2025 (3) TMI 839 - SC - Indian Laws

Suspended director cannot be prosecuted under Section 138 when company under insolvency moratorium

VISHNOO MITTAL Versus M/s SHAKTI TRADING COMPANY

The SC allowed the appeal and set aside the HC order and summoning order in a dishonour of cheque case. The corporate debtor was under insolvency ... Dishonour of Cheque - case of the appellant is that the corporate debtor is presently facing insolvency proceedings before the National Company Law Tribunal (NCLT) and a moratorium order was issued u/s 14 of the IBC - HELD THAT:- Clause (c) of the proviso to Section 138 of NI Act makes it clear 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. This Court in Jugesh Sehgal v. Shamsher Singh Gogi [2009 (7) TMI 1143 - SUPREME COURT] has explained the ingredients of Section 138 of NI Act offence has held that the cause of action arises only when the amount remains unpaid even after the expiry of fifteen days from the date of receipt of the demand notice. The bare reading of the provision shows that the appellant did not have the capacity to fulfil the demand raised by the respondent by way of the notice issued under clause (c) of the proviso to Section 138 NI Act. When the notice was issued to the appellant, he was not in charge of the corporate debtor as he was suspended from his position as the director of the corporate debtor as soon as IRP was appointed on 25.07.2018. Therefore, the powers vested with the board of directors were to be exercised by the IRP in accordance with the provisions of IBC. All the bank accounts of the corporate debtor were operating under the instructions of the IRP, hence, it was not possible for the appellant to repay the amount in light of section 17 of the IBC. Conclusion - The High Court should have exercised its power under Section 482 of the CrPC to quash the proceedings against the appellant, as the cause of action arose after the moratorium, and the appellant was not in charge of the corporate debtor's affairs. The impugned order dated 21.12.2021 and the summoning order dated 07.09.2018 set aside - appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) can be initiated against a director of a corporate debtor during the moratorium period imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).Whether the appellant, as a director of the corporate debtor, is protected from prosecution under Section 138 of the NI Act due to the moratorium and appointment of an interim resolution professional (IRP).2. ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework revolves around Section 138 of the NI Act, which penalizes the dishonor of cheques, and Section 14 of the IBC, which imposes a moratorium on proceedings against the corporate debtor during insolvency resolution. The judgment also references the precedent set in P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd., which held that the moratorium under Section 14 of the IBC does not extend to natural persons like directors of the corporate debtor.Court's Interpretation and ReasoningThe Court differentiated the present case from P. Mohan Raj by emphasizing that the cause of action under Section 138 of the NI Act arose after the imposition of the moratorium. The Court noted that the High Court erred in applying P. Mohan Raj as the facts were distinguishable. In P. Mohan Raj, the cause of action arose before the moratorium, whereas, in this case, it arose after.Key Evidence and FindingsThe Court found that the cheques were dishonored before the moratorium, but the demand notice, which triggers the cause of action under Section 138 NI Act, was issued after the moratorium commenced. The appellant was not in charge of the corporate debtor's affairs due to the appointment of the IRP, which suspended the powers of the board of directors.Application of Law to FactsThe Court applied the provisions of Section 14 and Section 17 of the IBC to conclude that the appellant could not be held liable under Section 138 of the NI Act, as he was not in a position to fulfill the demand due to the moratorium and the IRP's control over the corporate debtor's affairs.Treatment of Competing ArgumentsThe appellant argued that the moratorium should protect him from prosecution under Section 138 of the NI Act. The respondent relied on P. Mohan Raj to argue that the moratorium does not extend to natural persons. The Court sided with the appellant, distinguishing the facts of the present case from those in P. Mohan Raj.ConclusionsThe Court concluded that the High Court should have exercised its power under Section 482 of the CrPC to quash the proceedings against the appellant, as the cause of action arose after the moratorium, and the appellant was not in charge of the corporate debtor's affairs.3. SIGNIFICANT HOLDINGSCore Principles EstablishedThe judgment establishes that the moratorium under Section 14 of the IBC can protect directors of a corporate debtor from prosecution under Section 138 of the NI Act if the cause of action arises after the imposition of the moratorium and the directors are not in control of the corporate debtor's affairs due to the appointment of an IRP.Final Determinations on Each IssueThe appeal was allowed, setting aside the High Court's order and quashing the proceedings under Section 138 of the NI Act against the appellant. The Court emphasized that the appellant's lack of control over the corporate debtor due to the IRP's appointment and the timing of the cause of action were critical factors in its decision.