Prosecution halted under Negotiable Instruments Act due to Insolvency Code moratorium

The court found that prosecution under Section 138 read with Section 141 of the Negotiable Instruments Act against the respondents could not continue due to the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code. The court held that the freezing of the corporate debtor's bank accounts during the moratorium absolved the respondents from liability, as they were not in control of the company's financial operations when the cheques were dishonored. The Revisional Court's decision to set aside the order of process issuance against the respondents was upheld, following precedent that prosecution under Section 138 cannot be maintained when bank accounts are frozen due to a moratorium.

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Issues Involved:
1. Whether prosecution under Section 138 read with Section 141 of the Negotiable Instruments Act (NI Act) can continue against the respondents in light of the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code (IBC).
2. The effect of the moratorium on the liability of natural persons involved with the corporate debtor.
3. The impact of the freezing of the corporate debtor's bank accounts on the prosecution under Section 138 of the NI Act.

Issue-wise Detailed Analysis:

1. Prosecution under Section 138 read with Section 141 of the NI Act in light of the IBC moratorium:

The court examined whether the prosecution for dishonor of cheques under Section 138 read with Section 141 of the NI Act could continue against the respondents given the moratorium imposed under Section 14 of the IBC. The moratorium was imposed on the corporate debtor, prohibiting the continuation of suits or proceedings, including those under Section 138 of the NI Act. The court noted that the moratorium was ordered on 08/01/2019, which was before the cheques were presented for encashment on 11/04/2019 and 02/05/2019. Thus, the respondents were no longer in control of the company's day-to-day affairs when the cheques were dishonored.

2. Liability of natural persons under Section 141 of the NI Act:

The court discussed the liability of natural persons (directors and others responsible for the company's affairs) under Section 141 of the NI Act in the context of the moratorium. The court referenced the Supreme Court's judgment in P. Mohanraj and Others vs. Shah Brothers Ispat Private Limited, which held that while the moratorium under Section 14 of the IBC applies to the corporate debtor, it does not extend to natural persons who can still be prosecuted under Section 141 of the NI Act. However, in this case, the court found that the cheques were dishonored due to the moratorium, which froze the company's bank accounts, thus absolving the respondents from liability.

3. Freezing of the corporate debtor's bank accounts:

The court noted that the cheques were dishonored for the reason "Drawer's Signature Differ," which occurred after the moratorium was imposed and the Insolvency Resolution Professional (IRP) took over the management of the company. The court emphasized that the freezing of the company's bank accounts due to the moratorium meant that the respondents were no longer in control of the company's financial operations. Therefore, the ingredients for constituting the offence under Section 138 of the NI Act occurred post-imposition of the moratorium, and the respondents could not be blamed for the dishonor of the cheques.

Conclusion:

The court concluded that the Revisional Court was justified in setting aside the order of issuance of process against the respondents. The court agreed with the observations made in the case of Rajesh Meena vs. State of Haryana and Others, which held that the prosecution under Section 138 of the NI Act could not be maintained when the company's bank accounts were frozen due to the moratorium. Consequently, the revision applications were dismissed.

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