that while a moratorium under Section 14 of the IBC applies to corporate debtors, it does not extend to natural persons such as directors or signatories of cheques. Consequently, the court concluded that interim moratorium under Section 96 of the IBC does not shield individuals from criminal proceedings under Section 138 of the NI Act. Therefore, the Delhi High Court dismissed Sandeep Gupta’s petition, allowing proceedings under Section 138 of the NI Act to continue against him.
However, the Court also made an observation that the case would have been different if personal liability of Sandeep Gupta was in question (i.e. if he was not arrayed as an accused in his capacity as a Managing Director/ natural person under Section 141 of the NI Act). In such a case, the moratorium would apply to him. But in the present case, the debt of Richa Industries Limited is not Sandeep Gupta’s personal debt and hence no moratorium will apply to Section 138 proceedings qua Sandeep Gupta.
Therefore, the moratorium protects only the corporate debtor (i.e., the company), while the signatories or directors remain liable under Section 138 of the NI Act, even if they file for personal insolvency proceedings.
ii. Surendra Kumar Patwa vs. Dharmendra Vohra[18], adjudicated by the Madhya Pradesh High Court on October 25, 2024,
In this case, the petitioner, i.e. Surendra Kumar Patwa, faced proceedings under Section 138 of the NI Act due to dishonour of a cheque issued by him to the respondent, Dharmendra Vohra. One of the creditors of the petitioner, namely, Bank of Baroda, filed an application for initiating insolvency resolution process under Section 95 of the IBC before the NCLT, Indore. Patwa contended that an interim moratorium declared by NCLT, Indore, under Section 96 of the IBC, should stay all legal actions against him, including the ongoing proceedings under Section 138 of the NI Act.
The court examined whether the interim moratorium under Section 96 of the IBC applies to criminal proceedings under Section 138 of the NI Act and held that the law laid down in P. Mohanraj (supra.) is applicable to the given case. The court held that the proceedings against the petitioner under Section 138 of the NI Act shall remain stayed till the moratorium declared by NCLT under Section 96 of the IBC is in operation.
The court distinguished this case from the decision passed in Sandeep Gupta (supra.),observing that the latter was a case in which the petitioner himself had approached the NCLT by moving an application under Section 94 of the IBC for initiating personal insolvency proceedings whereas in Surendra Kumar Patwa (supra.), one of the creditors has approached the NCLT by moving an application under Section 95 of the IBC.
The decision in Sandeep Gupta (supra.) has now been challenged in SLP 9316/2023 before the SC. By an order dated April 30, 2024, interim stay on further proceedings was directed. Various courts in the country have taken different views on the applicability of moratorium under Section 196 of the IBC to proceedings pending under Section 138 of the NI Act. This issue is now before the SC, with the lead matter being Rakesh Bhanot v. M/S. Gurudas Agro Pvt. Ltd., SLP 6087/2023 (reserved for order on December 17, 2024). It will be interesting to see the observations of the SC in this regard.
CONCLUSION
The interplay between the IBC and the NI Act remains a complex and dynamic area of jurisprudence. While the SC’s ruling in P. Mohanraj settled the issue for corporate debtors, significant uncertainties remain, particularly concerning the impact of moratorium on account of individual insolvency resolution process on cheque dishonour cases. Clarity from the SC will be crucial in ensuring a balanced approach that accommodates both the objectives of insolvency resolution under IBC and the deterrence function of Section 138 of the NI Act. Future judicial pronouncements will shape this evolving legal intersection, determining the extent to which insolvency law can shield individuals from penal consequences under the NI Act.
[1] Vinay Devanna Nayak v. Ryot Sewa Sahakari Bank Ltd., (2008) 2 SCC 305; Electronics Trade & Technology Development Corpn. Ltd. v. Indian Technologists & Engineers (Electronics) (P) Ltd., (1996) 2 SCC 739.
[2] Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17.
[3] Sundaresh Bhatt, Liquidator of ABG Shipyard Vs. Central Board of Indirect Taxes and Customs, (2023) 1 SCC 472
[4] Section 14 of the IBC.
[5] Kaushalya Devi Massand v. Roopkishore Khore, (2011) 4 SCC 593.
[6] Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.
[7] (2021) 6 SCC 258.
[8] 2018 SCC OnLine Bom 2069.
[9] 2016 (4) Mah LJ 249.
[10] 2019 SCC OnLine Cal 9097.
[11] (2021) 6 SCC 258.
[12] (2023) 10 SCC 545.
[13] 2025 SCC OnLine SC 558.
[14] Hitesh Verma v. M/S Health Care at Home India Pvt. Ltd., Criminal Appeal No(s). 462 of 2025 (arising out of S.L.P. (Criminal) No(s). 8368/2019) (Diary No. – 29293/2019)
[15] AIR 2012 SC 2795.
[16] (2024) 246 Comp Cas 1
[17] Sandeep Gupta v. Shri Ram Steel Traders, 2023 SCC OnLine Del 2786
[18] MANU/MP/3889/2024