Case Note & Summary
The Supreme Court allowed the appeal filed by a director of a corporate debtor against the order of the Punjab and Haryana High Court dismissing his petition under Section 482 CrPC seeking quashing of proceedings under Section 138 of the Negotiable Instruments Act, 1881. The appellant was a director of M/s Xalta Food and Beverages Private Limited, which had a business relationship with the respondent, M/s Shakti Trading Company. The appellant drew eleven cheques in favour of the respondent totaling approximately Rs. 11,17,326/-, which were dishonoured on 07.07.2018. A legal notice under Section 138 NI Act was issued on 06.08.2018. Meanwhile, insolvency proceedings against the corporate debtor commenced on 25.07.2018, and a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 was imposed on the same day. The respondent filed a complaint under Section 138 NI Act in September 2018, and summons were issued to the appellant on 07.09.2018. The appellant sought quashing of the proceedings before the High Court, which was dismissed. The Supreme Court held that the cause of action under Section 138 NI Act arises only after the expiry of 15 days from the receipt of the demand notice, i.e., on 21.08.2018, which was after the moratorium was imposed on 25.07.2018. Relying on the judgment in P. Mohan Raj v. M/S Shah Brothers Ispat Pvt. Ltd., the Court distinguished the facts, noting that in that case the cause of action arose before the moratorium. The Court held that since the cause of action arose after the moratorium, the debt was not legally enforceable, and therefore, the proceedings under Section 138 NI Act could not be initiated or continued against the appellant. The appeal was allowed, and the complaint and all proceedings against the appellant were quashed.
Headnote
A) Criminal Law - Dishonour of Cheque - Section 138 Negotiable Instruments Act, 1881 - Cause of Action - The cause of action under Section 138 NI Act arises only after the expiry of 15 days from the receipt of the demand notice, not on the date of dishonour of cheque. (Para 9) B) Insolvency and Bankruptcy Code - Moratorium - Section 14 IBC - Applicability to Natural Persons - The moratorium under Section 14 IBC applies only to the corporate debtor and not to natural persons such as directors, but if the cause of action under Section 138 NI Act arises after the moratorium, proceedings against the director are also barred as the debt is not legally enforceable. (Paras 7-10) C) Insolvency and Bankruptcy Code - Moratorium - Section 14 IBC - Effect on Pending Proceedings - Where the cause of action under Section 138 NI Act arises after the moratorium, the proceedings cannot be initiated or continued against the director as the underlying debt is not legally enforceable due to the moratorium. (Paras 8-10)
Issue of Consideration
Whether proceedings under Section 138 of the Negotiable Instruments Act, 1881 against a director of a corporate debtor can be initiated or continued after the imposition of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, when the cause of action for the NI Act offence arose after the moratorium was imposed.
Final Decision
The Supreme Court allowed the appeal, set aside the impugned order of the High Court, and quashed the complaint and all proceedings under Section 138 NI Act against the appellant.
Law Points
- Moratorium under Section 14 IBC bars proceedings against corporate debtor only
- but if cause of action under Section 138 NI Act arises after moratorium
- proceedings against natural persons are also barred
